Are Higher Gross Margins in Your Company’s Future?
When I wrote my book, “Gross Margin,” I did a considerable amount of research to learn the gross margins achieved by retailers outside the lumber and building material industry. I learned that lumberyard gross margins are among the lowest in the nation.
One of the greatest writers on the subject of success was the late Napoleon Hill. One of Hill’s greatest discoveries was this: “Whatever the mind of man can conceive and believe, it can achieve.” I believe this statement is also true when it comes to improving a company’s gross margin performance.
To improve gross margin, I recommend owners and managers follow the rules of goal setting. Here are the rules as they might apply to gross margin: The company’s gross margin goal must be in writing. Everyone who has any influence over gross margin, i.e., buyers, salespeople, managers, etc., must monitor the company’s gross margin goals by both customer and product category. I believe the most effective way to accomplish this is to call a meeting for the express purpose of discussing and outlining how much the company wishes to improve its gross margin.
Is the gross margin goal realistic? Display on a flip chart the gross margin the company has achieved in each of the past five years. No matter what those numbers are, setting a goal to improve them by, say, two percentage points is—based on my consulting experience—totally realistic.
What is the deadline for achieving this goal? I suggest the deadline be set for six months from now. Be sure to review progress against your goals at the end of each month.
Are you committed to achieving this goal? Commitment is a strong word; it means that you will achieve the goal in spite of obstacles that pop up along the way.
List obstacles we are likely to face along the way. Here are a few that I have observed as I have worked with my clients to increase gross margins:
Most salespeople have developed a mindset as to what gross margins or what markups are possible. I call this a markup rut (Chapter 2 in my “Gross Margin” book); these attitudes must be discussed and expanded. Salespeople are often more price conscious than customers.
Many salespeople feel guilty (Chapter 11) when they begin to apply higher markups. While 5% to 8% of pretax margin is optimal, the average lumber dealer earns between 2% and 2-1/2% in pretax margin. As an industry, our bottom lines are pathetic when compared to many other retailers. If we raise our margin, sales will suffer. Remember that gross margins can be improved without necessarily raising sell prices. Break up your managers and salespeople in small groups and brainstorm ways to raise “margins” without raising prices. Here are a few examples:
1. Sell the complete package (Chapter 12), not just low-margin commodity-type products.
2. Upgrade customers (Chapter 9) to higher margin products that will look better, last longer and give customers the advantage they’re looking for.
3. Practice defending prices (Chapter 10). Ask one salesperson to play the role of customer and another to play the role of salesperson.
4. Special order sales (Chapter 5). Examine the thought process surrounding the pricing of special orders. Identify the specific special order products that make up 80% of special order sales. Pull the sales team together to brainstorm ways to change the current mindset on S.O. pricing.
Owners and managers call me frequently to share their successes at raising gross margins. I’m seeing more and more dealers with gross margins in the mid- to high-20s. You can too! Just set the goal and make gross margin control a priority for everyone in your company who influences gross margin.