How to be price competitive and still increase profits
By Rich Lindblom, AVB Marketing
When I first got into the business in the late 1970s (yikes!) we only sold Maytag brand products. Back then that meant dishwashers, food waste disposers, washers, dryers and, of course, wringer washers.
Being in Chicago, we were in competition with a retailer by the name of Abt Electronics. You might have heard of them. If you haven’t, you really should check out their operation. They weren’t huge at that time, but they were aggressive and I was constantly getting price-shopped by customers who had received a quote from them. And these prices were low compared to everyone else in the Chicago market.
So one day, my Maytag sales representative walks through my door and I immediately asked him, “How can Abt sell an A710 washer for that price? Are they getting a better deal than us? What’s going on?” It was the same basic question you have all probably asked your sales rep at one time or another.
Huh, Wha?
He assured me that they weren’t getting a better deal; the difference was they netted out everything on the goods they sold. At first I didn’t understand what the heck he was even talking about. So he had to explain it to me …
In simple terms, Abt took every dollar they got from Maytag and rather than just putting it in their pocket as extra profit, they used it to effectively lower their cost on the goods they were purchasing. Co-op advertising, volume rebates, in-boarded warranty credits, special programs — you name it, they applied it to the bottom-line cost of the products.
To give you an example: When I sold a washer for $600 that cost me $500, in my mind I was making $100 profit. But when Abt sold that same $500 cost washer for $570, they were actually making more money than me because they were applying up to 7% of the back-end money that I was sticking in my pocket.
Now, with the advent of MAP and UMRP, the wild pricing fluctuations that we used to see at retail are largely a thing of the past. But there is still a lesson to be learned from what Abt (and my Maytag rep) taught me over 40 years ago.
Today, dealers often complain about shrinking profit margins, but are they really shrinking?
Shrink or Swim
I have long argued that dealers need to factor everything into their COGS (cost of goods sold) to calculate their true profit margins. Don’t just look at the invoice cost and the selling price; you need to consider any monies earned or derived from the purchase of those goods. This includes volume rebates, co-op advertising, sell-through allowances, spiffs, margin enhancements and any other special programs such as truckload purchases.
Why include them? Because if you didn’t purchase the goods, you never would have received those funds. But don’t take my word for it, let’s look at it from an accounting standpoint. Whether you use QuickBooks or have an accountant or both, when you deposit your volume rebate, you must apply it against an account. What account do you apply it to? Cost of goods sold. So even if you aren’t applying it on a line-item basis, at the end of the day your accountant is in fact using those funds to reduce your COGS.
The same is true for every other vendor funding I mentioned above, with the exception of advertising money earned. Most people apply that against advertising costs, but in reality, that too is an incorrect accounting principle and actually skews your ad expenditures on your profit & loss statement, showing a much lower advertising expense than actually occurred. So I would argue that since co-op funds are based on a percentage of your purchases, in reality they too should reduce your cost of goods sold.
The bottom line is that if you properly net out all the trailing funds you get from your vendors to your cost of goods sold on your financials, you will see that your profit margins increase by anywhere from 5% to 10% percent instantly.
Rich Lindblom is a past principal of Chicago’s Advanced Maytag Home Appliance Center and a member of BrandSource’s Maytag Channel Council. After four decades of working at and eventually leading the 64-year-old family business, Rich and his brother sold the operation. He now shares his hard-won retail know-how with BrandSource dealers as a YSN columnist and member of the AVB Marketing product team. Contact Rich at rich.lindblom@avb.net.
