Is it or isn’t it?
For most of us, whether it’s a “textbook” recession or not, is immaterial. The reality is inflation and slowing sales growth will make the next year tough.
So, what do you do? Here are 4 actions you should take right now which will protect your company during the storm.
Review Your Customer-Specific Pricing
Distributors build up a lot of legacy pricing records. It’s like filling up your closet at home. It’s easier to add than to clean it out. Here’s a fact from our practice…60+% of your customer-specific pricing is unnecessary or worse, counter-productive.
You know why…your sales team sets up a price record with the best of expectations. Often, the sales never come at the rate that was expected. Or conditions change and the customer buys something else. How often do you go back and review the initial pricing decision?
In tough times, every profit dollar counts. Compare your price vs. the sales for each record. See where you may be overpriced and in danger of losing the business. Find out where you’re underpriced. Clean out records that you don’t need.
Watch Your Rebates
Suppliers have already cut back on rebates and allowances. However, not all distributors are losing rebate support. Many of our clients are increasing cost support.
There’s always been a squeaky wheel gets the grease element to optimizing rebates. Now’s the time to elevate your game and “squeak”. The best operators make sure they renew current and seek new cost support where necessary. Identify customers to add to current rebates. Increase oversight to make sure you renew. Open communication with your sales team to find new sales opportunities that require cost support to be competitive.
Target the Bottom 30% of Sales
Most distributors make about the same margin on competitive sales. The market has a way of keeping everyone pricing the same on these key items.
The most profitable distributors make 5 to 7 points more than their peers on “incidental purchases”. These are sales on items the customer buys infrequently and where their annual spend on the item is a few hundred dollars. These items are hard to track for buyers and are relatively price inelastic.
Incidental sales account for about 30% of your total sales. You should be making 10 to 15 points more than your company average margin when you price these sales. Most distributors don’t. If you’re looking for the low hanging fruit, focus first on making more where you can.
Stop Your Team from Cutting the Price
It’s a struggle. In our industry the sales team has a lot of pricing authority. That’s good sometimes. But too often salespeople tend to sell everything at about the same margin. In fact, 40+% of all system generated prices are cut at the point of sale.
And price utilization is only getting worse. With the unprecedented rise in costs, sales teams feel the pressure. They often sell at last price paid, despite higher costs. The general increase in industry margins last year are now eroding.
As volume slows down, sales teams will be more tempted than ever to drop the price…even on non-strategic sales. Now’s the time to jump into action. Your people need more coaching and support to get the full margin you deserve. Take more control over pricing so you can be competitive and still earn the profit you deserve.
It’s not easy but the job is straightforward. Send a consistent message on when and where you want sales to make pricing decisions. For most distributors, that means letting the sales team price the competitive items and using pricing you create for incidentals.
Now’s the time to focus on optimizing margin where you can. Enter this recession (or whatever it is) stronger than ever. Remain competitive and increase your overall company margin by 1+ points. Contact us if you’d like to see how companies just like yours are doing this.