Have you ever tried to raise your margins and realize that the resistance doesn't come from your customers, but rather your employees? If you are going to improve profits and you can't continue to cut expenses, you need to focus on your margins.
Fact: Your employees need to be on-board with your decision to move margins.
Fact: The margin percentage on an "A" item is usually substantially less than that of a "D" item. Don't get sucked into replicating A margins on your D items.
Educating your employees about the differences will lead to higher margins. Here a story of recent consulting assignment where I had tears in my explaining the difference.
Until January of 2011, my work had been 100% focused in the LBM industry. But this year I crossed over into the electrical distribution industry. While I am not familiar with the products, I realize that the margin management is the same.
I spent two months analyzing 25,000 SKUs determining the optimal selling price of each, after which I was ready to implement my 2% margin increase.
Every point on $1,000,000 in sales is equal to $10,000. Sweet!
During a pivotal phone meeting with the purchasing agent, Joe, and the CEO, Tim, I was asked to stop working on the project and immediately report to their office.
I dropped everything on my plate and journeyed to the corporate office. Sure, I was upset as the purchasing manager challenged my pricing equations and style, however, I listened to his argument.
"Chris, let me make sure that I understand what you are getting ready to do," Joe said. "If an item cost us $60 and we currently sell it for $80, we are going to change the price to about $85. Is that correct?"
"Yes. We are going to gain between five and eight points on these blind items," I responded.
Joe abruptly replied, "Chris, It will not work."
I then asked what I thought was a quick question, "Why not?"
I thought how could this not work? I have performed margin movement in the LBM Industry over 100 times with only two companies not reaching an additional 2% gross margin.
Joe continued to tell me reasons why moving the prices on his D items will not work. He stated that each time an employee sold a product they would review the cost of the item during the order entry process. They pressed a button on the computer that would calculate a margin percentage based on cost, arriving at the new selling price that was always lower than the selling price. If they [employee] felt the margin was fair, they did not change the price. It did not matter if it was an A, B, C, or D item.
Fact: Do not allow your employees to see costs and sell off of costs during order entry.
You guessed it, I did not believe Joe.
"I would like to speak to everyone at the company that can write an order or change a price," I said. "Joe, I can't imagine that this is true. But, if I ask the employees I will find the answer."
I then began a two thousand mile journey visiting 15 locations speaking to 66 employees that would make a pricing decision. I asked particular questions about how they were pricing products, among the many questions that focused on margin skills.
Joe was correct. I was wrong.
I realize that no matter what price we implemented into the new pricing structure, whether per location, per price level, or per customer, it would not stick as almost every employee sold based on costs.
I had to come up with a quick solution or we were going to lose two points instead of gaining two point.
My solution was to educate the salespeople about the increase in insurance costs, labor costs, fuel costs, material costs, increased competition, reduced margin dollars on reduced sales dollars, and other factors restricting net profit dollars. Sounds familiar?
I spent about an hour with each person and I went deep with my discussions even playing games to make my point convincing them to move margins. The employees 'Got it!' They understood.
Well, I thought they 'Got it!' and then I met Mary.
I delivered my training to Mary and her two co-workers. They listened and they said they understood. In fact, they said it makes sense. I was on top of the world as I understood that they understood. How can this be so easy?
A customer then walked into the store waving a credit card in his left hand and large light bulb in his right hand. He said, "I have my credit card and I would like to purchase three of these light bulbs."
For the records, I usually don't see bulbs this size in an LBM Dealer. These were large commercial bulbs.
Mary went to work. She located the three bulbs and brought these to the counter.
Tim was with me as he traveled to every store and was a part of the process showing his support for increased margins. Tim and I observed every customer move, as well as Mary.
My eyes teared up because I realized that we were getting ready to sell a D item at an increased margin with zero resistance. This was a textbook case.
Mary wrote up the order, processed the credit card, and thanked the customer for his business.
I then asked Mary for a copy of the invoice and realized that she had adjusted the price because there were four numbers on the right side of the decimal.
I then asked, "Mary, did you change the price?"
She replied, "Yes!"
I asked, "Why?"
She said, "I wanted to help the customer."
I then asked questions at a rapid pace and received curt answers.
I asked, "Mary, do you know that person?"
She replied, "No."
I asked, "Have you seen him shopping here before?"
She replied, "No."
I asked, "Did he ask for a discount?"
She replied, "No."
I then asked, "How much did you discount the bulb?"
She replied, "$7 a bulb, I guess. It was about $29 and with the new margin, it was now only $22 a bulb."
I now had tears in my eyes because I realize that Joe was correct. I realized that CEO was going to probably fire me and send me on my way. How could Mary go through all of the training and still move the price?
We then called a time-out and I reviewed everything again with Mary focusing on the light bulb. Tim, realized that if each employee gave away $21 per day for the number of days each location was open over a year, it would equate to approximately $350,000 on an annual basis.
Tim told me that this was the best $21 that his company ever gave away and it was clear how our struggle to move margins was not because of resistant from customers, but from the sales people.
Because of Mary's light bulb example, we began reporting to each location the number of lines on orders that are changed on a daily basis, in addition to margins and sales. We addressed it daily and saw the number plunge, the margins increase, and the sales increase also. We realized that the sales were not tied to the margins and we were going to get the sales dollars regardless of the price. Of course at some point we were getting resistance, but it was nowhere near 2%.
Tim asked me to again travel another two weeks telling the light bulb story to his remaining locations, as well as many other stories we learned along the way. We also reported the increase in margins and many success stories from the employees of his company.
From that point forward I have incorporated the light bulb story into my consulting.
If you would have told me that a key stroke of $21 would equal $350,000 in net profit, I would not have believed you, but the company has increased margin dollars by over $350,000.
If you have a light bulb story, write me at the email address below. I would like to share it with our industry as we work to continually increase our margins.
Chris Rader is a consultant based in Lafayette, La. Contact him at email@example.com.