SOI 2014 - Profit Pressure

Distributors Being Squeezed By Low-Price-Searching Clients

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Profit PressureDistributors are being squeezed by low-price-searching clients. How can they handle the pressure?

“We’re seeing a decrease in profit margins, but our goal is to increase margins,” says Steven Polish, stating his frustration with the marketplace in the most obvious manner.

Polish isn’t alone in his frustration. A large portion of distributors we surveyed were disgruntled with decreasing margins, an ever greater problem within the industry even as revenues rise. And slipping profits are causing more and more distributors to sweat. “As a business owner, there’s no such thing as security,” says Jennifer Lyles, lead igniter of FireSign Inc. (asi/522741), a distributorship in Smyrna, GA. “It’s imaginary.”

Profit PressureData within the State of the Industry report shows the profit pressure that distributors are indeed facing in their businesses today. First, showing that prices of orders are decreasing, the average gross profit margin for distributors dropped from 34.8% in 2012 to 32.9% last year. Also, the average value of an order fell last year by about $50 – from $1,061 in 2012 to $1,010 in 2013.

Unfortunately, that $50 shortfall is coming out of distributor profits on every single order they place. However, experts and distributors alike say there are ways to boost declining margins. And much of it has to do with client relationships. Distributors who build rapport and gain the trust of their customers can often hold firm on margins, even if they have to concede a margin point or two initially.

After “you drop the margin once or twice and then you build that rapport, the typical customer gets busy” and stops shopping around for the lowest price on a product, Lyles says. Then, she adds, if distributor costs increase, clients are less likely to balk at a price increase on a product, knowing their distributor is reliable and trustworthy.

Even a small increase can make a big difference in overall profits, Lyles says. If you’ve got a 1,000-piece order and the product is $1.00, adding just a nickel to the price will add a boost to revenue. “We just added a nickel, but increased the margin by $50,” a substantial return when that five-cent addition is added to hundreds of product orders across the board.

When the Price Goes Too Low
While Lyles negotiates with clients and drops a margin here and there on occasion only to raise it over time, other distributors simply refuse to drop margins, and admittedly risk losing clients in the process. “When I run my numbers, we’re actually up from last year,” says Judi Brown, owner and corporate wellness engagement consultant for Getting Personal Imprinting LLC (asi/205008), a distributorship in Lakewood, WA.

Brown says she rarely, if ever, budges below her 35% margins. Between online vendors, demanding clients and a few suppliers selling direct to end-users, Brown admits customer requests for lower prices are becoming more frequent. But unlike others who may drop unit prices to close deals and hold onto clients, Brown is loath to cut into her take just to keep an order. If she must lose income, she says, she prefers to donate products on occasion to build community goodwill.

“I think down the road something greater might come” from that, Brown says. But, she warns, distributors who take that route should be cautious. “It’s something we look at very, very closely, and don’t jump at everybody who comes asking for us to do that.”

Profit PressureOthers overcome margin decreases by avoiding certain product lines. For Idea Workshop Inc. (asi/229563), the easiest way to avoid margin battles is to simply offer items that aren’t as price-sensitive as others. In this case that means high-end apparel like Brooks Brothers and Lacoste shirts or Inky and Bozko glassware.

“Our products are a little bit immune” from price gouging, says Bob Horwitz, president of the Minneapolis-based distributorship. As providers of quality, name brand items, Horwitz says, his company’s clients tend to compare pricing to the retail market as opposed to other distributorships. And that, he says, can help separate distributors from the common conversation they have about price – especially the need for lower prices. If the conversation can be elevated to compare promotional products to retail-type items, that will help to minimize the price discussion.

“They’re going online to source discounted brand-name shirts, but they can’t find them cheaper,” Horwitz says.

Moreover, he adds, the company isn’t aiming for a high- volume business where price discounts are more frequently requested or even demanded. Instead, he says, “we’re trying to keep it small, and what we do is get deeper in with those clients,” which, for now number less than 40.

It’s an approach that Robert Mascia certainly espouses in his management consulting business. The best way to carve out a lucrative niche in such a commoditized, competitive market is “to almost create your own brand and niche,” says Mascia, managing partner for Green Ridge Group, a financial services company based in Basking Ridge, NJ.

But other strategies work as well, particularly for distributors who don’t want to sell only name-brand or high-end product lines, says Mark Faust, principal at Echelon Management International, a business consultancy based in Cincinnati. For starters, he suggests a “bundling or flanking” strategy in which distributors offer tiers of products with different prices. Instead of offering “yes/no choices” they should offer options, which often persuade clients and prospects to consider products other than the one they might have in mind initially.

“When everyone is doing a price quote for a commodity, price wins,” Faust says.

But it doesn’t have to. Flanking, he says, in which distributors offer a threesome of products, offers clients “a gold, silver and bronze set of options that improves upon the customer’s requested” and often low-priced products, Faust says, “with a combination that delivers more value for the client, and yet will also have more margin.” Doing so, he insists, can double profits, even if revenues rise nominally.

But the end game in driving up margins, Faust says, should be for distributors to continually build connections with clients. That should include identifying a company’s top 20 customers for yearly interviews. “If distributors would just interview five to 10 of them every quarter, they could uncover great amounts of new business,” he says.

And when they connect with clients on a regular basis, they lock in rapport, which allows them to consistently inch up margins over time.