Pricing Efficiency isn’t Always Pricing Effectiveness
The win-win model of lower pricing
Distributors should strive to practice good-pricing hygiene. For example, don’t underprice SKUs or customers if they will continue to (happily) buy from you at higher prices. But, consider also the positive trade-off of lower prices in exchange for larger average order-size buying. What are your general buying and selling incentives for increasing order size?
Order-size Economies
In 2018, a $100 million contractor-supply distributor had roughly 4,000 active accounts. More facts:
1) The overall gross-margin rate was 23.7 percent of sales with a profit percent of 2.1 percent.
2) Order-size averages: Sales per order, $444; margin dollars per order, $106; operational expense per order, $97; and profit per order, $9.
3) The top four (one one-thousandth of their accounts) generated 16 percent of the company’s total profits. Their average margin-percentage rates ranged from 17.5 percent to 23.2 percent, margin-dollars/order ranged from $250 down to $177, and their profit percentages bunched from 12.1 percent to 12.6 percent.
4) The bottom four, the biggest-losing accounts, had net-losses ranging from $161,000 to $57,000. Their margin rates: 20-25 percent and margin dollars per order ranged from $33-$45.
To convert the losses to break-even, prices could theoretically be raised by 14-25 points, which is not a likely solution.
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Conclusion: margin percentage has no correlation with the profit margin, because both order size and the cost of processing orders matter, too.
The key theories here are that buying small orders creates high activity costs for both parties, and profitable customer “best buying practices” can be pitched to the big losers.
Reactive Price-judo Selling Suggestions
Every time a customer asks one of your reps for a better price, are they incented and coached to counter with:
1) Thanks for the “you win, we lose” offer, but may I ask (quid pro quo), “What will you do in return to offset our loss?” Will you order more volume and/or increase your average order size?
2) And, why stop there? For big, replenishment-system savings, why not have my supply-chain-solution team analyze your statistical buying data to identify avoidable small-dollar picks and orders that cost us both. Then, we can retune our buy-sell process to achieve win-win savings that boost the uptime productivity of your people who use our stuff.
As our cost-to-serve drops as a percentage of your sales due to collaborative tweaks, we can lower your prices and still make a net profit. McDonald’s has done this with its distributors over the past 60 plus years. Why don’t we?
Action Idea
Why don’t distributors get the analytics to proactively pitch (honcho-to-honcho) the biggest 1-4 percent of their customers (winners and losers) on win-win collaborative, replenishment-system solutions?
For more information, visit www.merrifieldact2.com.
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