Your margin is my opportunity
by Nelson Valderrama
Imagine for a second that you had the opportunity to step back five years in time and have dinner with Jeff Bezos, founder of Amazon. You would probably pick his brain about e-commerce or his vision for expedited worldwide shipping. But Bezos might have another idea in mind. What if during that very dinner, he said to you, “your margin is my opportunity”?
As Amazon gets ready to hit $20 billion in revenue this year, you’d be crazy not to be paying attention to how they got there.
Now let’s imagine that while having dessert, Bezos shared with you the chart at right and asked you which product segment you think his team should focus on, based on gross margin?
Don’t worry, this is not another article about Amazon Business; this is about you and what you can do for your company. As owners, executives and sales leaders across our industry are thinking about growth, they’re all hustling to get more customers or sell more products to current customers. Very few of them are leveraging pricing to improve their business, yet pricing has the highest impact on growth.
So let’s talk about how you can maximize your pricing power.
Pricing is the proven lever that no one is pulling
Understanding the real opportunity in front of us is as simple as comparing the outcome for businesses when you increase 1 percent volume vs. a 1 percent increase in price. Luckily for us, Harvard Business Review did the math for us back in 1992.
As you can see in Exhibit 2, when a growth strategy is focused only on increasing volume, operating profits increase by 3.3 percent (assuming price remains the same). But if you increase prices by 1 percent (assuming the same volume), your operating profit will increase 11.1 percent.
Naturally, this begs the question, if improvements in price typically have three to four times the effect on profitability as proportionate increases in volume, why aren’t more owners taking advantage?
That usually depends on who you’re asking.
Excuses come in all shapes and sizes
As with any major change in a business plan, there are always a thousand reasons not to try something new.
I’m oversimplifying a bit here, but one of the biggest reasons in our industry is simply that distributors perceive pricing as too complex to mess with. For example, let’s say a typical mid-sized distributor has 1,000 customers. Let’s also assume they have an average number of active SKUs at around 5,000 SKUs and at least three quantity breaks (few, medium and many). When you run the math on that, you get a whopping 15 million possible combinations that need to be priced properly!
Another major reason I hear time and again from owners, general managers or leaders is simply a matter of allocating enough time to the issue. Let me ask you a question: How many days in 2019 have you invested on pricing, either talking or collaborating with your team? If you’re like most teams I talk to at expos and conferences, your answer is probably something like “not enough,” “we review our margin at the end of the month,” “when we have a few free hours,” or more recently, “thanks to new tariffs, we’ve been reviewing pricing much more.”
In fact, a CEO told me the other day that they have been considering bringing someone in to assess their pricing for four years but haven’t gotten around to it. Another COO told me “we handle our pricing internally” but when I spoke to his GMs, they confessed it’s been years since anything has happened with their pricing.
I don’t know what the perfect answer for your team might be, but at the end of the day, I urge you to be honest with yourself. Take the time to actively look, engage or provoke your organization to allocate time into pricing. You know the return on that investment has three to four times the potential of focusing on volume alone, so don’t let it go to waste.
The harsh truth is this: Jeff Bezos and his team wake up every morning believing that your margin is their opportunity; do you have the same passion for your margin and pricing?
How Do You Get Started?
In a future article, I’ll discuss strategies for categorizing your current pricing practices and share some simple frameworks for understanding where your opportunities lie as well as the fastest path to profit depending on what type of team you run.
First, though, you need to take a look inward and take inventory of where you stand today. Ask yourself real questions, such as:
- When was the last time you evaluated your pricing?
- What practices do you have in place to categorize your customers currently?
- Do you have any automated tools in place to help you better spot inefficiencies?
- Does your sales team have the insights they need to communicate price ROI?
- Are you really taking advantage of all the data in your CRM to optimize pricing?
Take a moment, take a breath, and take the first step toward maximizing your returns through improved pricing. It’s the best decision you’ll make for your business this year.
Nelson Valderrama is CEO of Intuilize, a Software-as-a-Service platform that specializes in helping mid-sized distributors transform data into profits. With more than 22 years of experience as P&L manager and executive for major PE firms and industrial distributors, Nelson has dedicated his career to helping businesses uncover hidden competitive advantages and unleash the power of data. For more information or to learn more about using the data you already have to improve your bottom line, contact him by email at nelson@intuilize.com or visit www.intuilize.com.
This article originally appeared in the July/August 2019 issue of Industrial Supply magazine. Copyright 2019, Direct Business Media.
INDUSTRIAL SUPPLY MAGAZINE
The November/December issue of Industrial Supply magazine features an in-depth cover story about Kimball Midwest. Plus, we're featuring articles by contributing writers Dirk Beveridge, Frank Hurtte, and Mike Marks, as well as interviews with numerous product and distribution industry experts.
