Avoiding the “Race to the Bottom” on Price, Part I

There’s an online price war in full swing and so far, Amazon is winning. This is already abundantly clear on the business-to-consumer (B2C) side of things, where a recent Profitero study reveals that the e-tailer’s prices are typically 11% lower than its next-biggest competitors Walmart, Target, and Jet. And while Walmart looks to be closing the gap with prices that are just 3% higher than Amazon (versus 9% in 2014), key product categories like beauty, toys & games, electronics, and pet supplies are all being dominated by one player:  Amazon.

Working in an industry where price and availability reign as the top shopping criteria for most customers, electrical distributors could soon be feeling a similar price pinch, if it’s not happening already. For even in the business-to-business (B2B) arena—which is projected to reach $8 trillion by 2020—Amazon business is aiming to be the “top dog” by the time the industry hits that milestone.

“Incumbent distributors are flailing to produce a winning strategy against the e-commerce giant and it’s costing them money because no one is pursuing real digital transformation,” Alex Moazed writes in What Is a Platform For the $8 Trillion B2B Distribution Market?He points to Grainger’s 2017 missed earnings target as one sign of the times, and blames it on the “price-cutting strategy for responding to the threat it won’t name publicly: Amazon Business.”

“If Grainger keeps fighting a price war it is extremely unlikely to win, the company will probably lose half of its operating margins and EBITDA by 2020,” Moazed predicts, noting that Grainger is only the “first domino to tip,” and that eventually other companies in the maintenance, repair, and operations (MRO) vertical will “start missing earnings and spiraling downward in conjunction with Amazon’s rise.”

Borrowing a Page from Southwest
Not all companies succumb to the price war, even if it means leaving some revenue on the table in exchange for profitability and success. Looking outside of the B2B distribution space, we see that Southwest Airlines still doesn’t charge for checked baggage (both first and second checked bags), even though its direct competitors are raking in millions of dollars annually by making customers pay $25+ to put their luggage aboard the very planes that they’re flying on. In other words, the “if you can’t beat ’em, join ’em” mindset isn’t always mandatory. However, there are some steps that distributors need to start taking if they want to get out of the “race to the bottom” yet still remain profitable and healthy.

Achieving those goals will require a mindset shift away from assuming that those long-term B2B relationships you solidified years ago will somehow carry your distributorship through the current digital selling revolution. “A lot of B2B firms have gotten away with living off their existing relationships or by bidding on new work, neither of which works very well in the online environment,” says Rob Satrom, CEO of Minneapolis-based FeedbackWrench Web Design, SEO & Marketing. “But just because something worked in the past is no excuse to not innovate, find new sales opportunities, and ferret out additional revenue streams.”

Making that happen isn’t always easy in a world where brick-and-mortar retailers like Circuit City and Borders succumbed to the power of Amazon years ago. “Jeff Bezos’ company has been blamed for killing off once-stalwart retail chains, forever changing the way we read and shop for books, and squashing small businesses,” Megan Elliott writes in 17 Stores That Are Getting Completely Destroyed by Amazon.“And to hear some tell it, the path to total Amazon domination is just beginning. One investment firm even has a ‘Death by Amazon’ index that tracks the stock prices of 54 retail chains they believe are most threatened by the online retailer.”

Avoiding the Death Lists
Satrom says it won’t be long until more B2B companies start to appear on those “death lists,” and get destroyed by Amazon’s pricing power and quick delivery times. “Even more entrenched sectors like electrical supply—which is obviously slower to the party than the large sectors that got hit 10 years ago,” he points out, “will feel the impact as their competitors use technology and digital means of moving faster and quicker.”

For example, Satrom says because technology “flattens out” communication (i.e., between a distributor and its customers or prospects), it essentially shines a light on all of the different options that lie before them. And if price and delivery are the top requirements, companies like Amazon Business tend to attract the brightest light. To combat this trend, Satrom tells distributors to focus on innovating, opening up new channels, and diversifying their income streams.

“Try to find that qualitative value-add that customers are looking for, and that they can’t get from an online retailer that’s involved with myriad different industries and/or products,” says Satrom, who also tells companies to consider forming “exclusive relationships” with customers based on special pricing, delivery, and customer support options. “Find your best customers and analyze their current needs and pain points,” he says. “Then, capitalize on your firm’s strengths, fulfill those needs, and help customers think beyond price.”

In the second installment of this article series we’ll hear how NAED members and suppliers are avoiding the race to the bottom on price and growing despite the current levels of disruption and change in the electrical distribution industry.

SIDEBAR: 3 Ways to Get Out of the Race to the Bottom

Here are three strategies that electrical distributors can use to get out of the race to the bottom on price:

1. Create something special with margin. Identify a product solution with strong market differentiation that solves tougher problems or adds greater value, but that also provides your firm with higher margins. “You need to develop or identify some sort of value-add solution that can be differentiated from the sea of competitors,” Rob Satrom, CEO of Minneapolis-based FeedbackWrench Web Design, SEO & Marketing, adds. “Put simply, you need a diversified solution that goes beyond just price and delivery.”
2. Find a niche. Give them something that they can’t find anywhere else, be it product expertise, technical knowledge, or the willingness to always go the extra mile (even for 4am deliveries right to the jobsite). “The riches are in the niches,” Satrom says, “and in the war of price compression because of Amazon, it’s becoming even more important to find niches with demand for qualitative solutions.” Looking outside of the electrical distribution industry, for example, Satrom recently learned from a farmer that he was getting nearly triple the price for his barley crop because he had identified a craft brewer that had extremely high specifications and requirements. “This niche meant that he didn’t have to compete with his peers and was able to sustain profits,” he explains. “Sure, the farmer had to change his farming practices a bit to comply with the strict organic demands of the brewer, but he’s now diversified his business and added a completely new revenue stream.”
3. If all else fails, consider joining them. No organization really wants to hear this right now, but fighting Amazon is a bit like fighting off the move towards digital media. Blockbuster is the classic case of a business that fought the evolution and lost—and not only due to its inability to change. “The change towards just-in-time delivery of goods and retail through fulfillment through Amazon, and soon Walmart, is inevitable,” says Satrom. “Rather than fighting the tide, you may want to start negotiating with these companies now to find out how you can move alongside them in some way.”