Five Easy Ways You Can Increase Gross Margins

One of the issues that should always be at the top of a gases and welding distributor’s mind is how to increase your gross margins. There are several things you can do to improve them. Pick at least one of these and work on it over the coming year.

Raise Prices on Your Lowest Tier of Customers
Every business has a list of “F” customers. Using the ABC ranking does not really describe these folks. Do an analysis of your customer base and identify the bottom 20 percent. They probably buy a small amount from you—maybe only once a year. Raise prices on this group only. Give them a hefty price increase and see what happens. You might be surprised by the fact that they not only do not go away, they don’t even complain. And if some of them do go away, so what? The cost of serving them might be bigger than the value. Many organizations have increased their gross margins by at least 5 percent by this tactic alone.

Target Products/Services with Higher Margins to Sell
Many organizations have products/services that have higher margins than others, yet they do not focus on selling them. Look at the things you sell that have the best margins. Put together a list of focus products that includes these items and a customer list of where you want these products/services presented. Direct the sales calls to occur. One organization increased its overall margin by 15 percent in one year by implementing this tactic. Increases of 5-7 percent are fairly common.

Telesales
A way to take costs out is to make sales more profitable. Look at your customer list. Are a group of customers being serviced by outside sales who could be handled by inside sales? What would happen to the real profitability of those customers if you created an inside telesales territory and proactively sold them on a regular basis? I have seen margin/profit increases of up to 20 percent in this group of customers by implementing this tactic.

Strip Away Service Levels to Customers that Do Not Pay for Them
This is pretty radical, but a lot of organizations are doing this one. For example, one company instituted a shipping fee for orders under $500. Even though they had their own local delivery trucks (and they offered free shipping), they decided to add a cost to customers who did not order the minimum quantities. (This did not apply to good customers who had an occasional order that failed to meet the minimum.)

Other companies eliminated warranties or 24-hour service or technical support to customers who bid them out every year. When your product or service is defined as a commodity (and the customer is not willing to pay for the “extras” that you offer), why do you continue to offer them? If this is something that everyone does, maybe you have to continue to offer it. But if you are the only one and the customer perceives no value, maybe there is something you can do.

Companion Sales
A lot of companies have single-item orders. A lot of these same organizations have companion products that should be bought at the same time. Put together a list of companion sales items and at least try to add the second (or third) item to each order. This not only will increase sales, but also has the great ability to increase margins. I have seen improvements in margins by over 15 percent for this one—in one year.

Bonus Thought: Right People. Right Message.
Most of the margin you get is because you are not directing the sales team to talk about the right things to the right people. For example, if 80 percent of your sales calls are on purchasing people, you can expect to talk about price a lot—with a corresponding negative impact on your margins. Conversely, if your sales team is constantly trying to get people to buy your product because it is the lowest price (as opposed to the best value), you are going to get downward price pressure, regardless of who you are talking to. Make sure that your people are targeting the right people and have a message of value, and you can probably spend less time defending your margins.

Gases and Welding Distributors Association
44a_ellersjoe Meet the Consultant
GAWDA Sales Consultant Joe Ellers is director of Associate Consultants in Clemson, South Carolina. Members can reach him at joe.ellers@joeellers.com or at (864) 654-3997.