INTRODUCTION
The FFE industry (Furniture, fixture and equipment)
The education FFE industry is characterized by fragmentation, with only one major dealer dominating the market, while the majority of companies are classified as small to medium-sized enterprises.
As defined by Hitesh Bhasin 1
A fragmented market is characterized by the absence of a dominant organization capable of steering the industry as a whole It comprises numerous small and medium-sized enterprises that compete among themselves and with larger firms, resulting in a competitive landscape where no single company holds a commanding position.
Using this definition, the size of dealers and their product offering in the
The PreKindergarten to 12th grade school market is notably fragmented, with School Specialty being the sole large dealer This company operates as a conglomerate, encompassing various sectors including curriculum, supplies, audio-visual technology, and school furniture As of the end of 2017, the school furniture segment of School Specialty generated $190 million in revenue, according to its public annual report.
Table 1 School Specialty’s annual report 2015 – 2017
Thirty-Five Weeks Ended December 26,
Distribution revenues by product line
Customer Allowances/ Discounts (6,211,000) (5,868,000) (3,055,000) (4,133,000) Total Distribution Segment $594,955,000 $598,840,000 $466,323,000 $583,774,000
Curriculum revenues by product line
Total Curriculum Segment $63,428,000 $57,482,000 $37,955,000 $38,094,000 Total revenues $658,383,000 $656,322,000 $504,278,000 $621,868,000
(Source: School Specialty’s annual reports) tot nghiep down load thyj uyi pl aluan van full moi nhat z z vbhtj mk gmail.com Luan van retey thac si cdeg jg hg
The school furniture market is estimated to be $4 billion to $5 billion between 2018 and 2022 With School Specialty being the largest dealer in the market, it has less than
5% of the total market This matches the definition of a fragmented market – no one dealer has a significant portion or control of the market
Figure 1 North American addressable school furniture market
(Source: Global School Furniture Market 2017 – 2021 2 )
School Outfitters company
School Outfitters started in 1998 as a very small furniture, fixture, and equipment
The FFE dealer was established just before the Internet revolutionized retail sales, offering a standard range of products such as school chairs, teacher chairs, school desks, and whiteboards, similar to other dealers of that era It reached its customers by sending faxes to schools and providing a paper catalog of products and prices The dealer primarily targeted the largest school districts in the US, which had the most funding, as school funding is largely influenced by student enrollment and local property values, with only a small portion provided by the federal government.
Table 2 Top 10 largest US school districts
Rank Name of district State Enrollment
3 City of Chicago (SD 299) IL 396,641
10 Hawaii Department of Education HI 186,825
(Source: US Department of Education, National Center for Education Statistics 3 )
As a small startup with just two employees, School Outfitters prioritized targeting large school districts to ensure financial sustainability, as there were no unique features to set it apart from competitors at that time.
School Outfitters originally targeted K12 school districts, ranging from Kindergarten to 12th grade, in their marketing efforts using FAXes Today, their target audience has expanded to include Preschool and PreKindergarten, reflecting a slight shift in focus.
(PreK) and continuing through today, School Outfitters target customer is public and private PreKindergarten to 12 grade (PK12) school districts
Founded in 1998 with a small team, School Outfitters has grown to employ around 170 staff members, along with numerous temporary workers during the peak buying season for schools.
June to August when schools receive their funding from the government, know how many students they will have and can start purchasing for additional FFE, replacement
School Outfitters features a well-defined organizational structure, comprising essential departments such as accounting, customer service, human resources, information technology, marketing, sales, and supply chain management.
Figure 2 School Outfitters organization structure
School Outfitters competition
Initially, School Outfitters faced competition from other dealers who depended on suppliers for their products During the company's early days, many rivals were still using traditional methods like mailing paper catalogs and sending faxes, which limited the competition However, as School Outfitters embraced modern marketing strategies and developed a robust e-commerce website, it gained a competitive edge Over time, most competitors recognized the need to adapt to the changing landscape.
The internet has become a more effective tool for generating leads as customers increasingly prefer online search engines over traditional catalogs While some competitors struggled to adapt to online marketing, School Outfitters successfully embraced this shift, allowing them to gain a competitive edge As a result, certain dealers excelled in online marketing, while others lagged behind.
In today's competitive landscape, School Outfitters distinguishes itself by sourcing products from both traditional suppliers and its own private labels directly from manufacturers The following chart illustrates some of the key competitors in relation to School Outfitters.
Outfitters model of being both a dealer and supplier
Chief Innovation and Marketing Officer
Finance Chief Supply Chain Officer
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The chart compares core assets and capabilities of the competitors Some, like Virco, are only suppliers and do not have a good direct to purchaser model Others, like
School Specialty and Wayfair, are both dealers and suppliers similar to School
Outfitters Since School Outfitters lives in both worlds it’s useful to have context like this to understand their strengths
The information in below chart is based on internal information, internal research to compare capabilities and assets The important features to recognize are that (1)
School Outfitters offers a wide range of products and solutions, making it a convenient one-stop shopping destination for customers Their private label products provide good margins for buyers, while the company maintains control over much of its supply chain Additionally, School Outfitters develops systems that facilitate efficient transactions and generate valuable data for analysis In the FFE school market, the primary challenge for School Outfitters is
Outfitters specializes in project-based business but struggles with managing large projects due to their typically low profit margins.
Sales department
The Sales team operates across the entire United States, encompassing the eastern, western, and central territories It is organized into groups of sales representatives, each reporting to one of three sales managers.
Figure 4 Sales department organization chart
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Sales representatives are categorized into two types: phone and chat representatives, both requiring similar skills and knowledge about customer environments, solutions, and products While chat representatives excel in written communication and manage multiple chats simultaneously, phone representatives focus on verbal communication and handle one call at a time Both types utilize a system to receive and distribute incoming customer requests, which also records interactions for future reference.
When a sales representative receives a customer request, they begin by asking essential questions to identify whether the customer is new or existing They then search for the customer's name or phone number in the order system For existing customers, the representative reviews their records to examine past quotes and orders, gaining insight into the customer's history with School Outfitters before creating a new quote.
Sales representatives engage in independent conversations with customers to identify their needs, supported by training from School Outfitters on educational environments and product solutions By demonstrating expertise, they instill confidence in customers throughout the process As discussions evolve, representatives add relevant products to the quote and address pricing, shipping, and installation details They are equipped to understand and address customer concerns regarding pricing, competitor discounts, and budget limitations, having full visibility of all costs and pricing elements within the system.
The only pricing constraint the sales representative has in the system is they cannot have a negative margin
Each month, sales representatives and their managers convene to assess performance and skills Prior to the meeting, the sales manager evaluates the representatives' monthly quotes, orders, recorded calls, and overall performance for the year.
The manager provides essential feedback and additional training to help sales representatives enhance their performance, particularly regarding the reasonableness of discounts Monthly meetings serve as the sole opportunity for sales representatives to receive feedback and quick training tips Currently, there is no established process requiring sales representatives to involve the sales manager when finalizing quotes or orders with customers Sales representatives are expected to remember and apply the manager's feedback to future customer interactions.
PROBLEM CONTEXT
FFE market situation
In general, historically, the manufacturers control the products available in the market
Dealers primarily sell products designed and manufactured by well-known companies, which are recognized nationwide, particularly among educational customers In contrast, dealers tend to be regional entities familiar mainly to local school systems While suppliers and manufacturers may boast reputable brands, they face stiff competition, often offering a limited product range that overlaps with other suppliers Consequently, there is little differentiation to give them a competitive edge.
Market fragmentation limits dealers' control over product costs, customer pricing, and margins, leading to intense price competition that favors customers Dealers do not manufacture or sell products directly; instead, they receive only a portion of the available margin, with manufacturers retaining a significant share When price pressures arise, dealers typically bear the brunt, as manufacturers have multiple dealers and established brand recognition, granting them greater control This dynamic results in suppliers exerting pressure on dealers to accept lower margins.
Mr David Lewis – Chief Innovation and Marketing Officer said that
Historically, the industry has experienced a clear division between dealers and suppliers/manufacturers, leading to significant fragmentation with numerous dealers and a limited number of suppliers This competitive landscape has compelled dealers to lower customer pricing, while suppliers have largely maintained their costs As a result, dealers have had to reduce their overall profit margins.
School Outfitters company situation and its business results
School Outfitters, a competitive dealer in the market, has experienced significant growth in revenue, customer base, and staff The expansion of their product assortment has enhanced customer choices, contributing to their overall success However, despite these achievements, the company continues to face challenges with tight profit margins due to reliance on selling products from other suppliers.
Ms Michelle Booher – Sales Manager stated that
School Outfitters fosters a positive culture that prioritizes support for educators, establishing itself as a leader in the educational furniture market The company is dedicated to delivering high-quality solutions, products, and services that enhance educational environments With a strong focus on customer satisfaction, School Outfitters boasts impressive customer retention rates and a high Net Promoter Score (NPS), reflecting its commitment to helping educators achieve the best outcomes for their students.
Figure 5 School Outfitters sales volume
School Outfitters business model is people intensive, high touch The company’s growth and many manual activities require more people, higher full-time equivalent
To enhance customer experience, an increase in full-time equivalent (FTE) headcount is essential for managing complex tasks, allowing customers to concentrate on their core responsibilities Unlike other dealers that expect customers to resolve issues with suppliers, manufacturers, and carriers, School Outfitters takes on these challenges, ensuring a seamless process for clients.
The chart illustrates the correlation between increases in full-time equivalent (FTE) headcount and the percentage of gross margin As the gross margin percentage rises, there is a corresponding increase in FTE headcount, indicating a positive relationship between these two metrics.
Figure 6 FTE headcount and gross margin %
School Outfitters identified the need for improved operational efficiency due to the extensive activities and document management required by their business model To address this, they implemented several software system changes aimed at minimizing manual workload.
School Outfitters The company created software to better integrate the website with the ERP (Enterprise Resource Planning) system, used EDI (Electronic Data
Interchange facilitates seamless integration with suppliers and carriers, automating the finalization of orders and the approval of purchase orders (POs) for efficient communication However, as the company expanded, the complexity of orders increased, necessitating additional services such as installation.
The technology changes did help but could not offset the need for people to perform many activities
Clayton, Jerome, and Jason define a 'technological enabler' as advanced technology designed to simplify processes and offer solutions to problems that once necessitated innovation.
William and Phillip (2017) emphasized that the innovative and extensive use of technology is crucial for industrial survival, enhancing living standards, increasing leisure time, and providing a competitive edge in global trade They illustrated that by investing more in science and technology, industries can achieve higher rates of new product innovation and a greater integration of technology, ultimately leading to improved productivity.
Below Hoshin charts represent for the proportion of activities which are automatically done by the system
Approximately 98% of purchase orders automatically approved by the system
Approximately 88% of purchase orders automatically sent to suppliers and warehouses
Nearly all carrier invoices are automatically received and imported, ensuring a seamless process for managing logistics and financial records.
Approximately 88% of supplier invoices automatically match to purchase orders
Figure 7 Hoshin charts – Examples of automated processes
2.2.3 Update the business model – Be a dealer and a supplier
School Outfitters aims to enhance the industry's typically narrow profit margins by adopting a new business model centered around its own private label products The company has established four distinct private labels, including Learniture, to achieve this goal.
Norwood, Sprogs and Egghead Each label consists of different product assortments
By having own products, the company expected to increase its gross margin %
Gross margin percentage (GM%) is a key profitability metric that measures a company's gross margin relative to its revenue This metric highlights the additional margin typically earned by suppliers By manufacturing directly, School Outfitters eliminates third-party suppliers, thereby increasing its gross margin This strategy addresses tight margin challenges and enables the company to uphold its high-touch service model.
Decisions regarding in-house activities versus outsourcing significantly influence the success of new-growth ventures, as noted by Clayton and Michael Many companies adhere to the principle of focusing on their core competencies.
To optimize efficiency, focus on tasks that align with your core competencies and handle them internally For activities outside your expertise, consider outsourcing to firms that can perform them more effectively.
School Outfitters has identified an abundance of resources that enable them to transition from a retailer to a manufacturer, enhancing their product offerings and market presence.
20 a dealer Additionally, School Outfitters also noticed that private label products have a signigicant contribution to GM% increase
Mr David Lewis shared that
To enhance profit margins, School Outfitters developed its own labels, positioning itself as both a supplier/manufacturer and a dealer (distributor) This strategic move significantly boosts the company's margins, particularly for its private label products.
PROBLEM IDENTIFICATION
Possible problem 1: Unsuitable products for educational environment
Riaz and Tanveer define a product as anything offered to customers that fulfills a want or need, highlighting its crucial role in the buying and selling process Learniture tables, a private label by School Outfitters, exemplify this concept Kotler identifies three levels of product: the core product, which represents the fundamental benefit (e.g., a chair provides a seat); the actual product, which differentiates itself from competitors; and the incremental product, which includes intangible benefits such as after-sales service and free shipping.
Learniture, launched in 2015, has not gained the same popularity as other established brands, leading customers to prefer tables from companies with decades of market presence.
Secondly, not all buyers have much technical knowledge about tables and so they may ponder whether Learniture tables are suitable products for their schools Nevertheless,
School Outfitters specializes in designing and manufacturing Learniture tables, ensuring high-quality and innovative solutions for educational environments.
School Outfitters offers 24 features and superior quality, resulting in significantly higher margins compared to vendor tables They stand out from competitors by rigorously testing their products to ensure high quality.
Ms Peg Schroer said that
Our tables undergo rigorous certification processes and quality checks that surpass those of major vendors, including material safety assessments for toxins and strength testing We hold all the necessary certifications that our customers seek, offering more than our competitors Additionally, we involve customers in the product design process, allowing them to review samples before mass production and provide valuable feedback Our tables are recognized for their superior quality and features, which our satisfied customers consistently appreciate and purchase.
Mr David Lewis also said that
Learniture tables were high quality and feature rich compared to competing brands
School Outfitters conducted an analysis of order data to confirm the sales of Learniture tables, ensuring that these tables are consistently included in customer orders This verification process aims to understand the unexpected margin associated with Learniture tables.
The investigation revealed a notable increase in the purchase of Learniture tables by customers, particularly in the key years of 2017 and 2018, where the quantity purchased saw substantial growth.
Figure 11 Units sold of all Learniture tables
Possible problem 2: Learniture table’s starting margin % not large enough
A less likely but possible scenario is the starting margin % for Learniture table is less than expected
Manufacturers selling to industrial and commercial markets depend significantly on distributors for various marketing and support functions According to Roger and Jule 11, it is advantageous for manufacturers to manage the entire value chain, from suppliers to end customers, to enhance strategic positioning.
In fact, School Outfitters could see the benefit of getting whole value chain as being a manufacturer and they started to launch Learniture table At a minimum School
Outfitters anticipate a margin difference of 4 to 6 percentage points between the Learniture table margin and the vendor's table margin Specifically, this means that the Learniture table margin must exceed the vendor's table margin by at least 4 percentage points.
26 difference is not large enough then the benefit from Learniture table will not be noticeable
Ms Peg Schroer said that
My team worked hard to create much more margin in our Learniture table Our table has 5 to 15 points higher margin That’s the starting margin, the opportunity margin
We source our Learniture tables directly from manufacturers to eliminate unnecessary costs and maximize our starting margin Additionally, we prioritize designing our products for small package shipping, which is more cost-effective than freight shipping.
School Outfitters has identified a significant margin percentage difference when comparing Learniture tables to those of other vendors, with an average improvement of at least 12 percentage points This substantial margin difference presents a valuable opportunity for the company.
Learniture table to provide the expected benefit
Figure 12 Margin % of Learniture table compared to vendor’s table
(Source: Internal Data) tot nghiep down load thyj uyi pl aluan van full moi nhat z z vbhtj mk gmail.com Luan van retey thac si cdeg jg hg
Possible problem 3: Learniture tables not being sold as expected
A key concern is whether the tables are being sold effectively by phone and chat sales representatives Typically, customers browse the website, conduct research, and then seek assistance by calling a sales representative, who provides advice and creates a quote After the customer reviews and approves the quote, the sales representative finalizes the order in the ERP/Order Taking system Similarly, chat sales representatives communicate with customers via chat, following the same process All orders are processed into a purchase order system for fulfillment by the supplier or warehouse This raises the risk that sales personnel may alter the descriptions of the tables when communicating with customers and finalizing orders.
Weinberg 12 argued that optimal sales compensation programs can be designed by incorporating two key features that is allowing sales personel to set prices and basing commissions on gross margin He concluded that corporate profits will be maximized under these conditions because sales personel and the firm are sharing the same quantity
Ms Peg Schroer shared that
Sales representatives earn commissions based on their sales performance, meaning higher sales lead to increased earnings This commission structure often prioritizes their personal financial goals over the company's needs, as they focus more on achieving individual targets.
Sales representatives currently have the flexibility to set customer pricing based on their evaluation of each customer's circumstances However, there may be inaccuracies in the pricing input for Learniture tables.
School Outfitters is analyzing sales data to determine if there is a pricing difference between orders managed by sales representatives and those placed online without their influence.
28 orders Basically, a web order is made by a customer browsing the website, doing some research, finding the solutions and products they want and adds them to a cart
The cart can then be converted to a checkout where payment can be made and the order completed online The web order then gets synched into the main ERP/Order
PROBLEM VALIDATION
The FFE industry has experienced significant growth in recent years, with Learniture emerging as a strong competitor among prestigious manufacturers However, the School Outfitters management team is concerned about unexpected margin declines compared to initial projections Validating the primary issue among the three identified problems is crucial for developing effective solutions that can lead to positive changes.
The Learniture tables are underperforming in sales, which is linked to the behavior of sales representatives Their actions are negatively impacting the realized margin percentage for these tables.
Gross margin is closely linked to short-term profit determinants, as noted by William, Gary, and Stephenson It is significantly affected by pricing reductions made by salespeople.
Mr Dan Swanson – Vice President of Marketing said that
From an analytical perspective, our approach to discounts and pricing is inconsistent, as the website displays prices differently than what the sales and chat teams communicate to customers.
Ms Peg Schroer also confirmed that
Many employees in the company fail to recognize the effort involved in maintaining product margins, mistakenly believing that substantial discounts are necessary for customer satisfaction Daily reports reveal that numerous orders are discounted unnecessarily, raising concerns about why sales representatives compromise margins This practice creates an expectation among customers for future discounts, leading them to anticipate similar concessions on subsequent orders If significant discounts are offered now, customers will likely expect them in the future, undermining our pricing strategy.
Using actual customer orders and separating them by web orders versus sales representative orders, School Outfitters sees there is a noticeable difference in margin
% The sales representative orders with Learniture tables has a noticeably lower margin % It also shows an improved trend line for web orders compared to sales representative orders
Figure 13 Margin % of sales representative orders compared to margin % of web orders
POTENTIAL CAUSES
Potential cause 1: Sales representatives habitually offer discounted pricing to
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According to the research by William, Gary, and Stephenson, salespeople with pricing authority are inclined to offer discounts to meet their sales targets This authority is rarely utilized to sell at prices exceeding the listed price, which suggests that as pricing authority increases, the gross margin is likely to decrease.
Interviews revealed that sales representatives frequently offered discounts to customers, even without requests, leading to a noticeable trend where web orders received deeper discounts compared to phone orders This practice significantly lowered the realized margin percentage of Learniture tables, aligning them closer to vendor pricing While sales representatives employed discounts as a strategy for customer acquisition and retention, this approach diverges from management's expectations, which emphasize the use of alternative sales tools for these purposes.
Mr David Lewis stated that
The article highlights a significant disconnect in understanding the company's value to customers, leading sales representatives to excessively discount orders and products as a default strategy to secure sales They felt compelled to offer discounts to persuade customers to choose School Outfitters, particularly for the company's private label tables, which they believed required deep discounts to encourage trial This practice became habitual, resulting in customers developing an expectation for discounts in future transactions.
Potential cause 2: Sales representatives feel compelled to match competitor
The research into the problem also showed sales representatives believed they needed to match a price the customer said they had from a competitor
Ms Kayla Keck – Phone sales representative shared that
I find myself in a challenging situation where customers often inform me of lower prices from competitors for vendor tables I have quoted This requires me to actively promote our tables while manually checking competitor websites to verify their pricing If I discover that a competitor offers a better price, I must adjust our pricing to match it.
31 the customer just tells me they have a better price I may have to match it It would be better if our prices were already lower than our competitors
In certain situations, matching a competitor's price may be acceptable; however, doing so too often could reveal underlying problems with product pricing strategies or indicate that sales representatives require improved training on how to effectively compare prices This behavior suggests that sales representatives perceive School Outfitters' market approach as focused on being the lowest-priced option, which does not align with the company's actual perspective.
The company's strategy focuses on providing high-touch service rather than simply competing on price, which does not imply being the lowest priced option High-touch service involves managing potential issues in complex orders, allowing customers to remain uninvolved This approach offers sales representatives additional talking points to engage customers, making it unnecessary to match competitor prices or aim for the lowest price in the market.
Weinberg 12 assumed that the salesperson can have close contact with customer, and so that is best able to estimate the effects of discounts offered However, William, Gary and Stephenson 13 argued that if sales personels do not have adequate market knowledge to predict customer response to discount level, they may overestimate customer price sensitivity due to high motivation to get the sale, and so discounts given may be greater than necessary
Ms Michelle Booher – Sales Manager shared that
We faced challenges in aligning our prices with those of competitors, leading us to offer deeper discounts to secure orders The education sector often prioritizes the lowest price, which frequently determines the winning bid.
Potential cause 3: Sales representatives are concerned about the quality of
Additional conversation shows sales representatives do not believe the Learniture table is a high quality product that matches or exceeds competitor’s tables Kotler and
Armstrong 21 told that a brand is an important part of the product to customer, and the value of product can be added by branding Learniture is a clear value to customers based on the original price, product design, and product features The sales tot nghiep down load thyj uyi pl aluan van full moi nhat z z vbhtj mk gmail.com Luan van retey thac si cdeg jg hg
32 representatives didn’t know this or consider it valid so they lowered the customer price to make the product attractive
Mr Phil Rogers – Sales representative said that
To facilitate swift decision-making for our customers, we often offer discounts on products or shipping, ensuring that they choose to purchase from us.
Offering discounts is essential for maintaining competitiveness with other dealers and retaining customers at School Outfitters Initially, discounts attract first-time customers, and ongoing discounts are often necessary to keep them engaged With significant competition in the market, it is crucial to make our private label tables appealing through attractive pricing Without these discounts, customers may have little incentive to choose our tables over others.
The quality and features of Learniture tables are designed to match or surpass those of the vendor's tables School Outfitters emphasizes a manufacturing process that ensures rigorous testing for build quality, material quality, and safety Generally, Learniture tables boast superior quality and safety certifications This highlights a significant disconnect in understanding and approach with the sales representatives, which ultimately led to a price reduction.
According to Roger and Jule (2011), certain manufacturers believe that controlling the entire value chain is essential for ensuring product quality, providing customer service, and maintaining a satisfactory profit margin for all stakeholders involved.
Mr David Lewis also said that
The sales representatives failed to recognize that the company offered significant value beyond mere discounts, which should reduce the need for heavy discounting Additionally, they did not appreciate that Learniture tables were of superior quality and packed with features compared to rival brands Consequently, the company's new strategy was ineffective due to these internal misunderstandings.
Potential cause 4: Sales representatives have too much visibility and control
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The sales representatives had an open view of the table’s available margin in the company’s ERP and order taking system
Ms Kayla Keck admitted that
As a sales representative, I enjoy significant autonomy in assisting customers to find the right products at competitive prices The company places great trust in us, allowing full control over product pricing and visibility into each product's margin This enables us to determine the extent of price flexibility we can offer to our customers.
This empowered the sales representatives to be comfortable with discounting
Learniture tables offer higher profit margins compared to vendor products, which has created a challenge for the sales team and the company due to the transparent visibility of crucial financial data.
Research by William, Gary, and Stephenson 13 indicates that companies granting extensive price-setting authority to their sales teams tend to experience consistently poor performance This suggests that unrestricted pricing power for sales personnel can lead to weakened marketing and sales outcomes.
The focus of the sales team should be on selling with the toolbox they have available
The company's pricing model leads to significant inconsistencies, as over 20 sales representatives independently determine table margins, resulting in varying prices for the same product This discrepancy creates confusion for customers, who may receive different quotes from different representatives, contrasting with the fixed pricing on the company website Additionally, the varying levels of selling skills and business acumen among the representatives contribute to inconsistent margin percentages This situation is critical for the company's success, as it places control in the hands of numerous individuals rather than management, who are better equipped to implement effective strategies.
Ms Peg Schroer mentioned that
To enhance sales effectiveness, it is crucial to implement better training for sales representatives and establish a system that limits unnecessary order discounts We must ensure that discount decisions are not left to more than 20 individuals for each table in every order.
We must transform the mindset and actions of our sales representatives to enhance their effectiveness.
Cause – and – effect tree
From the results of interview with six respondents together with literatures and theories, the preliminary cause - and - effect is developed as follows:
Unsuitable products for educational environment
Learniture table’s starting margin not large enough
Learniture tables not being sold as expected
Learniture is less popular than other brands
Learniture tables are as same as vendor’s tables
Sales representatives are authorized to discount and control margin %
Sales representative inputs pricing for Learniture table in error
Learniture table has a significant margin% points difference compared to vendor’s table Unexpected
Margin of Learniture Tables tot nghiep down load thyj uyi pl aluan van full moi nhat z z vbhtj mk gmail.com Luan van retey thac si cdeg jg hg
The unexpected margin of Learniture tables can be influenced by three main factors: the suitability of the products for the educational environment, the starting margin of the tables being insufficient, and lower-than-expected sales Among these, the primary factor contributing to the unexpected margin is the underperformance in sales or discounting behaviors by sales personnel.
A study by McKinsey & Co., referenced by Bhattacharya and Friedman, revealed that a 1% price increase, while maintaining constant sales, can lead to an average profitability boost of 7.4% Furthermore, Anthes highlighted similar findings in the context of pricing strategies.
McKinsey & Co.’s study showed the effect of pricing on profitability was even stronger than that of increasing sales volume or reducing costs
The management team at School Outfitters emphasizes a high-touch model, prioritizing exceptional customer care over competing on price Instead of focusing on discounts to attract customers, they are dedicated to enhancing their professional skills to better serve their clientele.
While unsuitable products for the educational environment and the insufficient starting margin of Learniture tables do not generally impact margins, they are not the reasons behind the unexpected margin performance of Learniture tables in the context of School Outfitters.
Shapiro and Varian (2016) emphasize that the marginal cost of information, such as software, is very low, making traditional selling methods ineffective online They warn that pricing strategies like matching competitors or cost-based pricing can lead to failure Instead, they advise companies selling information on the web to establish prices based on the perceived value to the customer.
CAUSE VALIDATION
Through a comprehensive analysis involving a cause and effect tree, in-depth interviews, and secondary data from internal sources, School Outfitters identified that the primary factor contributing to the lower margin percentage for Learniture tables is the performance of sales representatives.
37 authorized to discount and control margin % because of its significant impacts It’s not about the product price, product quality, or customer acceptance of Learniture tables
Margin and profit are essential for growth in the education industry; without improving margins, profits may stagnate or decline Companies must distinguish themselves by offering new benefits or capabilities, which places ongoing demands on marketing, sales, and product development Each area requires significant investment, particularly in marketing, where the focus is on paid search engine optimization and building a brand that resonates with customers for long-term value.
Tim 19 emphasizes that incorrect pricing can lead to significant losses in revenue, profits, and customers, ultimately jeopardizing a firm's strategic position This mispricing not only threatens profitability and can lead to bankruptcy but also results in unemployment and customer migration to more competitive alternatives Insufficient profits hinder firms' ability to invest in productivity enhancements and the development of future products that meet customer demands Consequently, firms that fail to adapt often become irrelevant and face extinction.
Profit is essential for retaining top talent, as a decline in profits can lead to underpayment and the potential loss of skilled individuals to competitors or other industries These talented employees drive innovative ideas that enhance current operations and shape the company's future, ultimately contributing to profitability and competitive differentiation Without profit and the retention of these key individuals, the company risks stagnation and decline.
Reducing prices or offering discounts can lead to unnecessary complications for a company As noted by Howard in Stines' study, a 10% price reduction on a product with a 40% gross margin requires a one-third increase in sales to maintain revenue Furthermore, a 20% price cut necessitates doubling sales to achieve the same financial outcome.
A 30% discount necessitates a 400% increase in sales, making the effort required to lower prices significantly greater Howard highlighted that the primary objective of a business should be to generate profits, rather than simply increasing workload.
Examining the effects of allowing sales personnel to offer discounts and manage margin percentages is crucial, as it has contributed to the underperformance of Learniture table sales This analysis will reinforce the notion that these factors are the primary cause of the issue and assist School Outfitters in identifying effective solutions to enhance their sales performance.
SOLUTION
Uneffective implemented solution and evaluations
School Outfitters first solution for improving margin % was to hide part of the margin from the sales representatives The order taking system was the same, no changes to it
From the perspective of sales representatives, there were no significant changes in handling products, discounts, or customer interactions The sole adjustment made to address the margin issue was the enhancement of the product record, which now permits a higher cost to be established.
The increased table cost permeated the system, leading sales representatives to perceive a reduced margin in the order-taking process Although they retained the ability to discount as needed, this perception of lower margins resulted in less frequent discounts This straightforward system influenced their pricing strategies significantly.
“Out Cost” As an example, a table has an actual cost of $20 Its cost is instead set to
$25 in the product record The sales representatives see a margin based on the $25
This ensured at least $5 of the margin (25% of the margin) is not discounted
Theoretically, this solution should work well since it’s simple overall It keeps the order taking system the same It should reduce discounting and save margin
However, there are several issues that made this solution undesirable after trying to use it
Setting up and maintaining pricing tables requires careful consideration of margins to protect company interests while allowing sales representatives to offer discounts Each adjustment to a customer's price necessitates a reevaluation of costs to ensure that the protected margin aligns with the company's savings goals Regular updates are essential to maintain the integrity of the pricing strategy and support effective sales operations.
39 considered This meant people needed to be assigned to constantly review and update the protected margin, the table cost
Sales representatives discovered that the margin was concealed, leading them to estimate the actual margin for discounting This shift resulted in inconsistent discounting practices, as each representative independently determined the discount amount for customers Consequently, the company failed to safeguard the expected margin effectively.
Mr Dan Swanson shared that
This method faced significant challenges due to fluctuating supplier costs and customer prices, making maintenance difficult Each product required individual setup and ongoing updates, which became cumbersome, especially for suppliers with extensive product lines Additionally, the inconsistency in approaches among multiple team members further complicated the process.
The method of protecting margins led to significant reporting issues, resulting in inaccurate updates that either over-reported or under-reported margin performance This inconsistency diminished confidence in the reports, generated numerous queries, and ultimately slowed down decision-making processes.
The initial solution proved to be less effective and desirable than anticipated due to excessive workload, confusion, and growing distrust among sales representatives Consequently, the company opted to seek alternative solutions.
The first alternative solution: No discounting allowed
This solution eliminates all discounting by sales representatives, prohibiting them from altering customer prices or margins when generating quotes or orders The prices and margins established in the product record remain unchanged by the sales representatives, ensuring that the opportunity margin is fully realized for every phone and chat quote and order.
Mr Dan Swanson said that
One potential solution is to eliminate all discounting, which would allow the company to fully realize the product's available margin and enhance profitability from each order This approach ensures consistent pricing across all sales representatives and the website However, the primary concern is whether customers will accept this change.
Analyzing the current situation reveals a potential significant decline in customer numbers, as many may anticipate discounts based on prior purchases or find better pricing options with competitors like School Outfitters In the educator market, there is a tendency to expect discounts, which could lead to frustration among sales representatives who rely on discounting as a key strategy to encourage purchases.
Each table sold will yield the full margin available, as sales representatives are prohibited from discounting the price established in the product record Consequently, the actual margin for a quote or completed order will reflect the original opportunity margin, which is expected to enhance the company's overall margin percentage.
Faster order completion is achieved as sales representatives can streamline conversations with customers by eliminating the need to calculate margin percentages and discounts This allows them to focus on more relevant aspects of the discussion, enhancing efficiency and improving the overall customer experience.
Consistent pricing across all channels ensures that customers receive the same price whether they purchase through chat, phone, or web orders at School Outfitters Since sales representatives cannot offer discounts or alter customer prices, the total order amount remains uniform across all platforms and representatives This approach enhances the customer experience by reducing the likelihood of inquiries about potential discounts, leading to fewer phone and chat calls.
Failing to meet customer expectations can stem from their genuine need for discounts Customers may have limited budgets that necessitate discounts to make purchases from School Outfitters Additionally, if a competitor offers a more attractive discount, customers might be compelled to choose them despite their preference for School Outfitters Ultimately, previous experiences and competitive pricing can significantly influence customer decisions.
Engaging with a chat or phone sales representative at School Outfitters can create a strong expectation of receiving a discount When customers do not receive the anticipated discount, it may lead to feelings of disconnect and suggest that School Outfitters no longer values their patronage.
Sales representatives often rely heavily on discounting as a key strategy in their sales approach While they possess various skills to persuade customers to choose School Outfitters, their proficiency in discounting may overshadow other important selling techniques The loss of control over discounting can lead to feelings of inadequacy in meeting customer needs and highlight weaknesses in their overall sales abilities This frustration can ultimately result in decreased effectiveness in selling, potentially leading to fewer completed orders.
Customers are increasingly engaging in price shopping online or through their approved dealer lists, often discovering dealers offering discounts that result in more competitive pricing compared to School.
Convincing customers to choose School Outfitters can be challenging due to budget constraints faced by educators, who often rely on limited government funding and few additional sources While the value of services and benefits offered by School Outfitters is recognized, price remains a significant factor influencing their purchasing decisions.
To assess the anticipated margin improvement of this solution, we will analyze total sales over a five-year period, comparing the current average margin with discounting to the expected margin without discounting This evaluation will incorporate a blend of vendor's tables and Learniture tables, utilizing a total sales figure of $502 million for the five years to illustrate the impact of eliminating discounting.
The current sales representative behavior and discounting practices have resulted in a realized discounted margin of 25% In contrast, maintaining a no-discount policy yields a higher realized margin of 35%.
Table 3 illustrates the margin dollars achieved by comparing the discounted margin from sales representatives with the new solution for the undiscounted margin Additionally, it highlights the margin dollar improvement (Margin delta $) resulting from the transition away from sales representatives' discounting practices.
The result is a gain in margin of $50,200,000 over five years if sales representatives are not allowed to discount
Table 3 Comparison between sales representative discounted margin and undiscounted margin
Margin $ at 25% Margin $ at 35% Margin Delta $
The impact on sales must take into account customer reactions to the elimination of discounts School Outfitters' clientele is particularly price-sensitive due to their annual fixed budgets Furthermore, many customers have come to expect discounts from sales representatives based on their previous experiences with the company The removal of these discounts may lead some customers to feel undervalued, prompting them to seek alternative dealers.
The second alternative solution: Management controlled discounting
Sales representatives still have limited discounting capabilities, but these are now significantly restricted The system dictates the maximum discount for each table and order through advanced analysis, ensuring that discounts align with company needs and customer expectations Consequently, sales representatives no longer have access to margin percentages, which removes this factor from their discussions and decision-making processes with customers This strategy effectively optimizes the margin percentage achieved for each table and order.
According to the recommendations of William, Gary, and Stephenson, any necessary pricing changes should be initiated by the sales force, who must submit specific deviations from the list price and obtain authorization from management to implement these changes.
Joseph 18 also found that firms giving salespeople the least pricing authority generate the highest levels of gross margin Authorizing salespeople with pricing leads to the possibility of tradeoffs between price and effort Concluded by sales managers, they believe this would cause sales personnel to take the path of using discounting rather than spending effort on selling
Ms Peg Schroer said that
Sales representatives are currently giving away margin, highlighting the need for improved training for both them and their managers Additionally, modifications to the BOSS system are necessary to align it more closely with the website's policies, particularly by restricting discounting practices.
Mr David Lewis also shared that
School Outfitters recognizes the necessity for improved interdepartmental communication to address ongoing issues Additionally, the company acknowledges the need for a technological system overhaul to effectively manage and centralize discounting processes across various sales channels.
The discount control system allows 44 representatives to offer customers discounts, which can be refined over time By analyzing results, the company aims to find the optimal balance between discounting and margin gain, ultimately reducing unnecessary discounts.
This solution allows the sales representative to maintain a similar level of discounting ability as before, ensuring a consistent experience for both the sales representative and the customer Over time, the system and management will analyze discounting practices and customer responses to gradually decrease the permitted discounting levels.
Sales representatives are increasingly unaware of the margin percentages and the specific discounts applied during transactions, relying instead on a dropdown list for discount levels As they concentrate on enhancing their sales skills, they remain confident in their ability to offer discounts when necessary Meanwhile, management consistently evaluates the performance of sales representatives and customer responses to reduced discounting, strategically minimizing discounts to maximize overall margins.
The order taking system will regulate discounting, leading to increased margins As management evaluates customer responses to discounts and monitors sales representative performance, further margin improvements will be identified Ultimately, an optimal balance between margin percentage and total margin across all orders and representatives will be established While this solution may not capture the full potential margin, it effectively balances sales representative discounting, customer pricing acceptance, and overall company margin.
The new solution emphasizes the importance of building relationships in sales, moving beyond discounting as the primary sales tool It encourages sales representatives to enhance their selling skills and expand their toolkit, enabling them to effectively communicate the quality and features of their products By showcasing a broader range of selling points beyond just price, sales representatives are motivated to cultivate individual relationships with each customer, ultimately leading to improved sales performance.
Shifting the sales representative's focus away from margin percentage to the benefits of School Outfitters enhances their selling approach By emphasizing the high-touch, sophisticated nature of the company, representatives can alleviate customer concerns regarding suppliers and delivery issues Highlighting the features and quality of Learniture tables during sales conversations provides compelling reasons for customers to choose School Outfitters, ultimately creating a stronger differentiation from competitors.
The system employs advanced analytics to determine discount levels based on varying order sizes and margin percentages Regular manual assessments are essential to maintain an optimal balance, ensuring that reduced discounts do not negatively impact order conversion rates.
The system must perform real-time calculations to determine the allowable discount for sales representatives, taking into account the company's break-even amounts, individual table costs, and the total order amount including shipping Sales representatives are required to apply discounts to each table and shipping item individually Additionally, a management work queue is necessary for instances when a sales representative requests a larger discount The manager evaluates similar factors before approving or rejecting the additional discount request.
Sales representatives may experience confusion with the new system and its discounting process, as they are required to apply discounts to each table and shipping individually If a representative utilizes the maximum discount but still needs to adjust the product or shipping price to meet customer expectations, they must remove discounts from other products in the order This can lead to delays in processing quotes and orders, resulting in customer frustration during phone or chat interactions.
46 sales representative tries to match the customer’s expectation of applying the maximum discounting to specific products or shipping
To assess the anticipated margin improvement from this solution, we will analyze total sales over a five-year period, amounting to $502 million This analysis will compare the current average margin, which incorporates traditional discounting methods, with the new expected margin achieved through system and management-controlled discounting The margin calculations will take into account a combination of vendor's tables and Learniture tables, providing a comprehensive view of the potential enhancements in profitability.