If a wholesaler increases their prices on average by 10% over a small 5% of their sales volume, the additional net income is mathematically predictable: a 0.5 percent gain in sales, as long as there is no loss of sales or increase in office costs for applying a price increase policy. If your business sells $ 8 million a year, the additional income will be $ 40,000; $ 4 million, $ 20,000; $ 2 million, $ 10,000; $ 1 million, $ 5,000, and so on. These are annual dividends, the "prize" for raising the price on slow-moving items.
I verified with 160 clients, who do business of more than $ 330 million a year, and each of them thinks that the above mentioned price increase policy can be easily implemented by any wholesaler or distributor by using the most updated systems to establish inventory prices. Many wholesalers have done this for a long time. However, when there is no efficient inventory-based purchasing system, it could dramatically increase office costs, which would "eat" part of the savings.
Candidates for price increases
Let's first establish the number of slow-moving items in a traditional wholesaler's warehouse. For this we will use the histories of two clients, but the sales record of any wholesaler will inevitably give similar results.
Case 1. A large wholesaler with 600 active customers sells $ 8 million a year, stores 15,000 items, and has an average daily load of 335 invoices, each with 6 items, or approximately 2,000 billing lines. At about 250 business days per year, his annual workload is 500,000 billing lines. Thus, on average, each of the 15,000 items is sold 33 times in a year. It will be 18 years before the last of the 600 active customers buys the average item. Most items are sold only 6 to 18 times per year, so it will take 50 years for the last customer to buy slow moving items.
Case 2. A smaller wholesaler with 250 active customers sells $ 1 million annually, has 7,000 items in stock, and their average daily workload is 70 invoices, each averaging less than 4.5 items or 300 billing lines. On average, each of the 7,000 items is sold less than 12 times a year, or less than once a month. It will take 30 years for the last customer to purchase the average item and almost the same 50 years for the large dealer to dispose of slow moving items.
These facts are very revealing to each of the wholesalers our administrative employees speak to. Although computers are not needed to calculate this evidence, computerized reports confirm it. In most industries, 75 to 85 percent of the less active items traditionally stored represent 15 to 20 percent of sales, while the less active 50 percent of these generally account for only 5 to 10 percent. percent of sales.
Inventory percentage
Buying these items in modest quantities involves a much greater investment in inventory, in proportion to their small percentage of total sales. Thus, 75 to 85 percent of items representing 15 to 25 percent of sales can, if sensibly ordered, make up to 50 percent of a dealer's inventory. Using similar calculations, 50 percent of items that contribute only 5 to 10 percent of total sales and rotate 2 per year account for 15 to 25 percent of inventory investment.
Consider also the situation in monetary terms: A small number of the most active items may require an inventory investment of $ 50,000, but be sold 10 times, totaling at least $ 500,000 in sales. Meanwhile, 50 percent of your least active items can grab the same $ 50,000 of inventory investment, but only produce $ 100,000 in sales. Thus, you would need to quintuple the price on these slow moving items to produce the gross annual profit for the relatively few active items.
It is clear that you are not misleading the customer if you charge an average 10 percent increase in the price of low-turnover items to somehow lessen your losses. In fact, you are fooling yourself if you don't increase the price of these slow-moving items as soon as you can.
Practical use
Some wholesalers tell me that for years they have been using a policy of increasing the prices of their slow-moving items. It is generally applied to so few articles, that it does not affect the considerable additional income that would be obtained with a systematic method.
The calculations mentioned above suggest that it is mandatory to increase prices whenever possible. They also suggest that it is feasible to increase prices without sacrificing sales, as long as the company bills most of its customers at net prices, not at discounted list prices.
For example, take the total of our customers who buy at a higher price rather than the larger, higher volume customers. A dealer can sell 2,000 standard size fibers for flooring. This high-turnover product sells to smaller customers at 25 percent less than the vendor's list price.
Now, let's assume that the same records show that a less popular flooring fiber sells only 60 times in a year, and involves around 40 transactions. If you have 400 active customers, the average customer will buy this item once in 10 years. The chances of a customer buying fiber from you and acquiring it in the same month with a competitor are reasonably remote, realizing that yours is 10 percent more expensive. In fact, chances are good that you can already name one or two of your smaller clients who are whimsical enough to complain about the minuscule charge for a "foresight" item like this. And, as we saw, there are thousands of items like this that the average customer will buy only every 10, 20, or 50 years.
Chances are, you can't add a dime to standard items without provoking angry customer complaints. But the slow-moving items, which are the ones we're talking about here, aren't items like the fast-moving "sugar" that every customer takes time to check, in the rare cases that they don't know the approximate correct price. But if "sugar" is sold at a net basis of 25 percent off the vendor's list price, its low-turnover item can be sold to this class of customers at 15 percent off, thus reflecting the 10 percent price increase.
So far we have limited our analysis to smaller clients. Suppose a high-volume customer receives 40 percent instead of 25 percent off most items. You may feel the urge to give him 40 percent off in the long run because it was the quote your seller gave, and the customer has an accounting department that checks every item on every invoice. In such cases, reducing the discount from 40 to 30 percent is unlikely to work. But these customers are exceptions, and their high volume orders and inventory turnover offset the unrealized price increase.
Now suppose you have another client, also of high volume, to whom you grant payment terms of 60 to 90 days; The turnover of your accounts receivable may be only a third as frequent as it is with high volume, prompt payment customers. You can choose to give the slow-paying customer 40 percent off only on major items, reducing to 30 percent on slow-moving items. As Gilbert and Sullivan say, "Let the punishment correspond to the crime."
Pricing and billing
Some distributors (and companies in general) claim that current automated pricing and billing systems make line adjustments not only difficult, but impossible. However, this complaint is more often a sign that you have the wrong computer programs or lack of experience in using the current system, since most of today's computer programs offer much more flexibility than you think.. Having a global and standardized system in the industry also helps, and in reality, many wholesalers use entirely similar pricing and billing software. With this in mind, let's discuss some practical uses of pricing.
In our system, a billing line such as "c.1 specialties" shows almost 10 different net prices, each based on a different discount from the vendor's list price at 5 percent intervals. A sign at the bottom of each line (ours is located in the Kardex drawer) shows the discount on which the net trade price to smaller customers is based. On slow moving items, this measurement makes it easy to indicate a higher price per habit.
Once entered, exceptions to the discount for smaller regular customers appear on the card for larger, higher-discount customers. These cards show 50 to 60 main product lines separately. If only one discount appears on a line, it indicates that the customer obtains the discount on all items in the product line. If two appear, the lower one applies to items marked for a price increase (for example, items that move slowly). This is a formula that anyone involved in inventory pricing can easily use.
In our system we have the option to invoice either at list price and at a discount or at a net price. As already mentioned, what is recommended is the net price, but I do not recommend the use of any program so inflexible that it does not allow (as an exception) to invoice the list price and discount to customers who oppose the prices. net, and relatively few, but generally large. (For most customers, it's just a matter of getting used to net price invoices.) On such commonly large accounts, the price increase generally cannot be applied anyway, so you lose nothing if you invoice at a discounted list price.
Some distributors use a national pricing service. In such cases, the items with the highest increase configured in an inventory pricing system will not match the "stereotyped" book prices. But if you allow a pricing service to strip you of price-increasing revenue, you might think the annual cost of the service is $ 60, but in reality it is $ 10,060 or more, - $ 60 for the service plus $ 10,000. For allowing the service to control your business!
Some of our customers feel that they do not have to worry about such discrepancies in slow moving items. Others produce master catalog pages for each priceless product line. For a price change, they photocopy the master pages, add the system prices to the copy, the photocopy it with prices, and then make their own price catalogs. Since these catalogs were copied from the system, the prices match and contain the same price increase for slow moving items. Similarly, when a price increase is not integrated, many wholesalers use the price sheets of the pricing services for the main items and make their own sheets, mainly for products with increase,and the cost is justified by the additional income.
Limits to price increases
Of course, there are limitations as to which low-turnover items can be safely increased. Some wholesalers do not apply this policy to slow-moving items on certain product lines because many customers have easy access to pricing services, which inevitably show uniform increases or discounts. Again, wholesalers who have been invoicing at list and discounted prices must switch to net prices. Give your customers six months to get used to the change, and then start incorporating the increase into slow-moving items.
What are the upper limits of the additional income that we will obtain with an increase in the articles whose rotation is slow? As previously mentioned, for most companies 15 to 25 percent of inventory items account for 75 to 85 percent of cash sales. In my experience, traditionally, the items that make up this 75 to 85 percent of sales cannot safely be subject to our increase policy. Furthermore, it is clear that such a policy may not apply to all of the remaining 15 to 25 percent of sales. We would have to exclude most contracts, direct shipments, annual sale items, among others;as well as some unusual items in basic product lines where contractors and other industry “insiders” with pricing services can easily spot discrepancies.
Statistical studies show that thousands of slow-moving items (potential candidates for an increase policy) represent only a small proportion of total money sales. However, many of these studies suggesting unrealistic high additional profit margins could be claimed for pricing these items at more than 10 percent to achieve a 3 percent total increase in gross profit instead of 0.5 to 1. percent increase we suggest here. But consider the ramifications of further increase. Suppose, for example, that for a wholesaler items subject to an increase amount to only 5 percent of money sales. If a 10 percent increase in this 5 percent of sales yielded a 0.5 percent increase in gross margin,then a higher 3 percent of total gross profit would need an average price increase of 60 percent (x 10 = 60). If you have been selling it for $ 1, the new price would have to average $ 1.60. If your cost is $.75, your previous increase of 33-1 / 3 percent (the price increase from $.75 to $ 1) would now have to average more than 110 percent (the price increase of $.75 at $ 1.60). Let's consider another distributor whose items subject to further increase are equivalent not to 5 percent, but rather to 10 percent of money sales. A 3 percent increase in total gross profit would require an average 30 percent increase in these items. In this case, the previous average increase of 33-1 / 3 percent would now average 73 percent.
Some lower priced items with higher magnification can withstand an increase of 30 to 60 percent. However, most wholesalers agree that the realistic average increase is closer to 10 percent.
A 10 percent price increase on 5 percent of inventory equals a 0.5 percent increase in gross margin. A 10 percent increase for a dealer who has increased the price of 10 percent of their inventory will equal a 1 percent increase in gross margin.
Calculated on annual sales of $ 1 million, this represents a whopping $ 10,000!
