In my six years traveling the country on behalf of HME vendors, I have had my share of pricing discussions. I have arm wrestled over $.50 on an item as we all tried to maximize our margin. These conversations are exhausting and, frankly, don’t ever result in true profit growth for anyone. Rather, they establish a relationship on a weak foundation, making it easy for the vendor to be tossed aside by a price-cutting competitor—and for the provider to be pigeonholed as a price-driven non-partner unworthy of the highest level of service.
Please don’t misunderstand: Price is vital, and providers need to work hard to ensure they are getting the most competitive price possible. But the definition of a competitive price depends on so many changing factors that depend upon the specific business model and needs of each individual provider. No two providers are alike and any relationship with vendors needs to be customized to effectively drive them toward long-term, sustainable profitability.
The most important line of any profit and loss statement (P&L) is the last line. Is it red or black? Parentheses or no parentheses? Big or small? Bigger or smaller? The changing status in this line can dictate everything—from the potential for expansion to the closing of the business. The beauty of this line is that it can be affected by many factors. There are multiple pathways to profit running through a P&L and each must be managed to maximize the all-important bottom line.
Pathway 1: Price
While we’re focusing on all things beyond price, we still can’t ignore the top portion of the P&L. Everything is kicked off by gross margin, which evolves from price. But price comes in two forms—the price you pay your vendor and the price you charge your customers. It is the combination of these two prices that lead to maximizing your gross margin. Negotiating a strong vendor price is important, but so is fully defining your total value chain and setting the right price for your customers for each segment of your business. You don’t want to leave money on the table with your customers any more than you want to overpay your vendors.
Pathway 2: Expense Management
The second pathway involves diligently managing your money out the door. It is imperative to develop a line-item budget and set a review and adjust processes throughout the year. Negotiate regularly with vendors such as insurance providers, utility companies and other service providers. Remember that your staff will be your biggest expense and they are most expensive when they turn over. Hire right, pay well and keep them. Retention will keep labor costs down and increase efficiencies in the long run.
Pathway 3: Inventory Management
Having the right inventory balance leads to maximum profitability. More importantly, it leads to maximum cash flow. Too little inventory and you lose sales; too much and you bleed cash and end up in a discount spiral. Understanding the rate of sale of each product and aligning that with each vendor’s stocking and product flow programs will lead to a tight inventory flow—leading ultimately to strong cash flow and profit.
Pathway 4: Freight
We all know it costs money to move product from one place to another. This includes getting it from your vendors to you and also includes moving product within your own organization. Vendor freight is a great opportunity to maximize profit and partner with your suppliers. Your vendors spread freight costs across multiple customer orders on a single truck—leading to a lower per-item freight cost to you. Internal freight involves delivering products to your customers as well as moving items from location to location. Turning on your trucks is expensive; turning them on more than once for the same item is death. Mismanaging (or simply neglecting) the movement and touching of products can lead to a quick and deep erosion of margin.
Pathway 5: Margin
The total economics you employ with each vendor will directly impact cash flow and net profit. This is the clearest example of working beyond price. Payment terms allow for cash management that is tied to your sell-through rates and reimbursement timelines. For cash retail transactions, generous terms can keep you in a free cash flow position longer, providing more flexibility with your money. Quick pay discounts, if you are in a strong cash position, flow directly to the bottom line. Leasing programs allow for the expansion of locations, programs and contracts that increase revenue and drive you toward the next tier of overall profitability. Rebate programs can reward you for your deeper commitment to vendors and can provide returns that are significantly higher than even the best price negotiation can accomplish. Building the right combination of these tools and managing effectively will squeeze every penny of profit out of your inventory and product spend.
Pathway 6: Marketing
Simply put, selling more leads to more profit. That isn’t exactly profound, but it is true, nonetheless. The right marketing efforts will lead to an increase in brand awareness, customer traffic and contract opportunities. Marketing increases your perceived value in the eyes of your customers, allowing you to build a solid value chain and hold pricing steady. Marketing is communicating with your community and the right communication drives positive, continuous and sustainable profitability.
Pathway 7: Efficiency
Of all the pathways, this is the most powerful—capable of building profit and of eating it away. It is also a bit complicated and the least pursued. In a nutshell, efficiency is using time well. It is about eliminating waste, especially where people are involved. Are you overstaffed, understaffed or paying overtime? This leaks money and erodes profit. Take these real-world examples:
- One of our customers had a significant CPAP resupply business. They provided hand-packaged kits to 6,500 patients each month. By moving to a prepackaged kit from a vendor, they were able to save one minute for each set up for a savings of 6,500 minutes per month. With an average burdened wage of $36 per hour, the company was able to save $3,900 per month—freeing them up to take on an additional 1,500 new CPAP resupply patients. One minute=1,500 new patients.
- I recently dug into the purchase history of a customer looking for patterns to turn into savings. We found 10 stock keeping units (SKUs) that were being purchased weekly in consistent quantities and shipped to the same locations. We employed a blanket purchase order (PO) program with the vendor, agreeing to a set quantity of SKU’s being delivered each week (with parameters for sell-through review every three weeks to ensure accuracy). The savings were dramatic. We calculated it cost $38 to issue a PO; by eliminating individual POs, the company saved nearly $900 per week. Warehouse operations became easier and overtime was reduced. Unit prices dropped and rebate rewards increased because the vendor was able to streamline their process. The net result was a 4% increase in net profit for those items for the dealer.
- A three-location, all-cash retailer requested a very low order threshold for receiving free freight. They said they want to deliver directly to each branch, as transferring product from their warehouse or between locations is costly. I politely reminded them that there is no such thing as free freight and the cost needed to go somewhere. We raised their unit prices to offset freight costs. Even though they were paying more per item, it was still significantly lower than their cost of transferring product inside their operation. The end result was an increase in sell-through of 18% because they had the right product in the right place at the right time. Ironically, this increase in sales lead to a significant increase in their average order dollar amount, which made the lower free freight threshold a moot point.
Look beyond price to find all the pathways to profit. When you do, you will find a more streamlined business, happier and supportive vendors and more sustainable profit.