Pricing Strategy in Electrical Distribution: A Veteran’s View

The Bottom Line: An industry veteran with 30+ years spanning electrical distribution and contracting argues that hidden “system cost,” opaque rebate structures, and rigid GP% minimums actively cost distributors orders and inhibits salespeople from writing business with “the right price”. The fix isn’t more pricing software — it’s trusting and properly training salespeople to tailor quotes.

Pricing. The word itself concurs up lots of opinions. Companies are too high or too low whether you are a customer, a salesperson, or management. It all depends upon your role.

Earlier this year, Scott Sinning from MarginMax Partners shared thoughts on optimizing margins. A company’s pricing strategy is a component of realizing an “appropriate” margin.

I had a few calls and emails from readers who expressed their thoughts. One distributor salesperson was passionate about the topic and asked if he could share his views. Of course, I said “yes.”

What follows is, as they say, “in his words.” His article has only been edited for formatting and wording purposes, and because he is employed and this is his experience over time with multiple distributors, he asked to be anonymous.

Experience Provides Pricing Background

A brief history of my experience; over 30 years in electrical materials distribution, sales and purchasing, and years as a purchasing manager for a few electrical contractors. This combination of experience has provided me with some insight into how electrical material is purchased and sold at the distributor level and how electrical contractors purchase it, both are somewhat different and all involve Price!

It is important to understand that when purchasing material on the distributor level from manufacturers reps or manufacturers, in as much as they want the business this is usually not really on a personal level, manufacturers and reps move on to the next opportunity if they don’t receive the order. The relationship with electrical distributors and inside salespeople is on a more personal level, when you purchase material for an electrical contractor you make one person at a distributor happy and maybe three others disappointed; I learned this right away when I first started working for an electrical contractor.

There is a psychology to selling and to purchasing that is a topic for discussion at another time.

So, to respond to “Where Margin is Hiding” we will start with pricing from the distributor level to the contractor level.

A Distributor’s Pricing Perspective

Many years ago, before the introduction of computers, contractor net pricing was largely done by hand; this system was known as “completion billing”, where the counter ticket was written by the counter salesperson at the time the order was either provided to the customer or ordered by the customer for delivery. A person priced the counter ticket … with a BIG pricing catalog in front of them, this catalog contained Trade Service sheets and sometimes distributor made pricing sheets with columns depicting several GP % for resale.

We are taking about Commodities pricing – Conduit, Wire, Fittings, Wiring Devices etc. Sometimes the pricing was developed based on the velocity of the specific item – A, BC etc. – and quantity pricing was also considered based on Each, Inner Carton or Full Case purchase, or the quantity of the item purchased.

The important thing to remember here … A Person did this. There was a connection, usually, between the customer and the individual pricing the ticket, and … you knew the items that the customer would look at to judge if the distributor was competitively pricing the material, these items were different based on the type of contractor – Resi, Commercial, Industrial etc. This pricing system is what I called “Tailored Pricing” and did have “un-computerized’ matrix pricing. There was a personal connection here … this is the important thing to realize, the personal relationship of this whole transaction; the most important part of this was to try to keep stability in the pricing as the customer looked at what was charged previously as opposed to any currently price items.

Nowadays this is accomplished in very “sterile” and impersonal manner; other than overriding minimum G.P % Markup when quoting a customer or entering an order from a customer, most computerized pricing and quoting limits the salesperson options to “tailored pricing”. Maybe it is easier to do on a large BOM, where you reach out to the manufacturer for D/N quote, but not for everyday business. (And this will further change with the AI tools being introduced to distributors.)

The BIGGEST problem and issue here is “Cost” (D/N) in the system and acceptable G.P % markup. What is the parity between “Cost” in the system and actual Distributor Net Invoiced cost. All large national electrical distributors hide true cost and not to mention the rebates that are negotiated that add to the bottom-line.

So,.. to answer Scott’s narrative as to “Where the Margin is Hiding”, there is quite a bit of margin here, but distributors will not admit it, and with all the back-end rebates and cost hiding, I’m not sure anyone really knows the true GP% or GP$; least of all, the inside salesperson responsible for the quote, they may think they are working on a certain GP%, but are actually working on much greater GP%, but don’t know this … and they lose the order! Is this a productive system to use?

Ask the question as to who, at the distributor level, owns “system cost”, and you will hear crickets!

Most of the individuals who set up the pricing scheme in these systems may not understand what they are doing and how it may influence total sales (some are bean counters and would not know a customer if they tripped over them).

I have had many discussions with manufacturer’s representatives who become so frustrated at the extent of hiding true cost by distributors. The inside salesperson complains to the Rep about losing an order, only to find out that the price to write the order was there but was so hidden that the inside salesperson could not use it, to me this is counterproductive.

These systems do have “buckets” for customer classification.

When I was an electrical distributor, we classified customers as “Large Resi Contractor Fast Pay”, “Large Resi Contractor Slow Pay”, “Small Resi Contractor Fast Pay”, etc., and so on, based on the main work the contractor did.

The issue is most of the current systems do not look at the quantity of any particular item that the customer is purchasing or being quoted, and what is driving the total cost of the quote or order, is the price that is generated by the system adjusting GP% based on quantity of the item being quoted or purchased? (I don’t think it is). When the inside salesperson tries to adjust GP%, some are limited to minimum GP% markup and need special approval to adjust below a certain GP% level. When, as a distributor, you are constantly high on everyday quotes to a contractor, after a while that contractor will not even provide the opportunity to quote in the future, they just figure that you are not competitive and move on to those distributors that they feel are competitive.

Another topic for concern when quoting a contractor for material is how many items are on the BOM, what are the items, what is the quantity of each item on the BOM. This is important because the salesperson needs to understand what is actually driving the total price of the quote to the customer. Most contractors will not “cherry pick” a quote, they just look at the bottom-line total cost of the quote (Never add Sales Tax to a quote. When in a hurry the customer may pick up the wrong number and you lose the order). Contractors don’t really want to cut several P.O.’s for a BOM; one P.O. cut and done, so they take the best total number they get.

What is the answer to quoting and price? It is NOT pricing all items at the same G.P.%, it is about Tailoring the quote, so you have the best chance of receiving the P.O. and not sacrificing too much margin and therefore, maximizing G.P. $.

How is this done at the distributor level? By proper TRAINING and Trust of the salesperson, not by smoke and mirrors with “System Cost” and GP% minimum mark-ups. With the proper training you will get more orders and be satisfied with the margin.

At different times I asked some electrical distributors if they were interested in having someone train new hires to their business, their reply was there is no money in the budget to do this!

Naturally one must consider the burden on the distributor on all orders, direct from manufacturer to customer, distributor is just pushing paper not much burden, cutting and paralleling wire from stock, high burden especially when shipping on distributor truck.

Some distributors will have SPA (Special Price Authorization) with manufacturers, usually for specific contractors and this system provides relief from normal distributor net cost (with special net cost pricing), when proof of sale is presented to the manufacturer.

It is my belief that most SPA are somewhat useless, in many cases it may not really be a competitive level, because it does not consider the quantity of the item being quoted or purchased; SPA”s are in this case static, they are not dynamic, they may work in some instances but are not a replacement for effective quoting most BOM to the contractor. A better solution may be “Blanket Pricing” for a specific period for specific contractors,

which considers volume, the quantity of specific items and total$ spent over the period. This pricing can be set into the pricing system and does work when agreed upon with the manufacturer, distributor, and the customer. This also makes quoting much easier on the distributor level, the customer can just send a P.O, already priced by them.

One thing that Scott may not have mentioned in his article is the actual distributor cost of an item and how manufacturer price increases affect GP$, remember the higher the cost of the item, sold to the customer at the same G.P % generates more G.P $! Copper at $3.50 per LB vs $5.50 LB at same G.P. % margin, generates more G.P $ and the distributor burden does not change, this does generate more G.P. $.

Pricing from the Contractor Perspective

Now, price from the viewpoint of the electrical contractor is different.

Years of working for electrical contractors taught me how contractors look at price of material when estimating and purchasing material.

When a contractor is bidding on a project they have an RFP for equipment such as Switchgear, Lighting, Fire Alarm systems, Generators, and at times some commodities. The equipment is usually a “Street Price” and there are usually better Buy numbers for whatever contractor is awarded the project (it’s smoke and mirrors, but that’s how it is) so, the contractor must make an educated guess as to what the equipment may cost.

Commodities at Bid Time are different. Most contractors use Bidding Software to price Commodities and Labor, most of the time they know that they can cut the materials price (Equipment and Commodities) but, not necessarily the Labor. The most important point to realize here is that some contractors don’t. It is about total INSTALLED Cost (a combination of the Labor and Material). Most contractors will tell you that the most Labor-Intensive portion of any project is Branch Circuitry.

What are the dynamics at play here at the Electrical Contractor level and why is the electrical equipment and material price so important? It is because price is a somewhat controllable portion of the project. Labor maybe not so much even if much is built in Prefab. You really can’t cut labor that much other than closely watching Labor Hours as the project progresses, this is especially important during the last 20% of a project.

You are bidding on the project because you want the opportunity to do the job and may have a relationship with a G.C. that is involved.

Margins at the contractor level can be slim., When purchasing materials you try to beat the estimated cost. This can add to the bottom line and every purchase is an opportunity to accomplish this. This is more difficult to do with Labor costs.

Much of the contractor business is at times “Organized Chaos”, The end result – Will the Reward Justify the Risk?!

The Electrical Opportunity: Massive, Repeat, and Satisfying

The electrical materials distribution business is MASSIVE; it is all due to one specific thing … ELECTRICITY; try living one day without it!

The best part of the electrical distributor business is that contractors, if they are successful, must buy material, use it, buy material again and use it, and keep repeating this process. Electrical contractors have accounts with several electrical distributors, not just for competitive reasons, but for access to inventory; the contractor can’t build the project without the material! This is a volume driven business whether you like it or not, and remember it is Distribution, Not Retail.

I’ve spent my career in the electrical industry, and I am still in it because I enjoy selling or purchasing electrical material, seeing buildings, and realizing that I sold or purchased some or all of the electrical material that is part of it … this is extremely satisfying for me.

The relationships that I have developed and still maintain with many people in this business are of the utmost importance to me, and I cherish all of them.

The people that I currently work with are all very dedicated to their respective jobs and all provide support, that without, I would not be successful.

I would like to extend special thanks to David Gordon at Channel Marketing Group for providing me with this opportunity to express my views and I would welcome any response.

Take Aways

• Our contributor’s experience is from a contractor and sales perspective. You would expect it to differ from a more structured, corporate, perspective.
• Unfortunately, or fortunately, times have changed. The other part that has changed is that system automation has changed processes and, if you track gross margins versus communication tools, and the advent of the fax machine, you’ll see that margins have declined based upon the need to respond to quote requests quickly.
• The concept of Tailored Pricing (tiers) and customer buckets is very effective.
• Our contributor is correct by saying training is important. For understanding customers as well as pricing philosophy. Effective selling, in the electrical distribution industry, also requires understanding order and customer profitability. Gross margin is great, but it is important to remember that the company pays bills based upon net profitability. Don’t chase every order because it has some gross margin and hence some commission dollars.
• Neither is wrong. Which is more scalable?

What’s your thoughts?