Tips for Distributors to Improve Gross Margin

 

Sept 17, 2018

By David Gordon

For many, corporate success is typically defined as sales success, as sales revenue is an easily identifiable and discussed/shared metric. But in a quest to grow sales, and due to competitive pressures, gross margins for many distributors have eroded, making gross profit dollars more scarce for investment back into the business. And with operating costs increasing and investment requests accelerating, finding ways to increase your gross margin to impact net profitability is critical for long-term success.

Recently I participated in an interview with Tony Corley from Epicor and Jim Lucy from Electrical Wholesaling. The topic was “8 Habits of High Gross Margin Distributors.” Tony has written a white paper highlighting his observations of strategies that help distributors in their quest to improve profitability… essentially a roadmap. Tony’s eight habits include:   

• establishing a pricing committee   
• defining a profit margin goal   
• use “list less” pricing whenever possible   
• understand that not all customers and products are created equal   
• establish thresholds and approval processes   
• understanding value-added services – and how to charge for them   
• understand how to monetize customer service   
• walk away from unprofitable business

Tony came at the issue from an ERP company observational trend viewpoint. Not “how” they are using their ERP systems but more from the processes that top performing distributors utilize. (Watch for more on Tony’s eight habits in the next issue of CEW.) 

I shared observations from a strategic and practical viewpoint from what we’ve seen, recognizing that (admittedly) I’m not a pricing guru… not close. From a corporate strategy, sales and marketing viewpoint, we look at pricing strategy through a different lenses and I shared complementary perspectives which are highlighted in this document titled Channel Marketing Group – Improving Distributor Profitability (www.electricaltrends.com/wp-content/uploads/2018/08/Channel-Marketing-Group-Improving-Distributor-Profitability-1.pdf). Topics here included:   

• 8 causes of lack of high profitability   
• the pricing challenge includes “plugging the leaks”   
• the “whack a mole” approach and why it isn’t a viable business strategy but is needed (sales is creative!)   
• too many cooks can water down the pricing strategy. Sometimes a benevolent dictatorship is needed… and is needed to force selling vs. order acceptance and mediocre profitability   
• the need to identify root cause problems with your margin issues   
• the power of decimals and how they can improve gross and net margins by .25-.46% bps   
• overrides and how they cost distributors net profit   
• contract and SPA pricing maintenance   
• the current, and future impact of eCommerce on pricing strategies… and the need for consistency across your ordering channels

Listen to interview   

• If you signed up for the webinar and want to re-hear, click here

• If you missed the session, register for the webinar and then listen to it here

Let us know your feedback. Our goal is to add to your internal discussions and share some “thought nuggets.

”What are your biggest pricing challenges (or what you see as the industry’s biggest challenges) and/or inhibitors to improving margins?

David Gordon is President of Channel Marketing Group. Channel Marketing Group develops market share and growth strategies for manufacturers and distributors and develops market research. CMG’s specialty is the electrical industry. He also authors an electrical industry blog, www.electricaltrends.com. He can be reached at 919-488-8635 or dgordon@channelmkt.com.