An incredibly useful tool to improve gross profit margins is the customer ranking report. This report is run for parts customers and separately for service customers. The annual customer purchase history was ranked by Gross Profit Margin Percent.
The column headings are:
Account Ranking by
| Customer | $ Parts Sales | $ Gross Profit | Gross Profit Margin % |
Always show Gross Profit Margin to at least one decimal place, e.g., 32.9%. Even the gain of a fraction of a percentage point of Gross Profit Margin can have a very large impact on overall profitability in high volume items.
In a recent analysis of 448 dealer parts customers, we ranked his customers by annual Gross Profit Margin %. The owner was shocked to see that gross profit margins varied from 55.6% to a low of 5.9%. 219 accounts were above the average Gross Margin of 34.7%. 229 customers were below average. His profit improvement strategy for parts included two steps:
- Profile all of the high-dollar/high-margin accounts. Make certain that robust customer retention efforts were being made. Study their fill rates for possible improvement. Work on building broad relationships within each account. In other words, do everything possible to make sure these accounts were being serviced in a highly professional manner.
- Profile each high-dollar/low-margin account. Many were in identical businesses as the high-dollar/high-margin accounts. Determine what was causing the margin erosion. Identify steps to bring these accounts up to par, with no loss in service.
This was an extremely valuable exercise for this $2mm parts business. Every 0.001% point increase in average gross profit margin was worth $2,000.00.
We conducted a similar analysis for their 495 service customers. The average overall service customer gross profit margin was 58.4%. His highest external customer gross profit margin was 77.1%. But, his internal customer work only averaged 21.2%.
His profit improvement strategy for service included the same as for parts, plus a tutorial for his service writers on how to eliminate unnecessary discounts. In addition, he radically changed his internal billing rate.