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The first sin of margin management is failure to address price leakage.  This week we look at how you can make sure to account for this leakage of profit in your pricing policy by using a "salesman pad."  Even if you don't have "salesmen" you can benefit by using a pad amount to prevent errors in pricing policy from costing you profit. Also please remember that the pad should reflect all the overhead components  required to get that product in and out the door.

 

"Pride goeth before a fall (in profitability)"

Have you ever seen a business person tap their head and say "Don't worry, I've got it all up here."  Odds are it wasn't the most reassuring thing you've experienced, imagine your accountant assuring you they've got you're financial information "all up here."  Most business owners agree that this type of response would be unacceptable from a service provider, but many then turn around and accept that same "reassurance" from themselves and their sales managers when setting pricing.

Let's look at an example using paper products and ground beef.

Let's say that sometime in the past a distributor started offering paper products to some of their customers.  Things looked good, the paper products even showed a higher margin than the ground beef and the sales team expected a record profitability for the quarter but when the bookkeepers totaled up at the end of the quarter, profits were down.  What Happened?

Well, one thing that might have happened was an increase in the number of delivery runs, light-weight high volume paper products can take up a lot of space on the truck.  In order to offset the costs a distributor might be tempted to simply increase the price, this would create an even more inflated gross profit destroying the value of your sales reporting.

Right here is where many business owners will grow frustrated with the tools they have available, and start keeping track of profitability "up here".  The trouble is eventually, someone is going to make a mistake.

The better solution is to start "front-loading" some of your costs via a "Salesman Pad".  A salesman pad cost is a sales tool which allows business owners, managers, and salespeople to see a more accurate profitability reporting without corrupting the accounting data.

The most effective use of Salesman Pad will be an individual Pad for each item you carry.  Items that are labor intensive, or high volume low value will have higher pads. I also know distributors who use a higher pad for items that have high cubes in their storage requirements because they take more storage space and therefore have a higher carrying costs. A pad can be used to pre-load the cost of refrigeration, special handling requirements, high chance of breakage or spoilage.

Below we have a screen shots of how you might set this up.

For The Ground Beef

 For The Paper Products (notice the higher salesperson pad), is higher because of the warehouse and delivery space it takes.

Properly executed the use of a Salesman Pad will provide the business owner and sales manager a tool to protect their profitability and gain more accurate reporting of profitability from their sales reports.

Don't let pride or aggravation lead you to skipping important steps in your margin management and pricing policies.  Investigate your options and take advantage of the power of multiple cost structure management and salesman pad.

In some more advanced systems the "padded cost" is what is shown the salesmen so he/she doesn't negotiate your Margin away. It is a critical way to make sure the "manage your margins"

 

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