For over 5 years, Profit2 has been a preferred service provider with Affiliated Distributors. We’ve helped over a hundred members safely increase margin an average of 1.7 points on total sales while preserving AND growing volume.
The top questions distributors are asking us today:
How do we compare to our colleagues in AD and to our competition?
How do we become best in class across our industry segment from an earnings and profitability perspective?
We created a short video showing some of the benchmarking data that’s been valuable to other AD members over the years for your review.
Paul Parsons: My name is Paul Parsons with Profit2. I got my partner and our company founder, Dave Roller, on this call. Hey Dave.
Dave Roller: Good morning, Paul.
Paul Parsons: Hey, before we dive into this short presentation about benchmarking, I wanna give a little bit of background about Profit2.
Over the last two plus decades, we’ve worked with over 300 wholesalers on strategic pricing and margin optimization programs. We’ve been a partner with AD for over five years now, and we’ve got a lot of benchmarking information in the electrical segment to share with you today. Dave’s gonna lead the charge on this. Thanks for joining us Dave.
Dave Roller: And thanks to all of you for joining us. We’re often asked by distributors, how is my margin, how does it compare with similar distributors? It’s a simple question, but it gets complicated when you start considering differences in distributors, customer base and their product mix. But we think there’s a way that you can compare how you’re doing on margin and even more importantly, identify where you have opportunities to safely improve your margin.
There are five benchmarks that we use in our practice to evaluate how a distributor is doing on margin. They all involve what we call margin differentiation, and all we mean by that is the margin point difference between more competitive sales versus less. So let me show you the first benchmark.
We did a study of 35 of our electrical distributor clients, and on the first benchmark, what we did is compare the margin they get from their largest customers versus their smallest. We used customers buying more than $250,000 and compared the overall margin of the 35 electrical distributors versus their margin when customers buy less than $10,000 total per year. The overall median difference is 9.9 margin points. But within that, there’s quite a bit of difference.
The lowest quartile of those electrical distributors, those with the least difference, was just six points. Whereas those at the top, the top quartile, enjoyed a 13 margin point difference between their largest and smallest customers. And we found that difference in margin based on customer overall volume had a high correlation with the distributors’ sales and earnings as a percentage of sales.
Let me show you another one. This is the margin difference based on the total invoice amount. We used those invoices with $5,000 or more in purchases and compared those to the smallest, those where the customer was buying less than $250 on the invoice. The difference, again, around 10 points, 10.7 margin points.
The bottom quartile was just at six, whereas the top quartile was at 15 margin points difference. So those distributors were able to differentiate their pricing to a greater extent and make more on the low volume invoices.
We have a term that we use in our practice, customer item combination, and the definition is over in the rectangle to the right, but what we mean by customer item is how much any one customer spends on an item over the course of one year. The idea being the more they spend, when they’re spending a lot buying frequently, the item will be more price sensitive. The margin is lower than when they buy a little and they buy in low dollar amounts.
We took the 35 distributors’ data and we looked at how much a customer spent on an item in a year. Over there on the left, all the way from more than $2,500 to under $250. We show you to the right under the median margin column, the average margins. So you can see as you’d expect, the margin is lower when they spend a lot on an item over the course of the year, but it gets higher as the customer buys less. All the way down to when they spend less than $250 on an item all year long, the margin was about 30%.
So there’s an 11.2 point difference from top to bottom, but when you look at the most profitable highest margin distributors, they enjoy a bigger difference. So when a customer makes an incidental purchase, spends less than $250 in a year, they’re making 16, not 11 margin points additional, and that makes a big difference in their overall margin rate.
Unfortunately, electrical distributors overall don’t make much more on non stocks than they do on stock sales. The overall difference in margin is only two points, and it’s not much difference when it’s an incidental non stock. 56% of non stocks for electrical distributors are pretty incidental. The customer buys it once, they spend less than $500.
However, the most profitable distributors make more on non stocks, particularly on incidental non stocks. Rather than making just two points more like the average electrical distributor, they make six points more margin.
If you pull back and look at your business and simplify, there are two parts of your business. About 70% of your business, what we have in the blue slice in this chart, is price competitive. And on that, as you look from electrical distributor to electrical distributor, item to item, there’s not much difference in margin. The market makes it so itself corrects, there’s only so much you can make on these competitive items.
The big difference is on that green slice. 31% of electrical distributor sales are what we call incidental. Those are sales that customers buy the item once in a while or once a year, and they spend all year long a few hundred dollars on the item rather than a thousand. The average electrical distributor makes six to seven more points on the green slice than they do on the blue. The top quartile make an additional 12 points more margin.
What these higher margin, higher performing distributors do is pretty simple. They target this low hanging fruit of incidental purchases. They focus on lower volume customers, C and D type items, and infrequently purchased items. That allows them to pick up another five points on about 30% of their sales and do it safely, and they can over the course of three, four months have a tremendous impact on their overall margin and company profit.
Paul, I turn it back to you.
Paul Parsons: Hey, thanks a lot Dave. And for anyone that’s interested in learning ways where you might compare using your actual data, we do offer any AD members a complimentary pricing and ROI analysis. So you can reach out to me at my information here.
We sure appreciate everyone making time today. Have a great rest of the week. Hope to see you. We’ll be at all the conferences coming up this year, so hoping to see you at an AD conference soon. Thanks. Bye.
Dave Roller: Thank you.
