Looking for some simple and painless ways to make adjustments that improve your profitability? In our most recent Wholesale Change episode, we discussed some easy ways to make this possible in your distribution business.
Here are a few of our favorite profit-driving hacks:
Learn the power of 1%.
A McKinsey study from a number of years ago showed the power of 1% price adjustments. According to their analysis, a 1% increase in price, assuming volume remains steady, would generate an 8% increase or more in operating profits. What’s more, the authors point out that an increase in revenues at the expense of a price cut does not have nearly the same impact: Volumes would have to rise by 18.7% to offset the profit impact of a 5% price cut.
If you take a $30 item and you raise the price by 1%, and no costs change, the impact to the bottom line over time will be significant. With small changes, you can typically get additional points of margin without much sensitivity on the demand side.
Push up prices on C and D items to small customers.
One powerful technique to gain margin is to increase prices on low-frequency C and D class inventory items for small customers. The premise of this technique is that small customers who purchase these items may not pay much attention to the price increase since they purchase them infrequently and do not have much buying power with the distributor. This approach can be applied for the bottom 80% of your customer base and may yield a 1% increase in margin.
Avoid round markups or discounts.
On the other hand, be careful with discounting. Try to avoid round markups or discounts. So if you can do a 3.75% discount, instead of 5%, you just got another point and a quarter for your company. As a general rule, you don’t have to be the cheapest on everything. Rather, you need to provide good service and stand behind what you sell.
Centralize purchasing to buy better.
A lot of distributors have distributed sourcing. That means that a lot of people are authorized to do what they call buyouts, or source an item for a customer anytime they need it.
While many see this as an advantage, it means you have less control. Anonymous purchases must go away. Centralizing purchasing improves your margin opportunity. Start by understanding what you’re buying and from whom, and build a plan to minimize one-off purchases from your team.
Make web pricing consistent with contract pricing.
The key here is to avoid a situation where the price your customers see online is better than their contract pricing, which could result in losing the customer. You can’t eliminate channel conflict, but you can minimize situations where your web pricing is better than your contract pricing. A broad-brush guideline is to set the web pricing at about the middle of the pricing you offer your second tier of customers. This way, you’ll show a competitive price on the web, but you’re also going to be at a price that is higher than what your biggest and best customers are paying.
Put strategic purchasing agreements (SPA) in place with all suppliers.
Be sure to have professional purchasers in your organization who understand how to negotiate SPAs, a joint agreement between a distributor and manufacturing that includes rebates, marketing co-op and pricing terms. For many distributors, this is handled in an ad hoc fashion. But understanding how SPAs work and then centralizing your purchasing can push an extraordinary amount of dollars to your bottom line through more favorable pricing and better rebates. Even better: This strategy doesn’t raise your prices to your customers.
Learn how to get and take advantage of marketing co-op.
Marketing co-op causes a lot of confusion among distributors and manufacturers. Many major manufacturers have a marketing co-op budget, either from headquarters or the local rep. It adds up to 2%, 3% or even 5% of your purchases refunded to you in the form of marketing co-op if you earn it by doing specific marketing programs. But manufacturers don’t always volunteer this. So, consider having a category manager in charge of putting together a plan. Promotions that can be supported by co-op can be planned out months in advance.
Tie sales rep comp to gross margin percentage growth.
The idea behind this hack is this:
You want to hit 23% Gross Margin on a category. If your sales rep achieves 25% instead, a multiplier is applied to the portion of margin that exceeds the target and is counted toward commission and quota. If the sales rep gets just 21%, or under your target GM, a negative multiplier is applied because they went under target.
This is a powerful way to get alignment between what the company wants and what the reps are doing on the street.
Limit pricing authority.
Another best practice is for companies to centralize pricing authority; any movement in this direction is usually a win.Take pricing authority away from field sales reps as much as you can.
If you’re the general manager and you’re responsible for the profitability of your company, your ability to pay, hire, train and compensate good people requires making money. Focus on profitability through small adjustments, and make sure you’re communicating and giving customers the opportunity to buy in over time. Do that, and you’ll start to see profit improvement in no time.