Pricing efficiency isn’t pricing effectiveness.
Make sure you practice good pricing hygiene. Don’t underprice SKUs or customers if they will continue to happily buy from you at higher prices. But also consider the positive tradeoff of lower prices in exchange for larger average order-size buying. What are your general buying and selling incentives for increasing order size?
Case study on order-size economies
For 2018, a $100 million contractor-supply distributor had roughly 4,000 active accounts. Some more facts:
1) The overall gross-margin rate was 23.7% of sales with a profit percent of 2.1%.
2) Order-size averages: Sales per order, $444; Margin-dollars per order, $106; Operating expense per order, $97; And, profit/order, $9.
3) The top four (one-thousandth of their accounts) generated 16% of the company’s total profits. Their average margin-percentage rates ranged from 17.5% to 23.2%. Their margin-dollars/order ranged from $250 down to $177. Their profit percentages bunched from 12.1% to 12.6%.
4) The bottom-four biggest-losing accounts had net losses ranging from $161,000 to $57,000. Their margin rates: 20% to 25%. Margin-dollars/order from $33 to $45. To convert the losses to breakeven, prices theoretically could be raised by 14 to 25 points. Not a likely solution!
Conclusion: Margin percentage has no correlation with the profit margin because both order size and the cost of processing orders matter, too.
Key theories: 1) Buying small orders creates high activity costs for both parties. 2) Profitable customer best-buying practices can be pitched to the big losers.
Reactive price-judo selling suggestions
Every time a customer asks one of your reps for a better price, are they incented and coached to counter with:
1) Thanks for the you-win, we-lose offer, but may I ask (quid pro quo) what will you do in return to offset our loss? Like: more volume and/or larger average-order sizing?
2) And why stop there? For big replenishment-system savings, why not have my supply-chain-solution team analyze your statistical buying data to identify avoidable small-dollar picks and orders that cost us both. Then, retune our buy-sell process to achieve win-win savings and boost the uptime productivity of your people who use our stuff.
As our cost-to-serve drops as a percentage of your sales due to collaborative tweaks, we can lower your prices and still make a net profit. McDonald’s has done this with its distributors over the past 60-plus years. Why don’t we?
Why don’t distributors get the analytics to proactively pitch (honcho-to-honcho) the biggest 1-4% of customers winners and losers on win-win collaborative replenishment-system solutions?