Case Study – Start Slowly

Profit2 Works with HVAC Distributor to Increase System Price Utilization and Margin

Client Profile:

• $75 million HVAC Distributor, 6 branches in a 3 state area
• Servicing Residential and Commercial Contractors
• 70% of sales are equipment and price-sensitive items
• Client used customer pricing to price about 15% of sales
• One corporate matrix to price all of remaining sales
• Sales force controls customer pricing
• Very low utilization of matrix pricing by sales force
• The client has about one third of their sales that are relatively incidental:

The Problem:

Client margins had traditionally been in line with industry averages. New competitors had entered their trade area and used pricing on commodity items to gain new business.

The client had attempted to increase margins by increasing matrix margins. Given that the matrix prices most sales, the margins were too high. Consequently, the matrix pricing was only utilized about 30% of the time by the sales force.

The Solution:

We decided with our client that we needed to do a “reset” on increasing margin. Our tactic was to “Start Slowly” and only increase margin on the least price sensitive sales.

Our client had a total of 29% of their sales where their customer spent less than $1,000 per year on the item. The average annual expenditure per item was only $274 and the customer item combinations were purchased an average of only 1.7 times per year. Better yet, their current margin on these incidental sales only averaged about 6 points higher than their average margin.

Our goals for this “Start Slowly” strategy were to:

• Initially include 20+% of sales in the program
• Gain approximately 4 points on these sales
• Involve the branches from the outset to build understanding and support
• Increase matrix price utilization from 30 to 80%

We took the following steps to “Start Slowly”

1. We developed meetings to brief the organization on our goals, plan and their role in the program.
2. Branches were permitted to selectively exclude customers and certain sales from program
3. Profit2 helped branches set up pricing for price sensitive sales
4. Profit2 developed new incidental matrices based on client criteria
5. Branches reviewed matrices and made recommendations for edits
6. P2 provided files so new matrices could be macro imported
7. On a monthly basis we reviewed results and made adjustments
8. Branches were provided detailed reporting on margin gain, sales impact and price utilization.

Results:

Our client increased margin on total sales by 1 point in the first 6 months. They have increased price utilization to 85%. Over the past two years they have slowly continued to expand the program so that a majority of their sales are now priced through the program with a total gain of +2.1 points.