Most distributors make lots of profit on their large orders, but then give over half of that money back on smaller deals. If you’re happy with your company’s sales but frustrated by your lower profits, analyzing your orders might provide the information you need to make some smart changes.

In fact, in my experience, it’s very common for distributors who go through this analysis to reduce their number of orders by 20% and cut their sales dollars by 5% while raising profits significantly.

The Challenge
As a distributor, your overhead cost to produce each order is fixed, regardless of the order size. Sales reps typically set the profit margin while the distributor is stuck with this fixed cost to pay for, all while also trying to turn a profit for the company. It’s an interesting dynamic for sure.

“I’ve learned that most distributors lose money, incredibly, on all orders under $500.”— Randy Conley

Let’s do some simple math for a $300 order. This order, at a 50% gross profit margin (GPM), equals a $150 gross profit. With a 40% sales commission, about $60 will go to the sales rep. That leaves $90 to go toward administrative costs, with what’s left over as true profit. Remember, though, that the average distributor overhead is about $100-$150 per order, which would make this example a money-losing proposition.

I’ve learned that most distributors lose money, incredibly, on all orders under $500.

Time to Analyze
I’d suggest looking at several reports to help determine the profitability of your orders: average order size, median order size and GPM.

Most distributors know their average GPM. And no doubt, it’s critical to have a good profit margin to average order size ratio. The bottom line is the lower your average order size, the higher the average GPM needs to be to maintain profitability. Counselor State of the Industry (SOI) data shows the average distributor profit margin is around 33%-34%.

To get your average order size, simply divide sales dollars by the number of orders. The industry average, according to SOI reports, is around $1,000. But average order size can be misleading if you had a few very large orders that skew the numbers. Be sure to run a sales report that ranks all your orders for the year and find your median order size. If it’s a lot lower than your average order size, review your GPM and see if it makes sense.

Next, run that ranking report again and include the GPM for each order. Do all those small orders have high GPMs, or do you have a bunch of sub-$500 orders at a 35%-40% margin? These smaller orders are costing you money.

Exceptions to the Rule
Sometimes, it makes sense to take a small order even though you know you’re going to lose money on it. That great client that spends $20,000 per year with you via five large orders might occasionally need a small order filled. Take the order, as the client is profitable overall.

But if the customer spends $20,000 via 100 small orders, here’s a reality check: They’re likely costing you money, and you might be better off without them.

Consider These Solutions
First, go ahead and fire money-losing clients. Do the analysis and then take action. Second, adjust your compensation plan to encourage your sales reps to focus on money-making clients – meaning profitable for both the rep and your company. Also, establish minimum order sizes to qualify for commission. Maybe start at $250 and gradually raise it over a few years to $500. Reps will now start qualifying clients and prospects based on what’s good for them, which is in alignment with what’s good for your company.

If a rep decides they need to write a small order for a good client, that’s fine. But that doesn’t mean you have to pay them commission. You’re going to lose money on that small order, and so will the rep. But they’ve decided it’s worth it and your company will support that decision.

Getting Results
Once you’re processing fewer small orders and have your sales reps focusing on quality clients, profits will go up. The next step is to prospect for more quality clients and have your administrative staff spend more time processing profitable orders. The end game should be clear and after a few tweaks, it’s within reach for your firm.

Randy Conley is the VP of new business development at Facilisgroup, a technology and consulting firm in the promo products industry.