This is the first in a periodic series of Web-only management, sales and pricing features by consultant Chris Rader.
If your expenses are rising beyond your control, you must move your margins. But you can't move your margins across the board by the same amount or else you will spook your customers. What can you do?
Through transparent pricing, my changes on average have resulted in a 2% margin increase, or $200,000 in additional profit on every $10 million in sales. Here is an example that I am implementing now.
I begin with an Excel spreadsheet listing the frequency of sales (number of times sold) by item, ranked by frequency from highest to lowest. For example, in the last 12 months this dealer sold 7/16" OSB 2,210 times. A total of 124,911 sheets were sold in those purchases at an average price of $8.99 per sheet, so the total sales price was $1,123,240. This single SKU represented 5.96% of overall sales.
In addition to ranking the items by frequency, I kept a running total of the percentage of sales. I was able to show that 50% of sales ranked by frequency came from just 80 of the thousands of items in the yard. Similar to the cost of milk in a grocery store, these 80 items are price sensitive. The next 70 items make up only an additional 13% of sales, and everything after that accounts for even less.
I then grouped all my items into four categories: those accounting for the top 50% of sales; those between 50% and 60%, those between 60% and 75%, and all others. I kept unchanged the prices on the first 50% of sales (80 items in all). I then increased the margins in the 50-60 group by 1%, the 60-75 group by 3% and the 75+ group by 9%. The result was two extra percentage points of overall margin, or $528,049 in additional profit. And these increases are transparent to your customers.
There's also room for substantial improvement outside the stocked items. The special-order gross margin for this dealer is a dismal 17.39%. If we can top a 25% gross margin on the special order items, we will increase the overall margin on special order items by $418,983. It's also important to train sales people to not sell special order items at commodity prices because these sales are more complex and take more time to process.
Here are some things to look out for when making this change:
- If you price your items at the shelf level, you will need to change the bin labels or price stickers.
- Some similar products are sold for the same price regardless of frequency. For example, green shingles may sell for the same price as black shingles.
- The easiest way to upload the prices is to script the information back into your system, ODBC (Open DataBase Connectivity), or a customized application from your software vendor.
- Look at your top 250 items and verify the new selling prices are at the right price points. For example, if you traditionally sell products on the nines, like $10.79, $10.89, and $10.99, then selling at $11.06 may not be the answer. Instead move to 11.09 or the next nine up.
- Do it today. The longer you wait, the less profit you will make.
Should you want to look at my spreadsheet and get a better understanding of this, please feel free to visit http://www.radersolutions.com/transparentpricing.