The MHEDA Journal - Fourth Quarter, 2015 - (Page 79)

MONEY GROSS MARGIN MATTERS Pricing the Forgettable Last Five Percent BY DR. ALBERT D. BATES, PRESIDENT, PROFIT PLANNING GROUP M ost distributors continue to lament the pervasive, and possibly increasing, pressures on gross margin percentages. Seemingly, price is outweighing almost every other factor in the competitive arsenal. At the same time, gross margin is one of the "big two" in increasing profits for distributors (the other being operating expenses). This creates an imperative for distributors to generate extra gross margin dollars whenever they can to offset the dollars lost from price competition. A continually under-utilized margin opportunity for distributors involves raising prices on the slower-selling portion of the product mix. Many distributors may argue "been there, done that." Despite those protests, a major profit opportunity remains largely untapped. This report will examine the potential for enhanced gross margin associated with slower-selling items. It will do so from two perspectives: * The Gross Margin Potential - An analysis of how increasing prices on slow-selling products can influence the total firm gross margin percentage. * Finding the Margin Opportunities - A discussion of the types of items on which margins can be enhanced even with on-going price pressures. The Gross Margin Potential Within every line of trade in distribution, including MHEDA, there are wide variations in the gross margin percentage across different SKUs. In a typical variable pricing (or matrix pricing) scheme, fast-selling items have low gross margin percentages while slowselling items command higher ones. At the fast-selling end of the product line, the A items, there is virtually no opportunity to increase prices successfully. These items are purchased frequently so customers are very knowledgeable of pricing. To use an unpleasant term, these items are commodities. At the other end of the product spectrum, the D items represent a genuine margin-improvement opportunity. However, too often the profit potential is overlooked or even disparaged. Frequently, the sobriquet "D stands for dog" prevails. After all, the D items are usually only about five percent of total company sales. Seemingly, there is nothing to capitalize on here. In fact, if anything, the firm would like to eliminate the D items because they are such slow movers. Exhibit 1 The Common Characteristics of Blind Items * Characteristic Implication * Low Sales Level Bought rarely, unlikely to remember the last price paid * Not Heavily Promoted Information about price not readily available * Bought Only When Needed Availability more important than price * Low Price On a small item, no real concern about price * Repair Parts Buy something small, avoid replacing something large * Unusual Hard to find, availability is key * Non-Seasonal No need to discount "in season" * Unbranded Difficult to obtain specific price information The MHEDA Journal | Fourth Quar ter 2 015 79

Table of Contents for the Digital Edition of The MHEDA Journal - Fourth Quarter, 2015

President's Perspective
From the Desk of Liz Richards
Editor's Note
Ask Your Board
MHEDA University Calandar
MHEDA MEMBER PROFILE
@WORK
MHEDA’S 2016 CRITICAL IMPACT FACTORS
COLLABORATING TO GET THE JOB DONE
Industry Pulse
HOW TO GET YOUR ONLINE MARKETING EFFORTS BACK ON TRACK
BACK TO BASICS
PRIVACY AND SECURITY
A TREASURE CHEST OF EMPLOYEE TRAINING
GETTING THE MOST OUT OF AN INTERNSHIP PROGRAM
FACING INFLATION
MATERIAL HANDLING M&A: 3 REALITIES IN TODAY’S INDUSTRY
PRICING THE FORGETTABLE LAST FIVE PERCENT
New Members
Spotlight on Association News
MHEDA Milestones
TEN MORE REASONS WHY YOU CAN’T FILL JOBS
Index to Advertisers by Product Category
The Last Word

The MHEDA Journal - Fourth Quarter, 2015

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