Most distributors have 20 to 30% of their sales that aren’t price sensitive.
You can identify them easily. Look for items purchased infrequently by a customer and where their annual spend on that item is less than $1,000. Most of these sales are relatively price-inelastic. These sales are the low-hanging fruit for margin optimization.
Next compare your margin on these incidental sales vs. your average margin. Most distributors make 6 to 8 margin points more than their average on incidentals. However, 25% of distributors in each industry (i.e. electrical or HVAC) make more. These higher earning companies make an additional 5 points of margin on incidentals. As a result, their EBITDA is 2 to 3 times higher than comparable companies
- Customers spend an average of $250 a year per incidental item
- You can increase margin 4 to 5 points without reducing units sold
- Your customers will only spend $5 more a year per incidental item