Many executives view the monthly sales and gross margin report as one of the most important tools for operating a business. In reality, its importance is minimal because it represents only history.
Once the day is over, the month is booked, or the quarter is closed, the numbers are just numbers. Executives spend too much time looking at the history of sales and margin and not enough time looking forward.
Most executives lack focus on future margins because they are not prepared to face the harsh reality that they use losing strategies. It is easy to complain about a 19.8% margin on last month’s report; however, it takes effort to develop a winning pricing strategy.
Good margins don’t just happen; they require a forward-looking strategic plan. The following are some core margin strategies:
• Do not allow salespeople to set or control pricing because the vast majority do not have the courage or discipline to turn a low-margin sale down.
• The “longer the price, the higher the price” is my motto when forced into extended pricing. Long-term fixed pricing strategies usually fail because builders will enjoy the “goodie” in a rising market but will drop the company or demand a price change on a nickel turn down.
• Our managers meet monthly to discuss future pricing and all information affecting it including average, landed, and future delivered costs. Our vendor contacts play pivotal roles in developing a winning margin strategy.
• Once the future costs for next month are established, our team updates our weighted-gross-margin program with the costs and any changes in weighted sales. This program produces the selling price to achieve an overall margin.
Yes, we adjust pricing during the month for special large bids and to meet competitive pressures, but we operate with a forward-looking knowledge base instead of a backward stare.
The construction supply industry must evolve out of its archaic ways of pricing. The margins for too many companies are driven by the failed practices of the past, which include:
• Allowing cherry-picking of bids from customers.
• “Price flinching” by reacting every time a builder claims he’s gotten a price from a competitor that is a nickel lower.
• Giving automatic discounts across the board for anyone who claims to be a contractor.
• “Buying business” through low pricing, which only works as long as you have the lowest price in town.
Finally, my best piece of margin-raising advice is to really know your market.
Over the last several years, national suppliers have sold projects in Florida at numbers that make no business sense, leaving 10% to 30% in profit on the table. This is a sign that salespeople and inexperienced managers who don’t understand how to calculate margins are in charge of pricing, not executives with vested interest.