Don Magruder, former chairman of the Florida Building Material Association refers to this old saying, “When the economy turns bad, it brings out the worst in people” in his November, 2010 article – Reckless Pricing Behavior: A veteran dealer’s opinion on why cut-rate pricing is bad pricing. He goes on to say “The professionals need to assume control again.”
Profit2 works with companies in the Building Materials Distribution Industry every day and couldn’t agree more. Here’s a fact from our practice: 80% of industry distributors show only a 5 margin point difference between their most price sensitive sales and their least. This means they are pricing incidental items such as drill bits or saw blades only five points higher than highly competitive items such as lumber and nails.
They’re leaving money on the table.
By contrast, building materials distributors that pay attention to price differentiation average a 12 to 15 point difference between high volume, price sensitive sales and incidental sales. Overall margin for these companies average two margin points higher than the industry. This two point margin difference enables companies to earn 40 to 70% more than their competitors.
So why don’t all companies make more on incidentals?
As Magruder observes in his article, a tight economy can thwart best pricing practices, including reckless price slashing. But what about in an improving economy? You may find that your profit margin doesn’t improve just because the economy does. That is because your biggest pricing challenge isn’t expense management – you do that well! – It’s Fear:
- Given the choice between asking for a higher margin price and risking a sale, your sales people will choose making a sale almost every time.
- Sales people spend the vast majority of their day selling high volume items. They won’t take the time to apply complex pricing formulas to an incidental sale that will take away time they could be spending making larger sales.
Annual financial statement studies consistently show that 25% of building materials distributors and manufacturers earn 3 to 4 times higher than the average. Why? The key difference of success is gross margins. They report margin rates that are +1.5 to +2.3 points higher than their peers.
To overcome the fear that is holding your margin down, you need to create a distributor pricing strategy that will:
- Reclaim your pricing authority by putting you in control of pricing incidental sales.
- Earn trust by providing sales people with prices that are credible and saleable, thus increasing sales incentives.
- Measure what happens so you can provide ongoing feedback on pricing practices and results.
Profit2 has helped many large Distributors and Manufacturers build margin and earnings for over 10 years. Click Here to Request Full Information on how you can increase margin by providing better pricing guidance and sales coaching to your sales people.