Cost Structures: What Makes for a Good Sale?
•competitive strategy •profit analytics •WayPoint Analytics •distribution management best practices •profit training •big data •profit strategy •WayPoint systems •management strategies •Wholesale Distribution Industry •distribution industry trends •distribution industry intelligent pricing •business math for distribution •wholesale distribution basic mathWednesday, August 09, 2017—What makes for a good sale? Many wholesale distribution executives and salespeople are laboring under some dangerous misconceptions when it comes to what is or isn't a good sale. In this video, Randy MacLean discusses why some things that many of us have held to be true are incorrect and how we should really look at sales.
If you're anything like most people, your belief system was probably shaped by individuals who have been around the business a lot longer than you have. These beliefs may have been something that your mentors picked up from their mentors or, in a bigger company, it might have come off a spreadsheet. Regardless of where that information came from, it probably has one thing in common: it's wrong.
When we first invented WayPoint, we took a very a hard look at the numbers and it challenged our perceptions. As we continued to do profit analytics for companies in the wholesale distribution industry, we were forced to conclude that many of the things we were taught—and probably things that you were taught too—actually don't hold water. They were based on some assumptions that unfortunately just aren't true.
For starters, there are no magic numbers. Some distributors may have decided that, for instance, any sale with at least a 22% margin will make money. However, that approach overlooks the fact that different sales have different cost structures. It's not like there's one 22% cost structure associated with every sale. For instance, a customer who purchases a lot of product across a large number of shipments is obviously going to have a different structure than somebody who buys a lot of product but only requires one shipment.
We've found that about 75% to 80% of all sales, and over 60% of all customer accounts, actually lost money. This happened because even if the margins were above the magical line, whatever that number might be, the cost structure was even more above that line. As a result, the sales were losing money.
It's dangerous for distributors to operate under the assumption that as long as you meet a certain threshold in terms of margin percentage, that every sale would add some kind of a profit to the bottom line. This kind of thinking, which overlooks that the cost structure might be greater than the gross profit, is responsible for most sales actually adding a loss to the bottom line.
Don't believe me? You can test the idea yourself right now by considering the following information. In wholesale distribution, most sales run between a 15% and 35% gross margin. (Just to be clear, gross margin is defined as the percentage of the revenue that's left after you've paid for the product.) To put it in simpler terms, a 35% gross margin is 35 cents out of every dollar is left after we paid for the product.
While gross margins may run between 15% to 35%, the cost to serve or the cost structure for the sale can run between 0 and 200% (or possibly even more!). If you randomly picked a number from each one of those groups, such as a 28-margin and 58 cost structure, and married them together, you would wind up being 20 cents out of every dollar underwater on that particular sale, even though the margin is normally quite good. In wholesale distribution, many sales look just like this. Odds are you have quite a few in your company right now!
I'd like to urge you to take a deeper look into the cost structures of your own sales. Abandon the old teachings, the ones that promote gross margin, in favor of line item profit analytics so you can see whether each sale makes money and identify (and correct) issues with cost structures that are robbing your company of its profits.
For more information about Randy MacLean, visit: www.waypointanalytics.net
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