Gross margin has more to do with the attitude of a company’s managers and salespeople than it has to do with buying better.
When it comes to pricing, it has been my experience that a lot of salespeople are more price-sensitive than their customers are. In fact, many are so price sensitive that they will exercise any pricing discretion they have been given far more quickly than they will defend the prices their company has established.
Too many times I have heard a salesperson say, “Something is better than nothing every time.” What this expression really means is that it’s almost always better to make a sale and earn, say, a 10% gross margin, than to run the risk of missing a sale altogether because you refused to budge on price.
Based on what I see in the marketplace, virtually every company leaves gross profit dollars on the table because their people don’t have a system for determining where opportunities lie to boost gross margin. Managers are too busy to take the time to get to the bottom of margin issues. Salespeople are so eager to satisfy the managers by making the sale that they find it easy to overlook opportunities to earn higher margins.
Here are eight ideas that are guaranteed to improve your company’s gross margin:
1 Ask yourself this question: How long has it been since you did some in-depth research on the margins your company is earning today compared to the margins it earned in years past on several key product lines? Odds are it has been more than just a few years, if it has ever been done at all. Look at individual products, not just at the company’s gross margin as a whole.
2 Compare the gross margin you are currently earning on each major product category that you are selling to your top 25 customers. When you find wide variations, begin asking questions. Could some of your salespeople be playing favorites?
3 Test, test, test the market. If you were to go into your company’s computer system and raise prices across the board by, say, one half of a percentage point, how many customers do you think would even notice? How about by a quarter point?
4 Stop the practice of arriving at sell prices by marking up your cost. Cost should have absolutely zero to do with sell price. Sell prices should be determined by what the market will bear; that is, the price your customers are willing to pay for what you’re selling. Reread No. 3 above. Test, test, test the market. Raise prices in small increments, i.e., by a quarter of a percentage point and see if you get any push back. If you get no push back, try another quarter of a point.
5 Set firm guidelines for special order pricing. Don’t assume that because your salespeople are set up on a compensation plan that is tied to gross margin that they will optimize margins when they price special orders. If you believe you must give your salespeople pricing authority, give them a narrow range of flexibility.
6 Recognize the members of your sales team who produce the highest gross margins by ranking their performance each month. Note that I said each month, not year to date. The numbers go back to zero at the end of each month, so everyone has a chance to win the award for first place, second place, etc., each month.
7 If you make the decision to give your salespeople pricing authority, invest in training to prepare them to negotiate with customers who may be far better equipped to do battle than your salespeople.
8 When salespeople quote prices, they must have resolve in their voice: The price is $ . Something as simple as an insecure tone in a salesperson’s voice can cost the company gross profit dollars by the bucket full.
Business is a lot more fun when profits are growing.