Using Gross Profit to Gauge Income

by WOHe

When I joined Douglas Distributing as sales manager in 1946, Don
Douglas, the president and owner of our cabinet/appliance
distributing business, had already established gross margin on
sales as the criteria for sales compensation.

My first reaction was that this system created more work in the
company’s billing procedure, since each invoice was priced at both
the dealer cost and our landed cost.

Some of our salespeople weren’t very enthusiastic, either. Their
feeling was that, since they had no control over cost of goods,
established dealer discounts plus freight and delivery charges,
they had no control over the margins that determined their
commissions.

Builder and property management sales margins were at the
discretion of the sales representative, following guidelines in our
company pricing policy for that category of account. Large orders
were rewarded with generous discounts. Individual sales in new
homes were the most time-consuming per dollar of sale, but
generated the highest gross margins. This gave our builder salesmen
an incentive to pursue these detail-oriented sales.

As time went on, I began to appreciate our pricing/commission
policies as having more advantages than drawbacks.

There are several disadvantages to the policy that I can readily
cite:

  • Sales personnel sometimes felt that we were too stingy with our
    commission on volume builder and property management jobs with a
    variety of laycuts. Offsetting this were the low delivery costs on
    direct shipments of trailerloads on direct-to-jobsite factory
    tractor-trailers. This enhanced our gross margins on volume
    jobs.

  • Billings were complicated by our need to price invoices at both
    cost and selling price.’

    Dealer costs were dictated by management and were therefore
    consistent, pre-determined and non-discretionary. Our cost pricing
    was based on a multiplier x list, reflecting our cost of
    merchandise plus incoming freight and delivery.

    Since our sales force was among the best paid in our territory, we
    had few gripes about compensation, and were a sought-after
    employer.

The advantages to our plan were:

  • Sales representatives found that our pricing policies enabled
    them to earn a generous commission without gouging customers.

  • Dealers knew their discount from retail favored displaying
    dealers. This was a tool we used in selling representative
    displays, including cabinets and appliances, which made our
    products more attractive to the dealer’s customers. On top of this,
    non-displaying dealers received a lesser discount, which proved to
    be an incentive to show our products over our competitors’.

  • Merchandise sold for displays earned an extra discount for
    dealers, thus reducing their overhead. Our sales reps emphasized
    profitability to their customers, making our company a desirable
    supplier.

Appliances, as well as cabinets, contributed to the
effectiveness of our dealer displays as well as those in our
wholesale showroom. While appliance margins were lower than those
for cabinets, their cost of warehousing and delivery was less per
dollar of sale than cabinets. We emphasized our appliance lines to
displaying dealers regardless of their cabinet brand.

When our suppliers offered special costs for displays, we
greeted these programs enthusiastically. Products that were
purchased for personal use in our customers’ own homes invariably
boosted the sale of those products in the kitchens and baths they
sold. If a product wasn’t trouble free, we made a point of not
selling it for personal use in our customers’ own homes.

Fortunately, we encountered few disappointments of this kind. We
operated our own service department, which was especially valuable
in keeping customers enthusiastic about our products. Unreason-able
or demanding customers, we found, can be placated by well-trained
service personnel a sure path to referral business for a
distributorship and its resellers.

As distributors, we’re all vulnerable if our suppliers are not
quality- and service-conscious.

As a distributor, I felt that it was our company’s
responsibility to keep the customer satisfied regardless of factory
policies or attitudes. We felt that our customers relied on us for
support in case a product failed to perform.

We welcomed those opportunities to support our customers and
their clients. It made us a more valued supplier and made dealers
and builders reluctant to change suppliers for their kitchen and
bath needs. Further, it enhanced our value to our suppliers and
customers an important lesson for kitchen and bath distributors,
even in today’s very-different market.

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