August, 2007

Leaving Money on the Table

Are your special-order sales doing all they can for your bottom line?

By Bill Lee

Special orders are an integral part of the sales activity in most building supply businesses. 

In surveys conducted among our client base, we have found that special-order sales represent in the neighborhood of 25% of a typical dealer’s total sales volume, yet few dealers have developed a structured system for pricing special-order sales.

In your business, who prices special orders? In most of the businesses I work with, special-order pricing is at the total discretion of the salespeople. This is where I believe many dealers are leaving money on the table.

If a customer were to walk into your place of business and ask each of your salespeople to price a specific special-order item, what would be the odds that any two of your salespeople would quote the same price? When I ask this question, the typical answer I get is, “slim to none.”

When it comes to special-order sales, the great majority of salespeople I interview are in a classic “mark-up rut.” What’s a mark-up rut? That’s the term I use to describe the bad habit we have developed in our industry of using arbitrary mark-ups on cost to price merchandise. What the market will bear is frequently never considered.

Try this:

Identify the specific products that make up 80% of your company’s special-order sales. Next, conduct some market research and issue pricing guidelines so that everyone will quote the same price, at least initially. Depending on several factors, you can always deviate from these guidelines as circumstances dictate.

Granted, some special-order sales can be extremely price sensitive, i.e., trusses and premium windows, but there are hundreds of other products your company sells every day as “special orders” that are not at all price sensitive.

Let’s face it. Lumber dealers have to look far and wide these days to find opportunities to boost gross margins and special orders represent a golden opportunity.

Recommendation 1:

Advertise your company’s willingness to help customers find products that you don’t carry in stock. Make sure your customers and prospects are aware that special-order sales are an integral part of your company’s service offering.

Recommendation 2:

Set up a category for special-order sales and track this category every month. It’s also a good idea to reward the salespeople each month who generate both the highest special-order sales and the highest gross margin on the special-order sales they process.

Even if you don’t reward your high achievers, it’s good idea is to rank your salespeople by both the special-order sales they generate each month and the gross margin they achieve on these sales. This practice helps bring out their competitive spirit.

Don’t allow a substantial portion of your business to have a mind of its own. Develop a plan to optimize the profitability of your special-order sales. 

Consider this realistic scenario: Imagine that special-order sales make up 25% of your company’s business. Next, consider that through your efforts to optimize special-order gross margin, you are able to raise the average margin you earn on these sales by 4%.

If this were the case in your business, 100% of this margin improvement (on approximately 25% of your sales) would fall directly to the pretax line, resulting in one full additional point of pretax margin.

In many cases, one additional point of pretax margin can improve pretax profits by 35% to 40%.

And that’s enough money to get anyone’s attention.