Profitability for Distributors

Keeping up With the Changing Times?

Is your current business plan working? Has your Return on Sales (ROS) consistently been between 5% – 10%? If the answer is yes, I’d say you’re doing well. If your ROS is typically less than 5%, a few strategic moves can help your company improve its profitability? It’s probably comfortable running your business the same way year after year but there has never been a better time to tweak a few things. So much has changed over the last five years with the most profound changes occurring since early 2020 when the COVID pandemic first reared its ugly head. The way you ran your company in the past may have worked well but there have been many changes to buyer preferences, the markets you serve, and the competition. To remain viable and optimize profits, many distributors are rethinking their go to market strategies and making the necessary adjustments to their business models.

Our firm works with distributors on strategy and profit improvement tactics. The bottom-line results between one distributor and another are often very significant. MDM recently published the “2022 Top Distributors” and the list contained 17 different industry verticals. Top performers serving different verticals can have substantially different financial performance due to the markets served. It’s important to benchmark your company against other companies serving the same end user markets. Even with distributors serving the same end user markets there is often significant financial performance differences. These differences can usually be explained by how well the company leaders are managing, their willingness to innovate, the quality of the company’s strategic plan and how well they execute against their plan.

To improve the efficiency and financial performance of your company, you’ll need to determine what changes have transpired in the markets you serve. Let’s focus on three areas: digital transformation, sales organization structure (hybrid sales) and data analytics.

  • Buyers don’t want to see sales reps as often as sales reps want to see buyers!
    • A pre-COVID survey by Real Results Marketing asked this question: How often do customers want to see distributors sales reps? The responses from hundreds of buyers and key influencers were:
      • 15% – Never
      • 20% – Annually
      • 29% – Quarterly
      • 25% – Monthly
      • 11% – Weekly
  • McKinsey’s Pulse survey from February 2022: surveyed 3500 B2B decision makers. Key observations/conclusions from this survey were:
    • E-commerce has surpassed in-person as the single most effective channel
    • Omnichannel: the more channels a sales organization deploys, the bigger the market share gains
    • Most B2B customers prefer omnichannel
    • The bar for omnichannel excellence is ten or more channels over three engagement modes (in-person, remote and self-service) delivered 24/7
      Omnichannel: A concept where every customer-facing individual or platform within your organization works together, offering a consistent and truly integrated customer experience. Omnichannel provides a seamless, continuous customer experience across any device or location a customer wishes to shop, with a personalized brand experience.

  • When decision makers are researching/evaluating new suppliers, ordering, or reordering, they prefer interacting with suppliers in the following ways:
    • More than 2/3 prefer remote human interactions or self-service
    • Less than 1/3 prefer traditional in-person interactions
  • Hybrid (specialized) sales roles will soon become the most common sales organization structure

Why are some distributors consistently top performers? What are those distributors doing as compared to companies that have a consistently lower ROI? The top performers consistently execute most things better than the mediocre performers. The following are a few of the areas of innovation where top performers have differentiated themselves.

The importance of having a robust, user-friendly, eCommerce platform has never been greater than it is today. Buyers’ preference for and their use of eCommerce will continue to increase for the foreseeable future. Replicating an Amazon like eCommerce platform might be too costly and unnecessary but having a viable online solution for customers and prospects to conduct business with your company has become basic blocking and tackling in today’s business environment.

Sales and Service Structure:
We can see from the surveys referenced above, customer needs and expectations have changed significantly over the past several years. As a result, the role of sales representatives and the structure of the sales organization should also evolve. Advances to eCommerce and realizations brought to light from COVID restrictions have contributed to the need for developing new cost-effective sales/service models. Finding, selling to, and servicing customers has changed. If you haven’t already begun to make some changes in your company, now is a good time. Consider the role of the traditional sales rep. How should your sales and service organization be structured? Redefine sales roles, responsibilities, and align sales compensation to reward for those things that are consistent with your company’s strategic objectives.

Many progressive distributors are reorganizing into hybrid sales/service teams:

  • Sales Reps (hunters): focused on finding new customers; don’t keep them long term
  • Account Managers (farmers): handle key accounts; grow share of wallet
  • Inside Sales Reps (proactive): manage mid-market customers
  • Customer Experience Reps: manage small house accounts; support the sales team

Data Analytics:
Strategic pricing, cost to serve and customer profitability analysis are three key areas that most distributors can easily address.

  • Strategic pricing: Sales reps often leave money on the table, are sometimes hesitant or not capable of negotiating effectively and many price in fear of losing orders. Customers often receive unnecessary price concessions because sales reps don’t know true market prices. Pricing analytics, in your ERP system will provide market-based pricing recommendations for all products. Improved pricing practices will easily add 200+ basis points to your overall margins.
  • Cost to serve (CTS): Most distributors value customers based on sales or gross profit and forget about the expense incurred earning those dollars. The cost to execute an average warehouse order at your company may surprise you. Distributors who understand their CTS often have a gross profit threshold on sales orders before giving credit or paying commission to sales reps. Why reward sales reps for unprofitable orders?

    Highly detailed CTS analyses have great value but can be complicated and time consuming. With a few simple calculations you can determine average CTS per order. It’s easier if all orders are delivered from your facility:

    Total Operating Expense/Number of Orders/Deliveries = Average CTS per order
    ($12,000,000/75,0000 = $160 average CTS)

    If suppliers are also drop shipping for you, it’s a little more complicated. Separate sales into warehouse and direct. Apply all storage, handling, and delivery expenses to the warehouse sales only, then do the math. This will give you a fairly accurate average cost to serve for both warehouse and drop shipped orders.

    Customer Profitability Analysis: Having accurate P&Ls by customer, sales territory, branch, customer segment, etc. is extremely valuable. Customers with the greatest sales volume or gross profit are not necessarily the same ones making the largest contributions to your bottom line. Customer profitability data has enabled many distributors to identify which customers are the true profit contributors as well as identifying profit leaks and fixing them. If you determine that certain customer profiles or segments were returning a substantially different ROI, you might decide to stop investing scarce resources collecting more customers who predictably will be under performers and invest more resources going after prospects that most likely will provide a better ROI. Customer profitability analysis can only be done after completing a detailed cost to serve analysis.

It’s important for company leaders to think strategically about what moves are necessary to remain viable. Some of the key drivers forcing the need for change are buyer preferences, competition (industry consolidation), margin compression, changing markets and eCommerce. Small changes to your business model will substantially move the profit needle for your company.