Industry Viewpoint: Maximizing Margins With Smart Category Price Plans

By Mike Aylen, industry expert and NHPA strategic consultant

Welcome to the fourth article in the “Inside the Margin” series, where I will be looking at growing sales and protecting margin on your contractor/pro customers through the use of better category price plans.

Let’s start at the beginning—the building of your customer groups that will be assigned a category price plan. If you are starting this from scratch, I recommend limiting your customer groups to no more than 10. Of course, there will always be the need to have certain customers on their own plan based on volume, so these will be on top of those. Limiting the number of customer groups will make it easier to do regular reviews of the activity in each group and make the necessary adjustments when needed.

You can decide what your customer groups are based on your market, but for this example I am going to use plumbers and painters. You will need others based on activity, which could include builders, concrete workers, property maintenance, local councils and others. Use your current customer base to make your decisions.

When deciding on a customer group, like painters or plumbers, the first step is to develop the criteria around why a customer gets allocated to a certain group. What day-to-day activities are they involved in? Is your decision based on sales volume? If so, you may need more than one group for each. I worked with a large retailer recently who developed three different groups—large, medium and small plumbers—and discount rates based on monthly sales. The five main advantages of using this process are:

1. It’s very easy to do your customer allocation based on current sales information.
2. You can reward customer loyalty. For example, you may have a customer who, based on your monthly sales criteria, only fits the medium group but gives you 100% of their business. You can reward this by advising them they are in your top group with the highest discount rates.
3. It enables you to make easy adjustments to your allocations when reviewing the customer sales information. This should be done at least twice a year and is easily accessible by running sales by customer reports. If you see a customer who has declining sales, you can organize a meeting to discover why.
4. The main advantage is that you can use it to grow sales. The more you know about each customer the better, so use this information to estimate what the potential monthly spend could be. Look at what they are buying from you and in what quantities. Find the gaps and then talk to the customer about why they are not buying all of their day-to-day needs from you. Advise them of your offer and what they could be getting if they put more business through your store.
5. You can easily set up a 60- or 90-day trial period group. Don’t just give a new customer your best deal right away. Too many times I have seen this happen, and the customer walks away after receiving the discount or promotion. Talk to the new customer about your criteria and how you hope this is a beneficial relationship for both parties, then let them demonstrate that they can meet the criteria to be allocated into one of the permanent groups.

Once your customer groups have been built, you can then decide on what your discount rates can be for each group. Do not make the mistake of putting a global discount across all departments because this is too generic and will cost you sales in many areas on commodity lines and margin on others where the discount is too high and unnecessary. If you are a Margin Master or Epicor Pricing Planner user, this is a great way to use your software for more than just setting retail pricing.

You can look at each department and what the selling prices will be by offering a discount off retail price, just make sure your rounding is turned off when you do so. This will help you determine the correct discount rate at the department level and where the rate needs to be adjusted down to the class, fineline or even SKU level. If you are not using either of these two pieces of software, you can do this manually in Excel.

The reason you need to look at each department separately is to find the right discount rate for each group that helps you grow sales but protects margin by not giving it away accidentally.

For example, I have seen retailers offer 15% off retail globally to groups of plumbers and painters. For the plumbers at 15% off, good luck making any money on hot water units or other low-margin, high-value items they might buy.

For painters, offering 15% off will lead you to selling many ladders at a loss. I worked with a retailer who had set up a plumbers plan at cost plus 28% on all plumbing items. This sounded great in theory until I showed them they were selling a clamp at 94 cents when their main Corporate opposition was at $1.64. Do the work required to get your plans correct. Use a simple Excel spreadsheet to finalize discount rates for each group in each department and if there needs to be further breakdown into classes and finelines (see above for a snapshot of a plan I built recently), then build the category price plans into your system and allocate your customers accordingly. And please remember, if you are going to put a SKU-level exception on a plan, never lock it in at a certain price and make sure to use an expiration date.

I look forward to bringing you the next topic in our “Inside the Margin” series.