Return on sales in B2B Wholesale – What is it and how to increase it?
“It is not because things are difficult that we do not dare. It is because we do not dare that they are difficult.” Lucius Annaeus Seneca, c.4 BC-c.65 AD.
Some of Germany’s biggest B2B wholesalers have doubled their Return on Sales (ROS) after Corona, while others are struggling. Take, for example, the Würth Group, one of the biggest. Its Electrical Wholesale unit was particularly successful in 2022, reporting a growth of 25.0 per cent.
Is it hard to increase ROS? If Würth could, why not you? In B2B wholesale distribution, sales managers and executives must increase their return on sales (ROS) to remain competitive and profitable.
With the rise of e-commerce and other technological advances, wholesalers must find new ways to optimise their operations and maximise their profits.
Nevertheless, the E-business sales of the entire Würth Group grew by “only” 21.2 per cent compared to 2021, so the increase in electrical distribution also came from stationary and classic sales channels.
This article will discuss ROS and how sales executives can improve it using predictive sales software and AI in B2B.
What is Return on Sales (ROS)?
ROS is a financial ratio that measures a company’s operating profit as a percentage of net sales. It is a key ratio used by sales managers and executives to assess the profitability of their business.
To calculate ROS, divide operating profit by net sales and multiply by 100 for a percentage. A high ROS indicates that a company is making a high margin on its sales. A low one? Well, the opposite. A negative one? I leave that to you.
The ROS ratio varies between companies depending on their sector, size and other factors. According to a study by the German Institute for Economic Research (DIW Berlin) on the ROS of German companies in 2020, the average ROS for the wholesale and foreign trade sector (which includes B2B wholesalers) is around 4.8%.
Take your operating income for the last twelve months and divide it by your revenues. What number did you get? Was it higher than 4.8%.?
ROS Examples of Public Wholesalers in Germany and the US
An average is just a way to hide an accurate picture. Thus, look at some ROS examples of public wholesalers in Germany and the US.
Germany first, most with data up to 2020.
Würth Group – ROS = 9.2% (from 5,4 in 2020 and 7,4 in 2021!)
Brenntag AG – ROS = 4.8% (Righ on the average!)
Schenker AG – ROS = 3.3%
Phoenix Group – ROS = 3.3%
Metro AG – ROS = 2.6%
Klöckner & Co SE – ROS = 2.4%
Bilfinger SE – ROS = 1.9%
Let’s cross the Atlantic and look at some American Distributors.
Fastenal Company – ROS = 21.9%
W.W. Grainger, Inc. – ROS = 11.5%
MSC Industrial Direct Co., Inc.- ROS = 12.1%
At first glance, the most prominent American wholesalers are doing much better than their German counterparts. Mostly, they are, but that does not mean much. According to a German Federal Statistical Office study, most wholesalers in Germany are small or medium-sized companies with at least 50 employees. These companies tend to have lower turnover than larger companies.
In Europe, the wholesale and retail trade sector significantly contributes to the economy, accounting for around 14% of the EU’s GDP. The industry includes various enterprises, ranging from small family businesses to large multinationals.
Some of Europe’s smaller public B2B wholesalers may operate in niche markets or focus on specific product categories, such as electronics or industrial equipment. These companies may have lower turnover figures than larger, more diversified wholesalers.
Bottom line: ROS varies widely from company to company, geography to geography, and industry to industry. While some do well (high ROS), others need help maintaining profitability. So, what makes some companies more successful than others?
In addition, it is crucial to consider factors other than ROS when assessing a company’s financial performance. Please note that I checked the above ratios using public information around 2020-21; they may have changed since then.
Why Some B2B Wholesalers Are Doing Well, and Some Are Not:
Many factors can affect a company’s ROS, including pricing strategy, cost structure, market demand and competition. Companies that perform well tend to have a strong value proposition, efficient operations and a solid understanding of their target market. They may also have a competitive advantage in product quality or customer service.
On the other hand, companies that are struggling to maintain profitability may have a high-cost structure, low margins or an outdated business model. They may also face stiff competition from new entrants, particularly in the e-commerce sector.
The difficulty of replacing an ageing technical population might be a point to consider in Germany. Some of the biggest Wholesalers tend to form follow-ups, which takes several years.
How to Increase ROS with Predictive Sales Software and AI in B2B Sales:
One way to increase ROS is to use AI-based software, such as predictive sales software, to optimise sales operations and improve customer targeting. By analysing historical sales data and using predictive analytics, sales managers and executives can identify which customers are most likely to buy and which products are most likely to sell.
For example, they can predict the products with the highest buying probability, pricing ranges and customer retention activities. These actions will lead to higher customer satisfaction and repeat business, which can increase return on investment.
In addition, AI in B2B sales can help distributors automate many of their sales processes, freeing up sales reps to focus on building customer relationships.
Return on sales in B2B Wholesale: What is it and how to increase it – Conclusion
In summary, return on sales (ROS) is a key metric used by B2B wholesale sales managers and executives to assess the profitability of their business.
Some companies find it easy. Some dare to change and grow. For those, there is hope. Some find ROS hard. Companies that perform well tend to have a strong value proposition, efficient operations and a solid understanding of their target market.
Those struggling may have a high-cost structure, low margins or an outdated business model. By using sales analytics software, such as predictive sales software, and AI in B2B sales, companies can increase their return on sales and stay competitive in the ever-changing world of B2B wholesale e-commerce.