Improve Profit - Manage and Create Rebate Income
Most of us will know how much GP we have in a job at the time we quote.
How many of us know where the GP ended up on completed jobs? It’s key information flooring retailers should have for every completed job.
If you are in the habit of measuring GP on completed projects against the original GP at the time of quoting, you will have noticed any variation to GP will almost exclusively be downward. More often than we like, projects are hit by extra costs; the salesperson missed something at the time of quoting, or we incur additional costs which could not have been anticipated.
The result is GP shrinkage.
There are some ways to combat GP shrinkage, and the first is to have systems that ensure all aspects of a quote are included in the costing process. Another way is to have systems in place to catch “extras” early, so we can pass them on to the customer. We will look at these in another article.
What we will consider today is how we can preserve margin through maximising rebate income. Most of us are familiar with rebates paid periodically by suppliers. For this article, this is an external rebate; rebate paid by parties outside of our business. Less familiar, maybe, is the concept of internal rebates, rebates we generate ourselves from inside of our business. Internal rebate is a powerful tool to make our businesses more profitable, so let’s talk about it.
As we get underway, a couple of points about rebate income; firstly, if it’s going to achieve the goal of making us more profitable, rebate should not be taken account when costing a project. We might be tempted to accept lower margins on rebateable product, anticipating we will recover it in rebate income. If we do so, we not only undermine the purpose of rebates, we devalue the product in the market. You should achieve the same up-front GP on a rebateable product as you would on any comparable product. If you can’t sell your rebateable products for an acceptable margin, you need to discuss it with your buying group or with your supplier. For a group or a supplier, rebates are only worthwhile if they result in more sales; nobody benefits if you can’t specify a rebateable product confident you can win the job.
Secondly, maximising sales in rebateable product requires your salespeople to know the products you want them to sell, and it requires those products to be front and centre in your store. Some retailers (those using RFMS, for example) can run reports to see what salespeople are selling by product, and they use this information to coach salespeople into focusing on rebateable products. It’s a simple equation; the more of these products sold, the larger the rebate payment and the more likely it is the supplier will renew the arrangement.
Internal rebate, on the other hand, is rebate we generate within our own business. In most flooring businesses product represents around 50% of turnover, and installation another 20-25%, so a $3m business likely spends $2.25m on product and installation. If the owner of that business had the means to apply an internal rebate of just 1% on the $2.25m, their annual net profit would increase by $22,500.00. In my experience, the sweet spot for an internal rebate is 3-4% (up to $90k additional net profit in our $3m example). Some caution is required; an internal rebate set too high has the potential to impact conversion rates at which point it becomes counterproductive.
The secret of a successful internal rebate programme is to start low and grow it over time, revising it upward until we hit our sweet spot. The goal is to have your salespeople continue to achieve their normal sales margins without realising that in addition to their GP, another small percentage of profit is being generated to offset some of the unforeseen expenses that are incurred.
The challenge for most retailers is the work required to implement and maintain an internal rebate structure; in most flooring businesses, it could be daunting, despite the benefits. On the other hand, for retailers using a business management system like RFMS, it couldn’t be easier; simply set the desired load within the system and after that, all costs used by the sales team include the internal rebate.
Creating and managing rebate alone pays for RFMS many times over. If you would like to see more, I can be contacted at cogden@rfms.com.