6 Ways to Create a Profitable Value-Added Approach

By Bridget McCrea

Pricing value-added services and actually making money from the kitting, assembly, inventory services, design and engineering services, transportation, and other non-product-related offerings is a constant challenge for electrical distributors of all sizes. And while some may have found the right formula for monetizing these services, others seem to be in a “race to the bottom” to give such services away for free in order to beat out their competitors.

“You’re making a big mistake if you’re out there doing these favors and not charging for them,” said Lynn Daniel, president of The Daniel Group in Charlotte, N.C., in tED‘s Is Your Distributorship’s Value Bucket Empty? “With margins under continual pressure, and with the need for customer loyalty higher than ever, now is the time to sit down with your customers, find out what’s causing their headaches, and come up with ways to solve them in order to increase your own profit margins and create more loyal customers.”

If your distributorship is trying to figure out how to monetize the value-added services that it either wants to offer—or that it’s been giving away for free for years—here are six good starting points:

1. First, figure out how much it’s costing your company to offer the services. Knowing that many electrical distributors grapple with exactly how to charge more for the services that they offer, Daniel says the first step is to figure out how much it’s going to cost your firm (in time, labor, and materials) to complete the value-added task. Then, factor in the volume of work that could come from adding this service to your menu of offerings (if one electrical contractor needs it, says Daniel, they probably all do). “Don’t look at just putting together two or three assemblies a week; multiply it out across your customer base,” says Daniel. “That will help build in some volume discounting and efficiencies to the equation.”
2. Look outside of the electrical distribution industry for cues. Other industries have figured out how to make money from their value-added service offerings, so why not borrow a page from them? In most cases, it’s a matter of being clear and transparent upfront about exactly what these services entail, how much they cost, how they’re handled, and the fact that they aren’t included in the cost of the “traditional” order. GAA Accounting’s The Benefits of Value-Added Services, for example, highlights this example from the auto industry:
   One of the most well known examples is Rolls-Royce Aerospace’s performance-based “power by the hour” model. By broadening the company’s scope to selling engine power (the outcome), instead of the jet engines themselves (the product), Rolls-Royce has taken on the downtime risk related to engine failure, at the same time differentiating its offering from competitors and seeing the bottom-line benefits of creating an entry barrier to its market. The company is charging for the capability provided by its products, rather than the products themselves.
3. Let your customers know about your value-added offerings. Don’t keep them a secret. This is a particularly important point for companies that actually want to make money off their value-added services versus just giving them away once in a while. “Talk to your customers about all of your solutions, and figure out how to package them/upsell/cross-sell with the products that they’re already buying from you,” says Doug Dobie, CEO and founder of growth strategy consultancy Delvantage, Inc., in Long Beach, Calif. “Look for opportunities to fill in areas where customers may be looking elsewhere for support—or trying to do it on their own with limited resources. These should point you to some good areas of opportunity.”
4. Match your distributorship’s competencies to your customers’ pain points. Tacking on an hourly charge for design services or a flat daily rate for inventory services sounds simple enough in theory, but in today’s price-conscious business environment distributors are extremely cognizant of how even a few cents added here or there will impact their customer relationships. Knowing this, John Dinsmore, assistant professor of marketing at Wright State University’s Raj Soin College of Business in Dayton, Oh., says electrical distributors should strive for a balanced approach that meets customers’ needs without negatively impacting their own balance sheets. “If you’re providing great, added services to your customers on a regular basis for no additional fee, you may be operating at a loss and not even realizing it,” Dinsmore points out. “Rather than joining the ‘race to the bottom,’ focus on your firm’s core competencies and match them up to your customers’ pain points. If you’re truly solving a problem for them, they should understand the need to be compensated for those services—plain and simple.”
5. Come up with ways to make business “frictionless” for your customers. Customers should be willing to pay for services that make their lives easier, solve their pain points, and ultimately save them money. Using these realities as a baseline, distributors should come up with ways to make doing business “frictionless” for their clients. By offering final assembly and engineered services at a fee, for example, you can help contractors get the job done without having to bring yet another vendor on the jobsite to finish the task. Dobie suggests using phrases like, “Do you know that if you add this service, you’ll get more out of your application because of X,” when promoting value-added services. “Let them know what’s in it for them, as opposed to just what the service itself is,'” he says. “Make sure those customers know the true value in the offering. Then they’ll be willing to pay for it.”
6. Break out of the commodity mindset…now! The days when distributors could stand by their traditional business models and take a stance against changing how they go to market are over. It’s time to break out of the commodity mindset and attach a true cost to everything your distributorship does, including inventorying, delivering, engineering, providing services, and so forth. “It’s not just about product cost anymore,” says Dobie, “it’s about the ‘price waterfall’ – or, those 10-12 other things that a distributor does on a daily basis. All of those things can be monetized and accounted for.”

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McCrea is a Florida-based writer who covers business, industrial, and educational topics for a variety of magazines and journals. You can reach her at bridgetmc@earthlink.net or visit her website at www.expertghostwriter.net.