Issue link: https://www.e-digitaleditions.com/i/314415
May/June 2014 19 continued on page 32 "Electronic media use, personal conduct, the company's sexual harassment policy…our social media policy relates to all of the policies that we have in our handbook," says Gustafson. "We don't want our employees to use Facebook to say something derogatory about one another. It's just a reminder to folks that social media is a great tool and there are good and bad ways it can be used. (See page 32 for a sample social media policy.) Q&A Featuring Profit Planning's Al Bates Q: One of my major suppliers is offering a short-term 5 per- cent price reduction on the entire line. I want to lower my own prices on the line by 5 percent to build a price image. Is this a good idea? A: Profit Planning Group says no. Any time you lower your price by the same percent your supplier lowers its price, you are going to go backwards in terms of profit. Since the math- ematics associated with the answer are relatively complicated, it is easier to simply show some "what if" examples. The fig- ures in the following table represent the percentage decrease in dollar profit that your firm will produce on the supplier's produce line if both your supplier and your firm reduce prices by 5 percent: Original Original Gross Margin Percentage Profit on the Produce Line Margin 15.0% 20.0% 25.0% 30.0% 2.0% 25.0 37.5 50.0 62.5 3.0% 16.7 25.0 33.3 41.7 4.0% 12.5 18.8 25.0 31.3 5.0% 10.0 15.0 20.0 25.0 The chart indicates that two factors are important. First, the lower the profit margin the firm makes on the supplier pro- duce line to begin with, the greater the negative impact from lowering prices in tandem with suppliers. Second, the higher the original gross margin on the produce line, the greater the impact. This second point is counter-intuitive but correct. To see the impact for a typical FEDA member, consider the following example in the second chart. It is for a distributor analyzing a specific supplier's product line. On that line, the firm generates a 25 percent gross margin and a 2 percent pre- tax profit margin. Both of these figures are very close to the historical average for FEDA distributors. That means the firm is looking at a fairly typical supplier. On that supplier's line, the firm is currently generating $100,000 in revenue and $2,000 in profit. With a 5 percent supplier price reduction and the same 5 percent reduction on the distributor's prices, profit falls by 50 percent, which is what the chart below indicates. An Example Using a 25% Gross Margin and a 2% Profit Margin 5% Price Current Results Reduction Dollars Percent Dollars Percent Net Sales $100,000 100.0 $95,000 100.0 Cost of Goods Sold 75,000 75.0 71,250 75.0 Gross Margin 25,000 25.0 23,750 25.0 Fixed Expenses 18,000 18.0 18,000 18.9 Variable Expenses (5%) 5,000 5.0 4,750 5.0 Total Expenses 23,000 23.0 22,750 23.9 Profit Before Taxes $2,000 2.0 $1,000 1.1 Profit Reduction: 50% May/June 2014 19 800-328-4493 WWW.SERVICEIDEAS.COM Accessorize It Mix & Match different products within our line to create a unique set-up. Urn + Table Tent Pitcher + Drip Tray Dispenser + Mason Jar