You’ve probably heard of Sun Tzu.
He’s the Chinese “Art of War” guy. If you’re now bombarded with vendor cost increases, you might like one of his quotes… “In the midst of chaos there is also opportunity”.
Some distributors are just trying to keep up with all the cost changes. The smarter ones recognize that all these changes create chaos they can use to raise their margin.
Your company needs to play both defense and offense to thrive in these times.
Let’s talk defense first.
You must avoid losing margin on items with cost increases. First, look at your customer-specific pricing. Identify any fixed price records. View fixed pricing as a “necessary evil” to be minimized. Change every record you can to a margin or discount.
Step two of your defense is harder.
Do you know how often your order writers lower your system price and use last price paid? The answer is often. We’ve found that when order writers lower the system price, 48% of the time they use last price paid. That always hurts profits…these days it’s suicidal.
The solution to using “last price paid” isn’t easy, but it’s straightforward. You’ve got to get your sales team focused on price utilization.
Now’s the time to support your team. Show them the cost of using last price paid. Let them know it’s not just okay, but essential to pass on cost increases. Focus on salespeople who don’t get on board. And one more thing…don’t stop. One talk isn’t enough to change behavior.
Now let’s look at your offense.
You have thousands of items you sell where it’s already hard for your customers to track their cost. That’s because 70% of the items a customer buys are “incidental”. They only buy the item 1 or 2 times a year and spend less than $150 per item.
These items account for 40+% of your sales. You can use the cover of vendor cost increases to gain 3 to 4 extra margin points.
You must get ready in advance to profit from cost increases…
- Identify the most competitive items for each vendor
- Move competitive items to item-based matrix pricing
- Maintain your current matrix margin on these items
- Set a margin-adder based on each product groups price sensitivity
- When your vendor increases cost, implement your plan
It’s just an update on the oldest play in the book. Add a little more when costs go up. The big difference is to not just slap an extra point on everything. That’s a good way to get caught on top items and leave money on the table on incidentals.
Profit2 clients nuance their increases based on product group price sensitivity. Their adders vary between ½ to 5 points. This allows them to play it safe where customers may be watching and make more where they’re not.
Sun Tzu probably also said something about acting fast. If your team is bogged down with the cost increases…we can help. You can be ready in a few weeks to take control and gain profits during this time. More vendor cost increases are coming, take a few minutes to talk with us now.