BILL LEE: Gross Margin: Who Is Accountable?
I read recently that the ability to lose weight is rooted in two key factors: achieving a balance between the number of calories consumed and the number of calories burned. Sounds pretty simple, doesn’t it? The key is keeping score.
A business’ ability to put optimal dollars on the bottom line is also rooted in two key factors: management’s ability to achieve an acceptable balance between its control of operating expenses and gross margin. It is my perception, however, that many managers expend more energy managing the factors affecting operating expenses than they do managing the factors affecting gross margin.
When I published my first book, Gross Margin, I identified 26 factors affecting gross margin. Of these factors, it is my observation that businesses do the best job at buying. Buyers put a great deal of energy into their effort to buy at the best possible price.
While buying “right” is important, selling “right” is equally important. Yet an incredible number of sales are made every day that leave gross profit on the table. And one of the principle reasons is because the salespeople in most building supply businesses have not received sufficient training on dealing with pricing objections to feel confident when they find themselves in a price negotiation.
In this article, I want to discuss just one of the 26 factors affecting gross margin:
The Ability to Defend Your Prices
In most lumberyards, management gives the sales force some degree of pricing authority. The damage to the company’s gross margin arises when the sales force either proactively uses its pricing flexibility as a marketing tool to try to “buy” business or when it caves into the negotiating tactics of customers who are attempting to buy a greater profit into their construction projects.
When salespeople lower their asking price the results are for the most part negative:
• The contractor will question if he received the salesperson’s lowest price.
• The contractor’s negotiating tactics are rewarded, so the contractor is more motivated than ever to hold out for a lower price on the next job.
• The salesperson’s gross margin is compromised.
• Any trust existed between the salesperson and contractor is diminished.