Pricing is often “compressed” around a company’s average margin. There’s too little difference in margin rate between high and low volume orders, big and small customer sales and price-sensitive vs. incidental items.

Margin Compression/Profit2

When pricing is compressed around a company’s average margin, hundreds of thousands of dollars are lost in margin opportunity.

Our research at Profit2 shows that up to 70% of your sales may be priced in a narrow five to ten point bandwidth around your average margin. The graph illustrates this phenomenon. Each bar represents a 5-point margin range. As you move towards the average margin (yellow line), the percentage of sales falling in each 5-point range increases. In fact, the bars form half a natural bell curve to the left of the average margin.

You’ll also notice that the portion of sales sold at a higher margin rate drops off steeply to the right of the yellow line. As you’d expect, most of these sales are incidental purchases.

However, you’ll also find a significant number of incidental purchases being priced at or even below a company’s average margin. Sometimes this pricing makes strategic sense, for example, when pricing to gain share with a large volume prospect.

More often, there is no strategic motivation for leaving money on the table. The sales person prices the incidental sale in their zone of comfort or they’ll play it safe to avoid the risk of having to justify the price to the customer.

The result … hundreds of thousands of dollars in lost profit margin opportunity.

As a Profit2 client, we help you price every item.

We identify the items that are at risk and highlight those where you have an opportunity to increase GP$. We do the analysis that your sales team doesn’t have the time to do. As a result, our clients sell more and still make more on price sensitive sales.

Are Your Margins Compressed?

With a wealth of experience, the pricing experts at Profit2 help manufacturing and distribution companies improve margins and increase profits. To find out more about how Profit2 can help you gain control of your margins and pinpoint areas of opportunity, fill out our Contact Us form or call (913) 897-0159.