This is one of the first insights that distributors who subscribe to Line-Item Profit Analytics are shocked to find out. Analytics reveal that:
- Naturally high-margin percent SKUs and customers are mostly net-profit dollar losers
- Gross profit dollars on small-dollar lines and orders are less than their cost-to-serve dollars
You can’t ignore small transaction size, or the variable service-people costs for customers with bill-me-later, paper-based trade credit.
And, losses are bigger at branches that are replenished nightly from a main distribution center (DC). The service value, such as 99% fill-rates and local pick-ups for main-DC-only SKUs, is big. But, having two piles of inventory at two facilities with doubled handling costs loses money at wholesale list mark-up prices.
These branches can charge more for their service value as Fastenal (FAST) proves.
Fastenal’s Two-Step Wholetail Model
FAST pioneered two-step distribution to convenient wholetail locations. Their rental costs exceed those of wholesale DC’s but are less than retail space. So, wholetail overhead needs wholetail pricing and terms.
FAST, from the outset, ignored suggested factory mark-ups and charged what their service value supported. They knew that high local fill-rates save customers time. FAST’s overall margin rate peaked at 57% and was just under 50% for 2017 on $4.4B in sales.
Why Don’t Distributors Charge More at Two-Step Branches?
Contractor-supply distributors tell me invariably, “But, we thought we were making money!” Sorry. After backing out very profitable direct sales and DC-direct shipments that are credited to the branches, most branches lose money on their local stock sales.
So, why not just set prices higher to be profitable? Most distributors assume that customers would think they were gouging them and would switch to competitors that work on wholesale list margins.
Test Beliefs. Sell Various Contracts
Here is where you should test your beliefs with analytics. The statement that “ALL customers will feel gouged and defect to a competitor” is an extreme, data-free belief. With customer profitability analytics at the branch level, you can:
- Shift to higher prices with less costly terms
- Allow different customers to earn different discounts
Better information provides more insight, more options, and courage.
A Case Example
A plumbing wholesaler shifted to the two-step FAST model and pricing. Customers initially complained about prices and threatened to leave. But, they stayed for the better fill-rate and time-saving value offered. Analytics shows that this company’s profit are insane, just like FAST’s.
Moral of the Story
Have the analytical clarity to move every customer to become net-profitable. Be in touch for a free, virtual tutorial and demo of Line-Item Profit Analytics. Email me at: email@example.com