PRICING EFFICIENCY ISN’T PRICING EFFECTIVENESS
Practice good-pricing hygiene. 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?
CASE STUDY ON ORDER-SIZE ECONOMIES
For 2018, a $100MM contractor-supply distributor had roughly 4000 active accounts. More facts:
1) The overall gross-margin rate was 23.7% of sales with a profit percent of 2.1%.
2) Order-size averages: Sales per order, $444; Margin-dollars per order, $106; Op. Expense per order, $97. And, profit/order, $9.
3) The top 4 (one-thousandth of their accounts) generated 16% of the company’s total profits.
- Their average margin-percentage rates ranged from: 17.5% to 23.2%.
- Their margin-dollars/order ranged from $250 down to $177.
- Their profit percentages bunched from 12.1 to 12.6%.
4) The bottom 4, biggest-losing accounts had net-losses ranging from a ($161K) to ($57K).
- Their margin rates: 20 to 25%. Margin-dollars/order from $33 – 45.
- To convert the losses to breakeven, prices could theoretically be raised by 14 to 25 points. Not a likely solution!
Conclusion: margin percentage has no correlation with the profit margin, because both order-size and the cost of processing orders matter too.
- Buying small orders creates high activity costs for both parties.
- 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? Like: more volume and/or larger average-order sizing?
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, retune our buy-sell process to achieve win-win savings and boost the uptime productivity of your people who use our stuff.
- As our Cost-To-Serve drops as a percentage of your sales do to collaborative tweaks, we can lower your prices and still make a net profit. McDonald’s has done this with their distributors over the past 60 plus years. Why don’t we?
- Why don’t distributors get the analytics to proactively pitch (honcho-to-honcho) the biggest 1-4% of customers (winners and losers) on Win-Win collaborative, replenishment-system solutions?