Client Profile:

  • $140 million Regional Janitorial/Food Service Distributor servicing restaurant, institution, and governmental customers
  • Client was experiencing increased competition from national competitors and declining margins on key items, creating profit pressure
  • Sales team had wide latitude to set pricing by customer
  • Most customer pricing was done at the item level
  • 50% of customer pricing was set at Fixed pricing vs. multiplier/discount

Background:

National competitors of this client consolidated and employed a “high-low” pricing strategy. By making more on incidental item margins, they were able to fund aggressive discounting on a handful of the most visible items. This resulted in share losses and significant pressure on our client’s margins.

After careful deliberation, Profit2 and our client, together, decided that we needed to increase margins on incidentals, yet, still price lower than the national competitors. Our client could then reinvest part of the profit to better compete on the commodity items.

The Solution:

Our key challenge was to overcome sales force concerns. Their paradigm was trapped in a hyper price-competitive market. In reality, they failed to understand the high-low strategy of their competitors. Our tactic was to “Give Sales the Final Say” and only increase margin on customer-item combinations where they had given final approval.

[pullquote1 quotes=”true” align=”right” cite=”Dave Roller, President”]Distributors can increase system price utilization from 50% to 85+% of sales by giving the final say on customer price increases.[/pullquote1]

Our goals for this “Give Sales the Final Say” strategy were to:

  • Identify about 40% of client sales that were not being targeted by competitors
  • Help sales people understand the market pricing situation and opportunity on these sales
  • Make sure all customer pricing commitments were entered as pricing records into the ERP system
  • Convert many fixed price records to a multiplier basis to reduce maintenance
  • Gain the support of the sales force to improving margin on these sales
  • Initially increase margin +2.5 points on 40% of client sales

We took the following steps to “Give Sales the Final Say”

  1. We conducted a series of educational webinars with the sales force.
  2. Initially, we excluded 63% of sales from the process.
  3. We permitted sales people to selectively exclude certain customers or items from consideration.
  4. The client and Profit2 set conservative margin increase limits.
  5. Profit2 helped client put all current pricing commitments into their system.
  6. Profit2 made specific margin increase recommendations at the customer-item level.
  7. The client set an annual GP$ increase objective for each sales person.
  8. This objective was tied to performance evaluations and compensation increases.
  9. Profit2 built an online portal to enable sales people to review recommendations.
  10. Sales people had the opportunity to accept, decline, or enter an alternative margin increase.
  11. Profit2 helped the client import the changes into their ERP system.
  12. Profit2 assisted the client in measuring the GP$ gain and sales impact.

Results

Our client increased margin on total sales by 1.2 points in the first 2 months. Sales people utilize the pricing they approved on 91% of invoice lines. The client has slowly become more opportunistic and increased margin repeatedly over two years. Overall sales have risen vs. the national competitors.