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: I’m Paul Parsons with Profit2. Thanks for making some time to learn more about a short about Profit2 and also about some benchmarking data that we’ve put together over the last many years of working with AD members. I’ve got our company founder and my partner Dave Roller on the call today. Hi Dave.
Dave Roller: Hey, good morning, Paul.
Paul Parsons: Hey, before we dive into the meat and potatoes of the presentation, I wanted to give you just a little bit of background on Profit2.
We’ve worked with hundreds of distributors on strategic pricing and margin programs, and as you can imagine over the course of the time working with distributors, we’ve cued a lot of data together and HVAC and plumbing distributors to help them optimize margins. And we wanted to share some of that data and benchmarking with you today. So, Dave, it sounds like you got some interesting information to share with the AD team.
Dave Roller: You know, we’re often asked by distributors, how’s my margin? How do I compare it? And it’s a pretty straightforward question, but then it gets a little complicated when you start considering distributors have different customer bases and different mixes of product, but there’s a way that you can compare how you’re doing and I think more importantly, identify where you can safely increase your margin.
We’re gonna talk today about five pricing benchmarks that we use in our practice, and they all involve what we call margin differentiation. And by that we simply mean the difference between price sensitive sales and less price sensitive sales.
So let me show you the first one. A little bit of background: we did a study of 28 of our HVAC clients, and to start with, we compared their annual margin for their largest customers, those buying more than $250,000 total a year, with their smallest, those buying less than $10,000.
Now, when you compare the takeaway margin from those two groups of customers, on average, HVAC distributors enjoy about a 10 margin point difference. But within that, there’s quite a bit of difference. Those who have the least difference, the bottom quartile, only get about an eight margin point difference. But we found the top quartile of HVAC distributors had a 15 plus point difference.
And that difference we found correlates highly with distributors’ earnings as a percentage of sales.
Here’s the next benchmark. We looked at the margin on the highest dollar in total invoices versus the smallest. We chose to take the margin on those invoices where the total was more than $5,000 and compared that to those where it was less than $250. The median difference for HVAC distributors was 13 and a half points, but the bottom quartile only had a seven point difference, where the top quartile distributors had more than a 16 margin point difference between their high dollar and lowest dollar invoices.
We have a term in our practice, customer item combination, and the definition of it is in the rectangle to the right. But what we mean by that is a measure of how much any customer spends on one item over the course of one year.
And you can see in the column to the left, we’ve taken all of the customer item combinations that were sold by our HVAC customers and broke those down into five ranges — from those with the highest annual amounts spent by a customer on the item over the year, $2,500, all the way down to the lowest, where a customer only spent less than $250 on the item all year long.
And as you’d expect, the margin is lowest when the customer spends the most on that item over time and steps up so that when they spend less than $250, the median margin was 34.7%, a 15 point difference from top to bottom.
However, again, the top quartile of distributors have found how to make more than the average. They have almost a 20 point difference, and their margin is about the same for the $2,500 plus and the $1,000 to $2,500. Where they enjoy the margin advantage is down low, when the customer isn’t spending very much a year and isn’t buying it very often.
Unfortunately, on non stocks, most HVAC distributors make very little more on their non stock business than on stock business, despite the cost of sourcing and providing those non stocks. In fact, the difference is only about two points more on non stocks, and about half of all non stock invoice lines are incidental, one-time purchases where the customer is spending less than $500.
The top quartile of HVAC distributors make more though — they make seven points more versus the average of two.
We’d encourage you to look at your business and simplify it in concept as having two basic parts. About 70% of your business is competitive contracts, key items, large volume invoices. And here, as we compared one HVAC distributor to another, item to item, there’s very little difference. And we think that’s because the market restricts how much you can make.
However, there’s a big difference on how much distributors make on the green slice of their business, which equals 31% of sales in our panel. And here there’s a huge difference. While some HVAC distributors only make five or six points more margin, the top quartile average 16 points more on 30 plus percent of their business than average. And these were far and away the most profitable distributors.
What they do is very purposely targeting lower volume customers, C and D items, and infrequent incidental type sales. They make another five plus points than their competition on that 30% of their sales, and they use that to increase their earnings and invest in the future.
Hey Paul, why don’t I turn it back to you?
Paul Parsons: Sure. Hey, thanks a lot Dave for sharing that information. And for anyone else that’s interested on the call, to benchmark your data versus some of your colleagues to see how you compare, we do offer any AD member a complimentary pricing and ROI analysis.
You can reach me at the information listed on this sheet. We will be at all the AD shows this year, so please feel free to visit the Profit2 booth. Past that, have a great rest of the day. Look forward to meeting with you soon. Thank you.
Dave Roller: Thank you.
