Improving Your Gross Profit Margin pt 2

IMPROVING YOUR GROSS PROFIT MARGIN pt 2

Last week I shared my intent to post articles each Monday morning focused on the business part of your business.

I kicked off the series by sharing part one of a two part article by Jason Bader, the managing partner of The Distribution Team. I continue last week’s theme of increasing your gross profit margin with part II of Jason’s article.

A more sophisticated pricing matrix In the excerpt below Jason speaks of the benefits of creating a more sophisticated pricing structure. Be sure to click the link to read the full article.

One of the best ways to maximize gross margin potential is to adopt a velocity based, or popularity based, pricing model in the company.  For example, many of us set up our matrix where a particular customer type receives a flat discount off of list price, or multiplier on cost, for the entire line.  Unfortunately, we tend to base this discount on the most popular item in the line.  What percentage of a vendor line do you think your customers know what they should be paying?  I suspect that it is less than 5 percent of the line.  It is the most popular items that get shopped around.  These items should receive an attractive discount.  Everything after that should receive a lesser discount or higher gross margin.  This is what good price matrix set up can do for you. 

It is definitely easier to set up one discount across the board for a customer, but Jason’s tip of assigning different multipliers or discounts based on particular items in lieu of a blanket approach wouldn’t take much effort and could yield a considerable increase in margin.

As usual, I welcome your input.  Do you see a downside to this suggestion?