Improving Your Gross Profit Margin

IMPROVING YOUR GROSS PROFIT MARGIN

After a discussion with a few of my customers about what might be useful to distributor owners and managers, I decided to dedicate Mondays to the business side of your business.  Topics like improving gross margin, cash vs accrual accounting, managing inventory, retaining employees, etc will be featured.  I have reached out to many professionals and will share their expertise and advice all aimed at improving your bottom line and reducing your stress.

My first post in this category is about improving your gross profit margin. I found a great article from Jason Bader, a managing partner of The Distribution Team.  The Distribution Team is a firm that specializes in helping distributors become more profitable through strategic planning.  Jason has written many articles for Doors & Hardware magazine. I will be sharing a lot from Jason Bader in these Monday posts!

In his article titled ” Improving Gross Margins, Part 1″ he notes a few methods to do just that.   I chuckled when he says he finds it humorous that every city he visits is a “really competitive market”.  I have heard that about our dear state of Florida at least 100 times during my career in this industry and I must confess I am guilty of saying a few times myself!

One method he shared piqued my interest.  Read the excerpt from his article below, click the link to read his entire article. None of the distributors I  worked for utilized this method, but since becoming a representative I have discovered a few that do.

The mechanics are fairly simple.  Take the base replenishment cost, this is the one that comes from the supplier price sheet, and add a nominal percentage to that figure.  I suggest half a percent to 5 percent depending on the popularity of the item or product category.  The result, after adding the percentage bump, becomes the new standard or loaded cost.  This is the cost that your sales people will see in the system.  Most sales people have an acceptable gross margin in their head.  We are just starting them at a higher place.  In some packages, this is new cost field referred to as a “commissionable cost” because it is what sales commissions are based off of.  I tend to shoot for an overall accumulation in this fund of 3 percent of cost of goods sold. 

If estimators are using manufacturers price lists to figure their estimates, of course this would be more difficult to accomplish.  I do see it being an excellent way to increase gross profit margins for stock and over the counter sales.  It would be easy to pad the product’s net cost by a half to five percent, as recommended by Jason, in a software database.

Please feel free to comment below and let us know what you think about this idea, we all welcome your input!

I will cover tips in Part 2 of Jason’s article next Monday.