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The Secret to Improving Margins

The Secret to Improving Margins

June 25, 2018

Margin enhancement programs begin and end for many B2B distributors with a focus on the outside sales team. You talk to your sales team and ask them to get more margin on every order. Everyone says things like “it’s up to you,” and “get paid for your value.” 

You might leave your margin meeting feeling that you have a plan, that things will be different, and that you will see improvement. Too often, you come back to the next meeting and don’t see the margin improvement. Then you plead with your sales team to try harder and make it happen, and you hope for the best. 

Your margin improvement plan is doing the same thing again and again. It’s like the back of the shampoo bottle says: Lather, rinse and repeat. Frustration may build with your outside sales team and you might question whether you have the right team on board. But it’s probably not all their fault. 

Here’s why. Your outside account managers are assigned your largest accounts. You already have a high share with these accounts. The challenge is the competition is also pursuing many of those same accounts with their outside account managers.

These competitive B2B distributors and manufacturers come after these largest accounts hard with new value-added programs and sometimes hefty price concessions to move their business. To hold share you have to respond, and sometimes lower your margin to hold onto the volume. 

That’s why I’ve rarely seen a B2B distributor grow margin percentage with the largest accounts that make up the top 25 percent of their business the next year. It’s a battle with your largest accounts.

That focus on the largest accounts may cause you to inadvertently overlook the two big opportunities to improve margin – to focus on improving your customer and product mix.

Improving Customer Mix

Let the data be your guide. If you look at an average B2B distributor’s pricing curve, you’ll find that the smaller accounts have higher margins than the largest accounts. It’s also true that most B2B distributors that take share often drive most of their growth from these smaller accounts. In the small and medium account space, there are fewer competitors (everyone is big game hunting) and better price controls. Smaller customers also tend to be more willing to pay a little more for the services you offer.

Distributors that have created an easy ordering experience for small- and medium-sized customers are winning. They are doing it with strong strategic plans, a willingness to change their sales coverage model, and often investments in marketing and online platforms. It’s a simple equation. If you make it easier for small- and medium-sized customers to order on the phone, in person and online, you win more business. 

Improving Product Mix

The highest price point for any product is when it is brand new. As the market tells us, prices come down as more competition hits the street. As information has become more accessible online, it appears a key part of what used to drive B2B distributor business is being eroded by increased pricing transparency. But you don’t have to passively accept the consequences. There are ways to move the margin needle. 

Where has the B2B distributor focus on new product introductions (NPIs) gone? You can get back that focus on NPIs by partnering with the right suppliers and making it a priority. The second area that can be a breakthrough is expanding your focus on profitable product groups and add-on sales. Distributors who track their NPI sales and profitable product category sales growth can drive margin up and broaden the product basket they sell. 

Here are some questions for your next meeting. If you get answers to these, it can lead you in the right direction.

  • How many new, small- and medium-sized accounts do you have this year versus last year? Are you growing this key group of accounts? 
  • What is the NPI percentage of your total sales? Do you have a company goal for NPI sales? What is the gross margin percentage of your NPI products versus your standard business?
  • What is your percentage of add-on sales in profitable product groups? Do you even categorize product groups by profitability?

Getting the analytics for these types of questions can deliver some breakthrough margin improvement and growth. This can lead to margin meetings that deliver better returns. Then you can follow the shampoo bottle instructions and lather, rinse, repeat… and smile.

As always, we value your feedback. Feel free to comment below or contact me at john@mdm.com

 

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