In the utopian world we heard about in college, we learned that there’s usually a direct relationship between the amount of business a company does with a customer and the margin on that business. The result in graph form ends up looking like your classic growth hockey stick reversed. It’s not quite this simple, but the point was you should expect big, high-volume customers to be less profitable than smaller, lower volume customers. “Not a problem,” the sales person would say, “We’re giving it away but we’re making up for it in volume.”
In distribution, the difference between a profitable and unprofitable customer or product can a couple of percentage points. In order to increase margins and profitability you need to do more than manage runaway discounting – you need to understand the ‘hidden’ costs to selling across different segments of your customer base and take action.
First, start with a look at cost of goods sold (COGS). While this is not exactly a hidden cost, it is often not examined analytically. Unless you’re selling everything with a cost plus formula, different product lines have different profit margins and an ‘unfavorable’ product mix could have a big impact on customer profitability and margins.
Then on top of that there is cost to serve. Distributors that fail to take cost to serve into account are likely leaving money on the table in a business that already has tight margins to start with. Factors such as variance in shipping costs, payment surcharges such as credit card service fees, and collections costs can vary dramatically, even between very similar customers.
Today everybody in the distribution world is into value-added services. Kit assembly, inventory management systems — the list is large. It’s all about competitive differentiation and earning that trusted partner status with your customers. What a lot of distributors don’t realize is that they may be providing a lot of value-added services that they’re not getting compensated for. Many of these “phantom” value-added services can also be found in cost to serve.
Improving Distributor Pricing Strategy
So, what do you need to do about it? Employing comparative customer analytics and data science-driven price optimization are two critical steps. By leveraging the wealth of customer data you already possess, you can begin to make better pricing decisions and arm your sales teams with the actionable insights they need to maximize deal value and boost margins.