84. What’s Really Hurting Your Industrial B2B Pricing Strategy? (with David Bauders, CEO of SPARXiQ and Trade Hounds)

Karthik Chidambaram: Hello everyone. Welcome to a new episode of the Driven by DCKAP podcast, and we are joined by a very special guest. I'm excited about this conversation. David Bauders, Chief Executive Officer of SPARXiQ and TradeHounds. 

David, thank you so much for joining me today. 

David Bauders: Great to be here with you, Karthik.

Karthik Chidambaram: So David, for our audience, if you could tell us about SPARXiQ. What is it that you guys do? I think that would be great. 

David Bauders: So I started what became SPARXiQ back in 1993, and we were one of the pioneers in price optimization. Back then, there were just a few management consultants who were doing pricing consulting, I guess is what I would call it.

And then over the years as we worked with manufacturers and distributors to optimize their pricing, it started becoming more and more of an analytics business. And so, around 2005, we started running distributor pricing workshops for groups of distributors in the fluid power and automation space. And as we started doing that work, many of those distributors were on.

ERP Systems of Active and Solutions, as it was called back then today Epicor. And that was P 21 and Eclipse in 2008, we formed a partnership with Epicor that took us, you know, firmly into the world of being an analytics provider around price optimization. 

Karthik Chidambaram: So it's awesome, right? So they say, you know, when you start a business, you always handcraft, do things by hand and then slowly evolve and it's like a great story, right?

So you start doing things by hand, run workshops, and then find a pattern and then create software out of it. 

David Bauders: That's right. There's a lot of tinkering that goes on early in a business, right? I mean, the most important thing is you're learning. It's not so much what you're doing is what you're learning. And as you experiment, as you see what works, what doesn't work, what's scalable, what's not scalable.

That's kind of what, what sets you on the path that ends up working for you? 

Karthik Chidambaram: So one question I always have, right, is how do you optimize pricing? Mm-hmm. And why should distributors or manufacturers choose SPARXiQ? This is a question I always have, Hey. Sometimes, you know, you leave dollars on the table, you don't want that, you know, because you could make more money there, right? And sometimes you have to reduce your price rates. How exactly do you do that? 

David Bauders: That's a big question. Right. So there's an important distinction, which I've used over the years, and it's the distinction between value creation and value capture. So everyday manufacturers are inventing new products that solve important problems and they create value and use for their customers.

The question is not just whether they will create value for their customers. That's how effectively they capture that value for their shareholders, and that's really the only way that capitalism works. You have to be effective, not only creating value, but also capturing it. Pricing is partly the science of how companies capture the value that they create for their customers in terms of why they should be focused on it.

It's really about how do you make sure that you're, you're getting the maximum value for your customers and from your customers and, and a good pricing architecture really involves deeply understanding where is value created in the business and therefore where can it be captured? 

And the way that we do that at SPARXiQ is we work with companies to be able to mine their transactional data, who bought from them at what prices and what quantities over periods of time, and help them to really profile where are the greatest areas of price sensitivity in their business. And conversely, where are their opportunities to get more margin and more profitability. 

Karthik Chidambaram: So you look at value creation across different parts of the business and then you optimize price. Am I understanding this correctly? 

David Bauders: Yeah, so just as an example, most manufacturers will have thousands, tens of thousands, hundreds of thousands or even millions of part numbers.

And depending on how they go to market, they may have thousands or tens or hundreds of thousands of customers. And same thing for distributors, broadly speaking. So what that means is they end up with millions, hundreds of millions, billions, or even trillions of pricing permutations. 

And so the difficult challenge for both manufacturers and distributors is to see through all of those permutations and understand the relative price sensitivity of each of them. And so that's where traditional approaches to pricing before price optimization really fell flat. A lot of salespeople were making up, you know, target margins, usually ending in zeros and fives. You had product managers trying to guess at how much margin they could get when they sold through their channel.

And that approach produced a lot of what we call peanut butter pricing, where people just kept replicating very simple values over and over again. What we realized as we started innovating in this space was that there was a huge amount of uncaptured value in these businesses. And, you know, distribution's a very thin margin business.

The average wholesale distributor in the United States makes about 4% operating profit. We were finding, as we mine the transactional data that there is typically two to 400 basis points more profit that could be captured if they would just start embracing this, you know, more robust approach to pricing.

So, not surprisingly, today companies work with SPARXiQ because they realize until they do the strategic pricing aspect of their ERP, they're really, they, they have a non-profit ERP system when they can leverage the functionality. Then they go from, from being non-profit to a for-profit ERP. And that's kind of our mantra is to help companies master their data and convert data into dollars.

Karthik Chidambaram: And I would think. Price optimization would be needed mostly for mid to large distributors, right? So what kind of revenue, at what point should I really think about price optimization? 

David Bauders: Well, it really is not, revenue is important because that determines how much opportunity there is and also therefore how much resource can be invested in it.

So I would say broadly speaking, distributors who have over $50 million a year in revenue. We'll have, let's just say a million to $2 million, 200 to 400 basis points of potential opportunity. That means they can allocate resources, they can have pricing leader, for example, whose job it is to set up and maintain a system like that.

They can invest in sales training to help their sales reps negotiate more effectively, to capture more value. But it is true that the primary driver of the opportunity is complexity. So anytime you have the number of customers, times the number of part numbers greater than, let's say a million, that's a good threshold level of complexity.

Karthik Chidambaram: Okay? These are great use cases, right? We are reading a lot about agentic AI and AI and all that. Right. I'm sure. I mean, I think, you know, in terms of price optimization, it's a great use case. Are you guys already doing a lot of that and what are some of the use cases you are seeing and are you seeing a lot of AI adoption amongst your customers?

David Bauders: There is. There are good use cases for artificial intelligence. However, it's important to understand where it does and doesn't work well, so. Machine learning and AI for, for example, are not terribly good when they're being trained on data that reflect bad behavior. So for example, salespeople deciding that they're gonna give away 10 margin points to close an order, the machine reads that, okay, they, they cave 10 margin points, they got the order, and then you train it to do that.

And next time, maybe it goes after 11 points or 12 points or 13 points, you can see very quickly how it could get off the rails. So that's not really where we see the best applications of it. Where we see better applications is on the purchasing platforms that SPARXiQ owns. So in material management and increasingly in Trade Hounds, we're getting actual buyer reactions to prices, which is different from looking at it from the seller's side.

So we're able to train our models around price sensitivity based on the way buyers are reacting, as opposed to the way that you know, the way that sellers are seeing it, which is often misleading. 

Karthik Chidambaram: Tell us about Trade Hounds. You know, what does Trade Hounds do? 

David Bauders: So, Trade Hounds is the largest social marketplace in industrial B2B and construction.

In construction, I mean, basically mechanical, electrical, plumbing. So there's about 400,000 users today. It's growing very quickly, and they spend between $20 and $30 billion per year. On the materials and products they need to do that work. And historically, this was a social app. It's very much for Gen Zers.

The folks who are under 30 years old, broadly over half of our users are in that age group. And historically it was kind of like a mashup of TikTok and Instagram. So lots of people sharing video, sharing images, you know, lots of discussion boards, people know young apprentices asking questions of the community, things like that.

We acquired the company two years ago in late ‘23. And the reason we acquired it was that the burning desire of our community was for us to help them free up the amount of time that it required them to get their materials. So they were finding broadly that distributors were not efficient to do business with.

That is they often were closed at night when they were trying to put together their estimates and proposals for their customers or do their invoicing. Their websites were clunky. They didn't have great navigation. They also didn't like, they typically would buy from three to five different distributors, and they didn't like having to navigate three to five different pathways.

And so that pointed to a, a much more streamlined and simplified commerce experience. So what we've been focused on with trade Hounds since acquiring them is really pivoting this business into being a social marketplace. Our users tell us broadly that they waste up to 40% of their time trying to source materials, and they're really looking for, as digital natives a new way to bring that Amazon type of experience into how they source on a daily basis.

Karthik Chidambaram: So it's very interesting. Right. So you are focused on the new H four, so people under 30. So it's primarily used by contractors?

David Bauders: And technicians. 

Karthik Chidambaram: And technicians. Right. But is it also used by the end user, or no? 

David Bauders: It will be. So one of our recent acquisitions was of Wrangld, as an upstart competitor to companies like ServiceTitan.

So they're involved in really that whole process between estimating and proposing to the end customer as all the way through cash collection. So that means that, of course they will have integrations with the end customer in order to be able to, to complete that cycle. So really what we're doing is bringing the wrangled functionality.

Into the Trade Hounds app so that our users can do that whole estimating through cash cycle in app 

Karthik Chidambaram: And Wrangld is used by end user?

David Bauders: No. Wrangld today is not used by the end user. 

Karthik Chidambaram: Okay

David Bauders: In the future, however, there can be consumer facing or end customer facing versions of Trade Hounds, which would have those engagement points between the contractors proposing the work and those who are reviewing and approving that.

Karthik Chidambaram: I like the chain, right? I like how you guys integrate everything, right? So Trade hounds. Mm-hmm. Or Spark iq, trade Hounds and Wrangler, right? Mm-hmm. So, I mean, I'm just curious, right? So, I mean, obviously strategy is an important constituent of this, right? 

So how do you strategize, you know. How do you work? I'm just trying to understand. 

David Bauders: Well, it's sort of similar to how the whole SPARXiQ started, right? You throw yourself into something and you start listening to customers. You start listening to buyers and sellers, and then you understand where are the pain points in the business. So at SPARXiQ, we had had decades literally of working with manufacturers and distributors.

We knew what a lot of their challenges were. We understood some of the important technical changes that were going on in those industries, and we saw that, that there was a, an opening in the marketplace to do this. How it evolves, though, it goes back to that whole tinkering stage. So we were very blessed early in our journey to start working with some of the, the leading manufacturers and distributors.

On this Trade Hounds project. And so we've been learning actively what are the, the goals of a manufacturer to innovate in the face of demographic change or what are the goals of distributors to be able to connect and sell to the next generation of customers. And so that's really what's led us to this point.

And then really spending time at all of the user conferences. Of the the contractor association. So in electrical it would be a National Electrical Contractors Association, attending those and, you know, really rolling up your sleeves, listening, learning, tinkering. And same thing with IEC, independent Electrical Contractors Association and even engaging with unions, trade unions trade schools, all of that stuff.

And, and the more you learn about it and the more you reflect on it and the more you experiment. You know, the, the better this journey kind of unfolds. 

Karthik Chidambaram: Yeah. Experiment, fail, you know, adapt and learn. Right. So I'm just curious, right. So how do you manage time between these companies, right? Because it's not just one, you know, you have like a few companies, right?

So how do you manage time and is there like a, you know, I need to allocate this time for this company this time, or is there like a method you use? 

David Bauders: Well, I think, you know, the most important thing is to be flexible. Because you never know on any given day, you know, where are the best opportunities to spend your time.

I would say, you know, we're very blessed at SPARXiQ to have a very strong operating team. And so really that team operates very effectively on a daily basis. We also have great teams in all of our companies. So really, I view my role as being a facilitator and a learner, I guess, is what I would say.

You know, I, obviously, I have a strong strategic bent, but my most important things I can bring are perspective because of all of these decades having spent with all the different parties in the ecosystem. And then really trying to integrate and collaborate with people. Try to make it easier for them to do the right work and to empower them to to take risks and tinker because the tinkering is just ongoing.

Karthik Chidambaram: Keep tinkering. Yeah, that's a good way to do it, right? I think it's a changing world order. Right? So I mean AI and also lots of things happening around us, right? So what's one thing you would offer our distributor and manufacturing audience out there? So if there's one piece of advice, or what should they be doing?

David Bauders: I think the most important thing that, as I see it, one of the most important, there's a lot of important challenges out there, but I think one that's often unremarked is. The whole demographic shift that's going on. You know, about half of the workers in the skilled trades in industrial B2B will be retiring in the next five to 10 years.

That means they're gonna be replaced. If we work hard, they'll be replaced by a new generation of people with very different buying expectations, very different ways of relating to their trading partners. I don't think a lot of manufacturers and distributors have fully thought through what the implications are for their business.

You know, we know. Large companies out there going out, buying up their competitors, trying to consolidate industries and dedicating almost no resources to mastering this demographic shift. Well, what good does it ma, does it do you to get 80%, let's say, of the market where half of those people retire and then you, you fumble the question of whether you get the people replacing them.

So I think that demographic shift has profound implications for the go to market strategy. And the way that these these entities engage with and sell to the next generation. 

Karthik Chidambaram: Yeah. And I think trade ons can play a big role there, right? So I think that's our 

David Bauders: intention. 

Karthik Chidambaram: Yeah. That's awesome. The theme of this podcast is driven, and you have been doing this for a long time and you keep reinventing yourself.

So how are you driven? 

David Bauders: You know, for me it's a lot of, it's just about enjoying discovery and, you know, I, I guess being willing to say you don't know the answer to a lot of questions and being, you know, frankly intrigued by the answers to those questions. You know, for us right now, one of the biggest questions is will people decide to do commerce and what was historically a social platform?

We see lots of evidence that that will happen. You know, we see TikTok becoming an originator of commerce. We see Amazon embracing more crowdsourced content in order to sell. So we do think it's a, it's a, a likely outcome, but it's not, it's far from certain. We'll be testing those theses over the next 12, 24, 36 months, but ask, answering your question about being driven.

It's just how are you gonna spend your time? You know, these are, these are fun, challenging problems to work on. They're very rewarding. You know, there's a lot of great cultural impact of the work that we're doing. You know, we're really helping a new generation of tradespeople to find a place in the economy.

You know, there's been a lot of disillusion around. The college education experience, the amount of debt that was created, the questionability of whether it produced real value. And I think a lot of young people in the economy today really want to rethink what, what is meaningful in work and where do we actually find a place in the economy that makes sense.

And, and so it's not just about strategic questions or about technology, it's, it's about real people. And one of the things I always say about Trade Hounds, if you compare it to other technology businesses is Trade Hounds has a very clear culture. This is a, a business where there it manifests itself on a daily basis, the values.

And because it's so community based, you see this in ways that you don't see with a typical SaaS type business or marketplace. 

Karthik Chidambaram: Yeah. I really like the purpose behind this. Right. So empowering the new workforce, you know, I think, and especially the trades people, so that's really cool. 

David Bauders: Yeah. For me, that's very motivating. And that's what really drives me, I think. 

Karthik Chidambaram: I would like to end with this question, David what is something you're reading right now or anything you're listening to which you would like to share? 

David Bauders: Yeah, there's an interesting book I've been doing on audio, which is We Who Struggle with Faith by Jordan Peterson, and Jordan is a person who has been an atheist and he's really struggling with, you know, what is, what is the meaning of all the great religious texts and why is it that they persisted for so many millennia? And I think what's interesting is hearing and learning about how somebody who was very skeptical of faith has found deep meaning in these longstanding religious texts.

And, for me, it's just interesting to see. That spiritual journey of a skeptic, uncovering new faith about really big questions. And I think, for me, that's been an interesting book to work through.

Karthik Chidambaram: Change is the only thing that's constant, right. So thank you so much, David. I really enjoyed chatting with you. Thanks for joining me on this Driven podcast. 

David Bauders: Thank you, Karthik.