High-margin Counter Sales Aren’t Profitable

Strive to provide the analytical clarity to move every customer to become net-profitable

Photo courtesy of Ferguson.

High-margin counter sales aren't profitable. This is one of the first insights that distributors who subscribe to Line-Item Profit Analytics are shocked to find out. These analytics reveal that:

Naturally high-margin-percent SKUs and customers are mostly net-profit dollar losers; and
Gross profit dollars on small-dollar lines and orders are less than their cost-to-serve dollars.

You can’t ignore small transaction size, or the variable service-people costs for customers with bill-me-later, paper-based trade credit. And, losses are bigger at branches that are replenished nightly from a main distribution center (DC). The service value, such as 99 percent fill-rates and local pick-ups for main-DC-only SKUs, is big. But, having two piles of inventory at two facilities with doubled handling costs loses money at wholesale list mark-up prices.

These branches can charge more for their service value as Fastenal (FAST) proves.

Fastenal’s Two-Step Wholetail Model

FAST pioneered two-step distribution to convenient wholetail locations. Their rental costs exceed those of wholesale DC’s but are less than retail space. So, wholetail overhead needs wholetail pricing and terms.

FAST, from the outset, ignored suggested factory mark-ups and charged what their service value supported. They knew that high local fill rates save customers time. FAST’s overall margin rate peaked at 57 percent and was just under 50 percent for 2017 on $4.4 billion in sales.

Why Don’t Distributors Charge More at Two-Step Branches?

Contractor-supply distributors tell me invariably, “But, we thought we were making money!” Sorry. After backing out the very profitable direct sales and DC-direct shipments that are credited to the branches, most branches lose money on their local stock sales.

So, why not just set prices higher to be profitable? Most distributors assume that customers would think they were gouging them and would switch to competitors that work on wholesale list margins.

Test Beliefs. Sell Various Contracts

Here is where you should test your beliefs with analytics. The statement that “All customers will feel gouged and defect to a competitor” is an extreme, data-free belief. With customer profitability analytics at the branch level, you can:

Shift to higher prices with less costly terms;
Allow different customers to earn different discounts; and
Discover that better information provides more insight, options, and courage.

A Case Example

A plumbing wholesaler recently shifted to the two-step FAST model and pricing. Customers initially complained about prices and threatened to leave. But, they stayed for the better fill rate and time-saving value offered. Analytics shows that this company’s profit are insane, just like FAST’s.

Moral of the Story

Have the analytical clarity to move every customer to become net-profitable. Be in touch for a free, virtual tutorial and demo of Line-Item Profit Analytics. Email me at: bruce@merrifield.com

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Bruce Merrifield has served as a consultant for the world of independent distribution channels since January 1980. He is widely recognized as a pioneering authority on both “Cost-To-Serve Economics” and “Line-Item, Profit Analytics Management” for distributors. His “Strategic Insights for Distributors” essay series reflect this work. For more information, visit http://www.merrifieldact2.com. Contact him at bruce@merrifield.com.