This isn't the first time I've covered gross profit margins, and it won't be the last. As you may have figured out, I believe in being more margin driven than sales volume driven. Yes, you need “X” amount of sales to operate a successful showroom, but it is the gross profit margin on those sales that really drives the bottom line.
Wait! If you're a showroom sales consultant and numbers talk doesn't turn you on, don't turn the page just yet. You too, along with the bosses, need to understand the importance of the gross profit margin (hereafter referred to as GP). Just so you don't skip to the next article, let me explain in simple layman's terms what GP is and why it's so important.
Gross profit is the dollar amount left over between the selling price of an item and the cost of that item. There will be GP dollars and a GP percentage on that sale. See if this example helps:
-- You have just sold a faucet.
-- The manufacturer's list price is $500.
-- You extended a 20% discount off list price.
-- That makes the selling price $400.
-- The acquisition cost price was $225.
-- The difference between the sell price ($400) and the cost ($225) is $175.
-- $175 is the GP dollars on the sale.
-- Now, if you divide the GP ($175) by the selling price ($400) you will get 43.75% - which is the GP percentage or GP margin on that sale (and a very nice margin too!).
The goal of every sales consultant should be to achieve sales at the very highest GP margin possible.
Too many bosses and salespeople put most of the emphasis on sales and not enough on GP margin. Plumbing wholesalers in particular are guilty of selling at too low a GP margin out of their showrooms. There are a lot of reasons for this. I don't agree with many of them, but here they are:
The first is what I call “wholesaler pricing mentality.” Many wholesale products are what I call “commodities” - and most wholesalers sell them. In order to get the sale, they must be competitive. This mentality carries over into the showroom.
Wholesale margins are in the low 20s. If they achieve margins out of the showrooms in the high 20s they believe they're doing a good job. Comparatively they are, but compared to what they should and could achieve, they're not!
Many wholesalers are driven by volume (the more they can buy from the vendors, the bigger the volume rebate at the end of the year will be). Memberships in buying groups add to this also.
Another reason for low margins is not having a different discount for the plumbing trade on showroom sales. There's a big difference between a wholesale sale and a showroom sale. Showroom sales take a whole lot longer to accomplish and it may be a relatively smaller sale. Plus the overhead expense of operating a showroom is higher. The plumber's discount on showroom sales has to be less than the over-the-counter or out-of-warehouse sales. Honestly, face-to-face “selling” can persuade the plumbing contractor to agree to a lower showroom discount. Heck - when they add their markup to the cost, they'll make more. Too many wholesalers only show and sell the traditional wholesaler plumbing products out of their showrooms. Every wholesaler and big box shows and sells the same products. Services are very similar, so it ends up being the source with the lowest price that gets the order. In other words, some great products have been turned into commodities. It's not right, but it is what it is! I'll suggest what you can do about this in a minute.
The bosses haven't taught showroom salespeople how to sell, to raise or improve their GP margin - many because they don't know how. In previous articles I have spelled out a 20-point list of various things that can be done to improve profitability. You can check out the SUPPLY HOUSE TIMES Web site at www.supplyht.com to find these articles.
Most wholesalers' sales consultants don't have monthly/yearly sales and gross profit goals. Wholesalers would be smart to set goals and then tie incentives/ commissions/ rewards to achieving these goals.
Okay, it's pretty easy to recite reasons why wholesaler showroom margins are too low. And, it's fairly easy for me to list several suggestions on how they might be improved. The hard part is getting management's attention to do something about it. And yes, it starts at the top. “Mr. Big” has to believe that showroom margin improvement is a priority. He/she must show how margins can be improved. He/she needs to establish some realistic, achievable goals and have some meaningful carrots out there for achieving those goals.
Once “Mr. Big” buys in, he/she must convince everyone else that margin improvement can and must happen. I suspect this would hold true for the wholesale side also.
I know for a fact that wholesaler showroom margins can achieve the 35 to 40% level. I have helped several dozen of my consulting clients grow margins from the low and middle 20s to this level. And, sales continued to grow through this process! Honest! If you're a doubter, then call me and I'll share some experiences and testimonials.
Don't expect to go from 25% to 35% in one month; it won't happen. But do expect to go from 25% to 26% to 27% in three months and from 27% to 30% in the next six months. Then continue to grow from 30% to 35% over the next two years. So the goal would be a 10% margin improvement in 36 months. It can be done - and YOU can do it!
Here are some ideas:
-- Change the discount extended to plumbers on showroom-only sales. This has to happen.
-- Change all the discounts off list price by 1%. If the going discount is 30% - make it 29%. TODAY! Then make it 28% in three months.
-- Don't extend discounts on everything to everybody. Not everyone expects or deserves it. It's okay to sell some things at list price or at a very small discount.
-- Add a diversity of related products to the traditional wholesale product mix. Select two or three decorative faucet lines (semi-exclusive to your marketplace if possible) to go along with the Kohler, American Standard, Delta, Moen, etc. Show and sell a nice mix of bath accessories, magnifying mirrors, whirlpool tubs and possibly door and cabinet hardware. Make your showroom the “one-stop shopping” showroom for everything for the kitchen and bath. Don't be locked into just one major fixture line. Mix in one or two other nice complementary lines that other companies in your area don't have.
-- Develop an incentive program that rewards salespeople for growing their GP margin.
-- Charge a delivery fee for all consumer sales where delivery is required.
-- Learn to sell add-ons. Don't just sell the kitchen sink - sell the faucet, an instant hot and chiller combination, a water filtration system, the cutting board and colander, color-matched soap dispenser, strainer, disposal and color-matched disposal button. This grows sales and margin!
Sales are important. Controlling operating expenses is important. Inventory control and accounts receivable management are important. But I believe the most important piece of the success puzzle is a high gross profit margin. Make it a priority TODAY! You'll be glad you did.