Just as many business owners and managers don't know that some customers are unprofitable because of too many transactions, many aren't aware that small orders are eating them alive. By this I mean that most businesses have a large number of small orders that generate less gross profit than the cost of processing the order. As I mentioned in my previous post, if you calculate the cost to process an invoice (see previous post for details on how to do this) and, to use round numbers, your cost to process an invoice is $100, then any transaction with gross profit under $100 is an unprofitable transaction. If you have thousands of unprofitable transactions over the course of a year this can seriously erode your profits.
For example, I was visiting one of our stores recently and it got busy so I waited on a customer. The customer got two items for total of $11. I told him to just take the items for free because it was more profitable for me to give him those items than to bill him for them. Our gross profit on that transaction was only about four dollars and our cost per transaction was well in excess of that, so why would I want to bill him? On top of that, he might not pay us and it would take time for our credit manager to pursue him for payment. The people in our store thought I was crazy to just give him the materials for free but once I explained why I did that, they understood.
Now, I'm not saying that you should give your customers products for free every time their purchase generates less gross profit than the cost of processing the transaction because if you did that too often some wily customers would always only pick up one or two items. The best solution to the problem is to train your salespeople to do "related item selling" so that when a customer attempts to make a small purchase the salesperson asks questions and then suggests related items that go with the items the customer initially wanted to purchase.
In my 35-plus years in business I have found that most salespeople resist related item selling as they feel they are being pushy. I constantly have to point out that, in most cases, they're doing the customer a favor by suggesting related items. By this I mean, if a customer gets home and finds out that she didn't purchase everything she needed to get the job done and she has to make another trip back to your store, is she happier then? No! A professional salesperson can do related items selling while sounding like a consultant, not pushy salesperson. A good salesperson can ask the right questions about the purchase in such a way that the customer isn't offended and the size of the sale grows, sometimes significantly.
Another problem with small orders that is even worse occurs when a customer phones in a small order and wants it delivered for free. In my business, which is building supplies, we regularly have customers call in an order for less than $100 and want us to deliver it 30 miles away. That is a 60 mile round-trip and when you add in the driver's pay, fuel, and wear and tear on the truck, that sale is a huge loser for us. If we can't get the customer to increase the order size, we mitigate this problem by charging an "expedited order charge" starting at $25 and going up from there based upon how far the order has to be delivered. If the customer balks at the expedited order charge we tell the customer that if he is in no rush we will deliver it without the expedited order charge the next time we have a truck going in his direction. Sometimes the customer will decide to wait on the delivery to avoid the charge and other times the customer will say that he needs it right away and he will pay this charge.
A couple of points about this: never call it a delivery fee; call it an expedited order charge. In our industry free delivery is the standard and customers refuse to pay a delivery fee. However, if you train your salespeople to call it an expedited order fee, and properly explain it, you will be surprised how much you will collect in fees over the course of a year. The other point is you may need to waive this charge for your best customers. For example, a customer who buys over $300,000 a year from us wanted us to deliver two hard hats to a job about 60 miles from one of our branches. When we couldn't get him to add more to the order we did it as a goodwill gesture. While that sale was a huge money loser for us we scored a lot of points with a key customer.
In summary, attacking your small order problem can have a significantly positive impact on your bottom line but don't throw out the baby with the bathwater. Be willing to waive the expedited order charge for your best customers or be willing to lose a lot of business. There are no "one-size-fits-all" solutions to business problems and there is also no substitute for good judgment.
If you have any other solutions to the small order problem, I would like to hear from you.
Jim Sobeck is president of New South Construction Supply, West Columbia, S.C. This article originally was posted on Sobeck's Biz 101 blog. Copyright 2010 by Jim Sobeck. All rights reserved. This information may be reproduced as long as full credit is given to the author.