Part 1. Pricing for growth and superior margins

azpricing 1a

At the end of the day this industry has to create value based on a commodity product that essentially is driven by price.

Players in this segment have to find ways to compete that allows them to make money and deliver sustained organic growth. The owner of these business knows the way they manage price can be the one singular distinction between success and failure.

The problem

If you in the industry price fluctuations come from every angle and they happen in rapid succession.

  • Your vendors change prices as the commodities prices fluctuate
  • Your customers demand different prices due to specific projects
  • Your competitors make you respond to their pricing structures

The problem is further complicated as you have literally hundreds of SKU that you are dealing with.

For example, take one category item you sell 2x4 lumber and they come in a variety of sizes 10’, 12’,16’ and say 20’ and you may have to change prices for this item based on

  • A specific customer
  • A specific job for a length of time
  • A type of customer, walk in, wholesaler and contractor
  • Based on the volume the customer purchases that provides specific rebates due to volume purchases.

If you don’t have an effective process supported by an easy to maintain ERP system the maintenance of this pricing is a nightmare.

The consequences are severe

  • High cost of people to maintain the pricing structure.

We reviewed a client with a $20M business and they had 4 clerks whose primary job was price maintenance.

This is a high non-value add cost.

In addition, the cost of fixing mistakes or rework was significant. 18% of all invoices had to be redone each month due to pricing errors.

  • Lost margins

We are not sure where to begin with this topic. There were lost margins due to

  • - Vendors price changes and the inability to respond fast enough to change the sell price to the customer
  • - Historical prices that should have been increased but were not
  • - Simply incorrect prices that were not identified
  • Lost sales
  • - Due to wrong price quotes customers purchased from the competition
  • - Customers simply purchased elsewhere due to continuous wrong pricing

We attempted to do an assessment of the financial impact on the above pricing consequences. The conclusion was that there were 3 percentage points lost at the gross profit level and 4.5% of gross sales lost at the top line. This is what we could substantiate based on the data we believe that that it could have been far more significant.

 

azpricing 1

 

What you don’t see you don’t miss…. Until you make it visible. When the owner reviewed the business case (in great depth) and realized that this opportunity delivered in the business case was real it certainly became a priority.

By doing this the owner could convert a 7.5% EBITDA business to a 12% EBITDA business within the existing business model.

Not only did this exercise reveal a significant loss in bottom line opportunity but it also highlighted the importance of working on the business as opposed to working in the business.

Opportunities for improvement like the above example are not easily visible they take effort and sound analytical skills however having the discipline to work on the business on a regular basis will be a significant differentiator in the performance of your business.

The solution

All solutions at least when it comes to the Science of Business Wealth methodology is focused on 3 things

We call it the PPT solution

  • - People
  • - Process
  • - Technology

For now, we will focus on the process and technology part of the solution. The reason if these two areas are in good standing you know what the problem is.

Process

  1. Document the process
  2. Support the process with checklists where necessary
  3. Ensure perpetual adherence to the process
  4. When errors happen identify where in the process the error occurred
  5. If it not a process issues you have the wrong people. Make the necessary changes.

Technology

We were very fortunate here, by accident we came across a ERP system that has been in existence for some 20 years and was designed specifically to the building supply industry.

We were so impressed, we contacted the owner Larry Wadsworth of JLW Software and his team to find out more about his A-Z system capabilities.

We are aware of the major players in the industry EPICOR with their CATALYST system, DSMI, and many others. By no means are we saying that these systems are inferior in anyway but we were drawn to the simplicity of the A-Z capabilities

The problem we had was that the A-Z system did not even have a website. They have a great user base that has been established over the years by reference only. Quite impressive.

The power of simplicity and ease of use was the first attribute that drew our attention. It was like someone took the traditional source documents and placed it into a system that was just so intuitive we were able to navigate our way around with ease without any reference to a manual or some training program.

When it came to price maintenance the process was extremely powerful. You have the capability to set pricing based on a time period now or in the future

Price changes were driven by a price sheet that was either customer based or project based. Maintenance was extremely simple by either changing the whole price sheet or specific items within the price sheet. You even have reminder that certain items prices need to be reviewed.

 azpricing 2

The price maintenance can be done by the same person who does the invoicing. This allows for the accountability and margin measurement to be placed where the action is. Reducing the non-value-added work by 3 people!

azpricing 3

In addition, when we inquired as to the system price we were provided with a cost structure that was about 20% of the existing clients ERP system.

Lessons learnt

  1. Working on the business ensure the strategic focus and priority settings to areas where you will maximize your performance and sustained growth
  2. Ensure the systems you use are easy to use and do not create unnecessary costs within your business
  3. Have the right controls in place. This includes sound processes supported by accountability to those processes
  4. You get what you measure


 

Coming next

  • - NTO and how to make Notice To Owners effective and low cost. Helping you to protect the money that your contract customer owes you
  • - Volume rebate management
  • - Production or assembly cost management
  • - Keeping your accounts receivable lean
  • - Inventory management

What we do at the Science of Business Wealth

We deliver outperforming business making your team accountable to your business expectations.

You know your business, we extract the hidden potential within your business as measured within your financial statements. Delivering more profit improved cash flow and greater returns.

Our programs include

Running the business by the numbers

A disciplined operating system that makes your business accountable to your financial statements

Starting from $2,000 per month. Expect a 10% profit improvement, 15% cash flow improvement and ROCE improvement of 8% - 15%

Business Health Test

The Business Health Test uses your financial statements to measure the impact of decisions and strategy. The process identifies the gap between how well you are doing and how well you can do.

We use this gap between how well you are doing and how well you can do, to motivate future improvements with actionable accountability.

BHT delivery platform

az what we do 1

Cost $1,000.

Financial statements diagnostic and what if tool

Use your financial statements to

  • - Discover the effectiveness of your strategy and decisions based on 5 key performance metrics
  • - Perform “what ifs” on profit cash and returns based on doing something different to your business
  • - Automate the budgeting process by instantly delivering future income statements balance sheets and cash flow statements
  • - Communicate your performance to bankers and others
  • - Evaluate the impact of adding on a new customer or product category
  • - Evaluate a potential business acquisition
  • - Set key performance criteria for your team. Creating measured accountability to profit cash and returns.

Cost: $660.00 per annum

Delivery: Web based application

For further information as to how the Science of Business Wealth can help your business contact Mick Holly at This email address is being protected from spambots. You need JavaScript enabled to view it. or 704-904 0994 or visit us at https://scienceofbusinesswealth.com/

Our podcasts can be found at:

https://itunes.apple.com/us/podcast/science-business-wealth-helping-owners-turn-their-business/id1311834530?mt=2

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Wednesday, 12 December 2018

Mick Holly & Andre Gien

Wealth Scientists

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