the Small Order Problem

The “Small Order” Problem

For wholesale distributors, small orders are like the weather: Everyone talks about their small order problem, but no one thinks he or she can do anything about it. I disagree!

Let’s start by defining the distributor’s situation. A small order is a problem if it doesn’t generate enough gross margin dollars to cover the costs of processing the transaction. These costs include sales and sales support, office, handling, delivery and overhead.

For example, a $250 sale with a 20% margin generates $50 of gross margin. If it costs more than $50 to process the order, that order is a money-loser by any measure.

You may be thinking that it really doesn’t cost $50 to process an order. Perhaps your company really is different, but if you’re like most, your numbers look similar to this:

the Small Order Problem

 

You may believe that only out-of-pocket costs are important, and overhead allocated to orders doesn’t count. In other words, some people like any and all orders that contribute at least something to overhead. If I agreed with you – and I don’t –the order above costs $77.50 to process. So, an order with $50 of gross margin is still a loser even if you want to ignore the fact that your overhead costs must be paid for with gross margin dollars.

So how could this otherwise “ugly” order become profitable? If you only pay sales commissions on profitable transactions, this order loses only $12.50. And, if the customer picks up the order, or pays the freight, this order generates a profit of $22.50. That is a return on sales (pretax) of 9%.

However, If the customer pays for that order with a credit card you’re out at least $6.25. That is almost a third of your profit.

For more information on this subject see my NAW book In Search of the Perfect Customer: Cost to Serve for Distributors, or feel free to connect with me at your convenience. It would be my privilege to give you a brief, online demonstration of the work we do for our clients. I look forward to hearing from you!