What do your people believe about your company’s profitability?

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Read our article about the importance of educating your sales reps on the actual profit margins your company makes and the value you provide to your customers. This will go a long way towards reducing their inclination to offer discounts as a matter of course. Excerpts of the article authored by Frank E. Hurtte Jr. who has 28 years of distribution industry experience and a lifetime in sales follow.

“Many distributors refer to the difference in sale price and costs of goods sold as Gross Profit.”

I believe this is a major mistake. Here’s why. When our employees here the term Gross Profit, they assume the lion’s share of what I call Gross Margin goes straight to the owner.

If your company buys something for $80 and sells it for $100, how much money ends up in the owner’s pocket?

The answers are mind boggling. I hear answers ranging in the $15-18 range. When I share numbers from distributor association benchmarking reports, I get blind looks of dumb disbelief. There is a big difference between the supposed 20 percent return and the actual 2-3 percent return of real distributors. The looks turn to utter amazement when I further explain that the 2 or so bucks are later taxed at rates nearing 45 percent.

“Distributors work on a razor thin margin.”

Lack of education creates an ongoing ignorance (not stupidity). Because the distribution model is about a whole lot of people making independent and often unsupervised business decisions, this leads to some really poor choices; especially around pricing.

How do we break out of this situation?

The first step is actually pretty easy. Creating an awareness sets a person’s mind into action. Posed with the question, how much of a discount can we give customers in a two percent business starts the process. Simply talking about it can make a difference with a few of the more astute employees. Back this information up with some other rules of thumb. For instance (and using the Profit Analysis Report of one distributor association), distributors in our industry must make an average of 24.6 percent gross margin to break even or the cost of processing a special order for a none stock item costs around 67 dollars.

Make sure your people understand the value you create for customers. Knowledge-based distributors carry out services far beyond just transactional sales. They provide technical guidance, engineering assistance, product selection and often hold special purpose inventory just to cover unique customer applications. One would expect these tasks and services cannot be provided at the lowest price on the planet. This move helps your team better react to offhand pricing challenges from customers.

Click here to read the complete article.

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