Are you a high-gross-margin distributor?
The ultimate goal of most companies is to improve their profit margins, and distributors are no exception. In fact, distributors may focus on this more than manufacturers or retailers, since they effectively connect the two sectors and don’t have the control or influence over raw materials and suppliers that manufacturers and retailers possess. Distributors are also at the mercy of logistic elements like transportation costs that fluctuate and impact an already tight gross margin. With increased competition and market pressures, it’s a smart time for distributors to examine what they can do to improve their margins and learn from others who are doing it well.
If you are looking to increase profit margins – achieving higher and higher gross margins – you may want to keep these five habits in mind.
- Establish a pricing committee that meets on a regular basis. Pricing decisions require a combination of sales, finance, marketing, purchasing, and operations information. Consequently, your pricing committee should consist of key members from those departments-or at least be able to gather information from them. The goal is to have all the stakeholders involved to provide a good understanding of the product portfolio, competitive pressures, and historical performance.
- Define a profit margin goal. The next step high-gross-margin distributors take is to define a profit margin goal. Sounds simple enough, right? However, for many distributors, there is no goal. Sales reps understand and attempt to keep margins up, but it’s difficult to achieve success without first determining a goal. The goal needs to be carefully thought out—it’s important that it isn’t extreme or arbitrary. It’s actually better to have a simple, straight-forward, and achievable goal—like an average gross margin of 22 percent. Additionally, if the current margin is below the goal, having a time-sensitive, specific goal is important—for example, increase gross margin a half point over the next year, from 21 percent to 21.5 percent.
- Use list less pricing whenever possible. There are a variety of pricing strategies used by distributors. There is cost plus, list less, fixed pricing, and the old stand by gut-feel. All of these strategies have their strengths and weaknesses, so how do you choose which is best for your business? Industry best practice is to have a go-to market pricing strategy of list less pricing—
using cost-plus and fixed pricing only when necessary. Here’s why. Fixed pricing involves setting a fixed price for every item. Typically, this type of pricing is used to match or beat the competition on high-visibility items. It’s a great tool for that purpose, but it’s incredibly labor intensive—requiring you to manually set specific prices for every customer/item combination that requires a fixed price. Cost plus is the simplest pricing method. You set prices by taking the product cost and applying a markup. It’s the easiest method for sales reps to use and the most straightforward, but it has drawbacks. That information is often shared with customers—reducing any opportunities to sell at higher margins to make up for deals you had to give away. Over time, you may find your sales reps applying the same markup to all items—regardless of the vendor, product line, or velocity of the item. - Understand that not all customers and products are equal. If your gross margin goal is 22 percent, it would seem simple to just apply that to each and every item. However, it’s not that easy. Customers will negotiate on high-volume items, there will be large orders with different pricing, and you may even have large customers who demand cost plus 20 percent. For every time your margin dips below your goal, you’ll need a sale on the opposite side of the goal to balance it out. To do this, you need to look to item and customer stratification. Stratification involves classifying items and customers into categories. Items might be classified by product code, velocity, or even velocity within product code. Customers might be classified by type, sales volume, and geography. Pricing is then structured to find the optimal price for each customer/item classification. Essentially, this means you find the price that allows for the highest margin you can obtain while still retaining the customer’s business.
- Leverage the right business intelligence technologies to help you with the four habits listed above! In today’s highly competitive marketplace, it’s important for distributors to grow, thrive, and compete—and maintaining or improving gross margin is vital to achieving those results. Additionally, if we consider the ways in which distributors can improve their bottom line—growing sales, reducing costs of goods sold, reducing operating expenses, or increasing gross margins—increasing gross margins can have the largest impact on your bottom line. The results can be truly game-changing for any distributor. To employ the habits that enable higher gross margins and maximum profitability, you need a business system that supports the unique processes of a wholesale distributor.
If you are ready to grow your distribution business, CompuData can help. Contact us today!