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We'll be taking a break from inventory management to catch up on some recent events. You might remember Brooks Provisions from our articles on protecting your company investments when an employee leaves.  Well the end came and it wasn't pretty please read below our excerpt from the Philadelphia Inquirer.

On a more positive note If you look at Margin Management   Issue 263-The sins of Margin Management Part 4 of 4,  We talked about getting more money for those "convenience items". Well Dave Roller of Profit2 e-mailed me and said hey Paul I can do a Part 5 of 5 for your readership. I was so impressed with what he said about Profitability I suggested he help our readers understand how to really maximize their Margins. I have never asked guys to promote themselves when they are guest writers but in Dave's case I was so compelled by his approach I asked him to tell us about his services also. I hope you folks can squeeze a little bit more out of your products using some of Dave's advice.

From PhillyDeals:

Brooks Provisions L.L.C., at Front and Packer, has closed without warning, idling 100 workers, after its private-equity owners decided it was cheaper to kill the firm than to finish its reorganization.  The new owners "milked the cow without feeding it; there's nothing left," said John Preston, business manager at Teamsters Local 929, which represents the 100 workers who lost their jobs without warning.

In our series about Margin Management we talked about ways improve profitability "to get more milk from your cow" while minimizing risk and continuing to grow your business "feeding your cow".  Today we have an article contributed by Dave Roller of Profit2 experts in margin management to give us some insight on ways his company has successfully helped food distributors and processors get more milk without killing the cow. 

Sins of Margin Management Part 5: Limited Differentiation by Dave Roller

When you walk into your local grocery, you enter a business built on price differentiation. 

Push your cart down the aisle… if you pick up a bottle of laundry detergent, the price provides less than a 10% margin for the store.  Same thing when you buy a gallon of milk.  However, if you pick up doughnuts in the store bakery you’ll pay a 60+% margin…and you don’t even want to know how much margin the store makes on that plastic toy for your child.

As the grocery business became increasingly competitive what happened?  The winners in the industry became experts in price differentiation.  They did exactly what Paul suggested in Part 4 of Sins of Margin Management, they “priced sensitive items competitively and non-sensitive items profitably”.

The stores studied sales data.  They measured item price sensitivity based on how often their customers purchased an item, how much they spent, what percentage of their customers purchased the item.  Then they differentiated their price accordingly. 

How good a job do food distributors do differentiating price?  Here’s a fact from our practice; 80% of food distributors have only a 5 margin point difference between their most price sensitive sales and their least.  It’s kind of like pricing a gallon of milk at 10% to be competitive, then only asking 15% for the doughnuts.   They leave money on the table.

There are food distributors that get price differentiation.  These companies average a 12 to 15 point difference between price sensitive sales and “incidental” sales.  Overall margin for these companies averages two margin points higher than the industry.  This two point margin difference enables these companies to earn 40 to 70% more than the average food distributor.

What do these top earners do differently?  In our practice we help these food distributors to:

• Measure the price sensitivity of every item sold to every customer
• Identify the optimum price for every sale
• Increase margin on those items that are underpriced
• Make sure margin increases don’t hurt sales
• Gain the active support of their sales organizations

The key is to measure the price sensitivity of each item for each customer buying that item.  It’s not enough to base your price on how price sensitive an item is in your business at large.

Profit2 has developed tools that enable our clients to identify the optimum price to charge each customer for each item they buy.  This optimum price is calculated based on factors that influence the price sensitivity of an item: how often your customer buys the item, how much they spend, how important the item is to your customer’s business and how similar items are priced.

Our partners have run companies similar to yours.  We don’t sell software; rather we use our experience in the industry and patented analytical tools to help you work step by step to improve margin.

Once we identify the optimum price for each customer-item combination you sell, we compare the optimum price with your current pricing.  What we often find is exactly what you’d expect.  Most highly competitive customer-item combinations are priced correctly, the market and competitors take care of that.  The big opportunity is to make more on incidental purchases. 

Together, we identify pricing that is too low and can be safely increased.  Then we help you update your pricing system to consistently make more on low volume, infrequent sales.  Profit2 clients gain an average of +1.7 points within 60 days.

Have you taken a comprehensive look at your pricing and focused on differentiation?  If not, you may be missing the single biggest opportunity to increase the earnings of your company.  Profit2 offers a free, no obligation pricing analysis.  Learn how your pricing compares versus similar companies, how much you can increase margin and what you’d need to do step-by step.

For complete information email me at This e-mail address is being protected from spambots. You need JavaScript enabled to view it or call 913-897-0159

Information on the Author
Dave Roller is the founder of Profit2, a 15 partner firm dedicated to helping distributors safely increase margin by helping them improve how they price.  Profit2 has helped Food Distributors and Manufacturers build margin and  earnings for over 10 years.

 

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