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How Much Are Price Based Margin Leaks Costing You? Here’s How to Stop Them

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Every manufacturer and distributor we have ever met has been leaking profit margin through pricing execution. Some leak just a little margin, while others are leaking a waterfall of profits that are never realized. These profit leaks are typically equal to 2 to 4 margin points – that is, $200,000 to $400,000 on every $10 million in revenue. In most cases, management is unaware of these leaks because they lack the awareness and visibility to identify where price leakage occurs.

A myriad of price leakage sources exist, including under-optimized prices, unrealized freight charges, insufficient recovery of handling costs and giveaways. You can begin to identify your leakage sources through four analyses that are relatively easy to execute provided you have access to historical pricing data taken from invoices. These simple starting points enable you to capture incremental pricing revenue that can fuel additional and more sophisticated analysis later. Starting points:
 
  1. Take a careful look at negative-margin customer transactions. While most manufacturers and distributors believe that they have a handle on this issue, many are surprised to see how much business is being shipped at negative margins. We recently completed an analysis for a $100 million manufacturer who had over $250,000 in negative margin transactions. There were two choices for remediation: “fire” the customer or raise the price to an acceptable level. Either would stop the bleeding.
     
  2. Extend your margin analysis to low-margin transactions. Determine the margin floor – that is, the minimum margin you are willing to accept. Identify all transactions that lie below this minimum, and adjust them to an acceptable level. Keep in mind that the margin floor is not a target; rather, it is your minimum threshold.
     
  3. Small accounts are often a major source of margin leakage. Many of these accounts get low prices that should be reserved for much larger customers. Analyze which of these accounts are getting prices much lower than their peers. Look for price levels normally reserved for much larger accounts. Small accounts are rarely on management radar screen and tend to go unnoticed. Lifting prices on these accounts is low-risk and easy to execute.
     
  4. Determine whether you are getting the most from high-value products. While commodity products may be the core of your business and require careful pricing attention, higher-value products that are customized or have a niche focus may be ripe for premium prices. Segment your product families into categories from commodity to high-value, and look closely at the respective pricing. Scale your price levels according to value, and ensure that your marketing and sales teams are effectively communicating the value.
 
Stopping price leaks can have a dramatic impact on your bottom line. And, getting started is relatively easy. For additional help in capturing margin through price leakage elimination, call the pricing experts at PricePoint Partners: 330-342-0923.