Issue link: http://read.dmtmag.com/i/236097
Profit Improvement Report A Supplier Price Increase Is Your Friend Do yourself a profit favor and pass it on as a straight percent, not as dollars. Exhibit 1 ExhibitImpact of Different Price The 1 The Impact of Differentfor the Typical AED Mem Price Strategies for the Typical AED Member Income Statement--$ Net Sales Cost of Goods Sold Gross Margin Expenses Fixed Expenses Variable Expenses Total Expenses Profit Before Taxes Income Statement--% Net Sales Cost of Goods Sold Gross Margin Expenses Fixed Expenses Variable Expenses Total Expenses Profit Before Taxes Current Results $35,000,000 27,475,000 7,525,000 5,145,000 1,750,000 6,895,000 $630,000 100.0 78.5 21.5 14.7 5.0 19.7 1.8 BY DR. ALBERT D. BATES Even in a sluggish economy, supplier price increases occur fairly frequently. It is safe to say that most distributors approach such increases with a sense of dread if not unbridled hatred. The reality is that supplier price increases are an unparalleled opportunity to increase profit. However, achieving that profit improvement requires a reversal in the thinking of distributors and a certain degree of fortitude in passing the price increases along to customers. This report looks at the nature of the supplier price increase issue. It does so from two distinct perspectives: The Emotionalism of Price Increase – A discussion of the fact that price increases are often viewed with emotion rather than logic. The Economics of Price Increases – An analysis of the profit impact associated with the proper handling of such increases. The Emotionalism of Price Increases The typical response of distributors to supplier price increases can probably best be summarized by the old political phrase, "There you go again." This antipathy toward price increases arises from three distinct issues. First, there is something of a loss of control in the pricing process. Second, there is a substantial amount of activity that must support the price increases. Third, there is the unknown nature of the competitive response. The issue of lost control arises because some other entity – namely a supplier – is making decisions that impact the fortunes of the distributor. The more the distributor's operation is functioning smoothly under current pricing arrangements, the lower the degree of eagerness to make changes. When changes 58 | www.cedmag.com | Construction Equipment Distribution | January 2014 are forced upon the distributor, some angst is inevitable. The activity level associated with price changes has two separate components. First, there is simply the operational aspect of making changes in the management information system to reflect the changes in cost, updating pricing information outbound and the like. It is a minor irritant, but still an irritant. The more important aspect of the activity-based concern is the need to explain the resulting outbound price increases to customers. Even though blame can be laid clearly at the foot of suppliers, there is still apprehension about rocking the boat with customers, who have seen too many price increases before. Finally, the competitive response gets to the very heart of the economic issue. There is a high degree of uncertainty as to how competitors will respond. It is possible some will absorb a portion or even all of the price increase as a competitive tool. Any time things change there is the potential for disaster. The heading of this section used the term emotionalism for a reason. All three of these issues are perceived by distributors as being worse than they are. If the price increase can be viewed as a tool for profit improvement, then such emotionalism can be tempered. If it cannot, the emotionalism only increases. The Economics of Price Increases Exhibit 1 looks at the economics of a 5.0 percent supplier price increase. All of the figures in the exhibit are for the typical AED member, based upon the latest CODB Report. The first column of numbers reflects current results. The last two columns examine different responses to the price increase.