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Don't Confuse Price Hikes With Increasing Profits

By Ian Heller

Many distribution leaders, investors and analysts line up to praise companies that consistently raise their gross margins. High gross margin and EBITDA percentages are often seen as measurements of management quality.Many distribution leaders, investors and analysts line up to praise companies that consistently raise their gross margins. High gross margin and EBITDA percentages are often seen as measurements of management quality.


Sit in on an operating review at a big distribution company and, in most cases, there’s a lot of planning around how to improve gross margins. Even if the focus of the discussion is EBITDA growth, the path to getting there is through price increases.


SalesGPS 2018Leaders have various ways of driving margin growth. Some talk about it in terms of getting paid for the value the company is adding. Others demonstrate that even a small increase in gross margin is significant because it’s pure profit dropping to the bottom line. That means if you run a 10 percent EBITDA business, a 2 percent price increase improves your profitability by 20 -- to 12 percent EBITDA. Gains like that are really hard to find. Additionally, it’s absolutely true that many customer-facing employees give away discounts not required in many situations.


Add all this together and the bottom line is that executives push price increases to help the bottom line.

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