Many of our clients who operate within complicated pricing environments have transactions that result in negative gross margin. There may be several reasons for these money losers but one thing for sure is that these transactions quickly drain the bottom line. Often times, manufacturing companies and wholesale distributors are not fully aware of the extent of the loss.
So, regardless of the cause, how do we correct these losers when it comes time to have the discussion with the customer?
Several approaches can be employed. But, why not let the customer suggest a price increase?
We know that one way of correcting negative margin transactions is to stop selling these items altogether. As soon as you stop selling an item at a loss you are already putting more money to the bottom line.
Consider a discussion with your customer that starts with a statement about discontinuing the sale of the item to the customer. For example, “Our company is unable to continue the sale of item XXX to your firm.”
What is the buyer likely to do next?
They will likely ask why we are discontinuing the sale of the item. This is our opportunity to share with the buyer that we are losing money on the sale of each unit. And, any data that you can share with the customer that supports your loss is helpful.
In many cases our pricing consultants find that the buyer will help find a way to correct the situation which often includes offering a higher price. Assuming that you are a valued supplier to the customer, the last thing the buyer wants is to find a replacement supplier.
Other options may arise that includes lower performing but acceptable products that may be lower priced.
The key is to engage the buyer in the problem which will help to engage them in the solution. If the buyer concludes that a price increase is appropriate then they have ownership of the solution. And, if in the end, the sale of the item is discontinued to the account you are money ahead anyway.