I didn't realize product mix, delivery costs, and variable rebates would affect our profitability so much

We have over 100 customers and sell the same set of products to each of them, yet some are profitable and others aren’t. I really don’t understand. They all get the same products for the same price. We have volume discounts and rebates but we show them a separate line item and can track them.

My husband’s friend works for an analytics company and took a look at our sales figures and accounts. The first thing he saw was there were significant differences in the mix of sizes between sales outlets. As the smaller sizes have higher margins it is the mix of sizes and not just the volume that affects profitability. The next thing he found was that different outlets had different thresholds where the rebates kick in. On some accounts the threshold was $45K in revenue, on others it was $65K, and one had $80K. So while we can track the total rebate we pay, we start paying earlier and this affects profitability. Finally, he said that delivery costs were assumed to standard costs, but the distance from the warehouse to the outlet varied from 1 to 150 miles. Moreover, we collected returns from some but not all outlets.

This made me realize that all revenue is not the same. I was shocked that our profitability was so affected by product/size mix, how we set rebate thresholds, and by underpricing delivery.

We weren't sure whether to price high to make our margins or low to gain market share

We were entering the market with our service business and had to figure out how to price: pricing at the top of the market or at a lower price to ease entry and build market share. After looking at different theories, we still weren’t sure what to do. If we entered with a premium price, we’d price ourselves out of 80% of the market. If we went at the lower end to gain market share, we’d barely clear a 12% margin; this wouldn’t be sustainable over the medium and long-term.

The total market was large, so it was difficult to get a realistic view of price sensitivity. Existing competitors were all over the place and it appeared that price was the primary way they were differentiating themselves and attracting customers.

We made a financial model with many different scenarios and decided we needed to get at least 35% margins to have a positive cash flow. If we priced to this margin, we knew that discounts would erode it, so we decided to enter in the top 20% of the market and then offer introductory discounts. The strategy worked.

In retrospect, we realized how difficult it would be to price up if you started with an underpriced service at launch.