It’s hard to compare your pricing. Is a price too low or too high? Are you leaving money on the table? Is your pricing system structured correctly? Each year, distributors make hundreds of thousands of pricing decisions. If you reflect on the variety of items sold and the diversity of customers…it’s easy to see why it’s tough to compare.
So how do you evaluate your pricing? Companies traditionally use one of 3 sources; industry margin averages, their sales people or customer feedback. If you compare your overall margin to industry averages it’s interesting. However, such comparisons aren’t very useful. The comparison is of course just a top line average. Once you’ve compared, what do you do next?
You can talk to your sales people. Unfortunately, they spend most of their days focused on the most competitive items. And no doubt your customers are doing their job by letting you know you’re too high-on everything!
Where to Start?
It’s easier to evaluate your pricing strategy if you think of your business as having two parts. The larger slice, approximately 70% of sales, come from price sensitive items. These are high volume items, purchased frequently. Over the past decade we’ve collected pricing data on 400+ companies in all sectors of wholesale/distribution. When we compare distributor pricing we find there is very little difference in pricing on competitive items. It’s logical if you think about it. The marketplace and the nature of competition tend to impose strict controls on how much you can charge for key items.
The other 30% of sales come from “incidentals”. These are items a customer buys less than 4 times a year. Customers spend an average of only $250 per incidental item a year. It’s this portion of distributors’ sales where the margin experts at Profit2 see a big difference in pricing. The most profitable distributors make 5 to 7 points more than the average company when they sell incidentals. This margin edge on 30% of sales is huge! It results in higher profits and more ability to invest for the future.
With a wealth of experience, the pricing experts at Profit2 help manufacturing and distribution companies improve margins and increase profits. Contact us today.
Next: Focus on 4 Key Metrics
