Specificity… A Path to Higher Margins

Specificity… A Path to Higher Margins

by Dave Roller

Published in the September 2016 Eclipse Users Group newsletter

As Lily Tomlin said, “I always wanted to be somebody, but now I see I should have been more specific”.

Most distributors “want to increase margin” but are frustrated in their efforts because they don’t get sufficiently specific. It’s easy to understand why. Each year the average Eclipse user prices over 100,000 customer-item combinations. The pressures of running a business makes it difficult to be granular enough to optimize margin.
Here are three pricing challenges where specificity is key:

Product Segmentation

Most distributors segment their products for pricing into Sell Groups. These groups are typically based on the supplier or type of product. Less than 20% of Eclipse users also segment items based on item price sensitivity. Not segmenting items by price sensitivity forces distributors to price all items in a Sell Group at one margin for the customer. The margin must be set to price the competitive items in the group. So distributors lose money when they sell less price sensitive sales in the group. You can increase overall margin by more than a point by segmenting by Sell Group and price sensitivity

Customer Segmentation

Distributors do not optimize margin due to insufficient customer segmentation. To maximize margin, it’s vital to segment customers on two axis. First, separate customers into industry groups. Then separate customers in each industry group based on their purchase volume/potential. Our highest margin customers utilize 4 to 5 volume groups per industry. And they enjoy a 12 to 15 point margin difference between their highest and lowest volume customers.

Customer Pricing

If you price at the Customer/Product group level you’re not being specific enough.  When sales people set up a blanket margin for an entire product line, it’s based on the most competitive items in that group. It’s easier to set up the record and easy to maintain. But it’s costly.

When a customer buys one of the less price sensitive items in the group you leave money on the table. You’ll make more if you absolutely minimize this type of pricing. Instead set the price sensitive, higher volume sales up at the Customer/Item level and allow the incidentals in the product line to be priced by your Customer Price Class/Sell Group matrix.

 

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