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Boosting Your Distributor’s Value-Added Proposition, Part I

By Bridget McCrea

Going the extra mile for customers is a no-brainer in this competitive distribution landscape, but when everyone else is battling it out on price alone, how can electrical distributors effectively layer fee-based options on top of their offerings?

Like most electrical distributors, Rexel isn't interested in being a “middleman” that shuttles equipment and parts from manufacturer to end user for a fee. Instead, it strives to become a partner that customers turn to when they need everything from product kitting to repair services to product application expertise. Using this strategy, San Diego Branch Manager Maxwell Gabin says the company knows that it may not always be able to compete on price, so it focuses on helping customers run their businesses better.

“For the most part, distributors sell the same stuff. And while there's definitely a price element to what we do, you can't always win on price on every product or order,” Gabin points out. “If that were the case, there wouldn't be as many distributors as there are.” To stand out from the pack, Gabin says Rexel focuses on getting products to their destinations as quickly as possible, and with as little friction as possible. In some cases, that means having to do a little extra research to help a customer find the right part for the right application. In other cases, it means eliminating extra paperwork or “hoops” that customers would otherwise have to jump through during the ordering and receiving processes.

“We go the extra mile so that customers can spend more time installing and doing their actual work, instead of getting mired in research and paperwork,” Gabin explains. “That's where the synergies are between us and our customers, who are left to do what they do best:  run their businesses.”

Changing the Mentality
But in a world where companies are going head-to-head with one another—and with the likes of e-tailers like Amazon Business—on price, how can distributors get compensated for these “extras” and not lose money in the process?

Gabin says the best approach is to clearly spell out the offering and its impact on the customer's bottom line before going ahead with the extra research, work, or effort involved with value-added services. Those conversations should include the company's foremen, engineers, and other “front line” employees, says Gabin, and not just your customer's purchasing department.

“A lot of times procurement is just looking at price, but if you can reach the people who will actually benefit from the value-added services, and get them to understand more about your company than just what price you can offer,” says Gabin, “then you can really change that mentality.”

Laying out the Options
Interstate Electric Supply of Boise, Id., knows that some customers will shell out a few extra bucks to have the distributor manage certain aspects of a job for them, and others won't. To accommodate both camps, the company draws up two (or more) different versions of its bids. One will include the bare-bones product offering, for example, but the others include the cost of the “add-ons.” That way, the customer is left to decide whether it wants to take the DIY approach or outsource certain aspects of the project to the electrical distributor. 

“On certain orders, we'll kit and package everything together and deliver it to the jobsite,
 says Timothy Young, district manager. “Or, we can just ship it direct and let the customer handle it. We just give them two different prices and let them decide how they want to do it.” Many times, the customer will opt for the DIY approach for the first couple of orders, and then revisit the second option.

Young says the value-added offerings are especially popular with small to midsized contractors that lack the warehouse space and staffers needed to handle kitting, storage, and other processes. “They just don't have the room or the capability to handle it on the job site,” he says, “so they begin to see the value in paying someone else to manage it.” When that happens, Young says the added responsibility translates into higher revenues for Interstate Electric Supply.

For example, when a customer offloads project management to the distributor, which in turn manages the purchase and delivery of material for a project that involves multiple vendors with multiple releases, both sides win. “Whenever we can present that price differential and then turn around and do a better job of managing the project, we make more money,” says Young. “That extra money goes right to our bottom line.”

Not the “Biggest Guy in Town”
For Metro Wire & Cable Corp., of Sterling Heights, Mich., value-added serves as a key differentiator between the distributor and its competitors. “We're not the ‘biggest guy in town' a lot of times,” says Devin Ezop, president and CEO, “so customer service is definitely our biggest selling feature. That's where we make our money.”

Ezop says the distributor doesn't sell customer service as a line item, but it does use it to its advantage when bidding on jobs. For example, Ezop says the company follows its orders all the way through from the point of receiving an order to ensuring that it's delivered in a timely fashion to getting proof of deliveries to its customers. “A lot of times on the jobsite, someone will sign for materials and no one knows who signed for them or whether the materials were actually delivered,” says Ezop. “We make sure the orders get where they need to go every time.”
Metro Wire & Cable also provides warehousing and storage support on local projects where its customers need a place to maintain stock and then have it delivered as needed. The contractors not only avoid extra leasing and storage costs, but they can also rest assured that their materials won't be stolen or damaged. Finally, Ezop says the distributor relies on its team's product knowledge, which goes well beyond what any offline or online catalog can provide. When a bill of materials arrives, for example, the distributor can take one look at it and quickly identify areas of potential cost savings, alternate materials, or better choices for specific applications.

Of course, the million-dollar question that many distributors ask themselves daily is, how does a company like Metro Wire & Cable recoup and/or get compensated for these “extras” that it uses to differentiate itself in the marketplace? Ezop says creating cost breakdowns and presenting those options to the right people are important steps. He says OEM customers (i.e., manufacturing facilities) tend to respond well to breakdowns that clearly show the cost benefits of doing it yourself versus outsourcing the tasks.

“We know that decisions usually come down to price, so we ask questions like:  Would you rather have your own people do it and wind up tying up their resources? Or, would you rather have my people do it?'” Ezop explains. “With the latter, they avoid the expense and hassle associated with adding more employees, benefits, and everything else that comes along with it.”

And as Gabin pointed out earlier in this article, one of the best moves a distributor can make is to present their value-added packages—and the costs associated with those options—to the people who will get the biggest benefits from them. “You need to talk to a project manager or engineer who is out running the floor, because nine times out of 10, a purchasing manager is only looking at price,” says Ezop.

“A project manager on the other hand, may say, ‘Hey, I'm saving a lot of money on labor because this distributor is coming in and doing this, this, and that for me,'” Ezop continues. “Time is money for those guys, and procurement doesn't always recognize that.”



Putting a Price on Value-Added Services

Confused about how to price your distributorship's value-added services? Here are six categories to consider when determining the value and total cost of ownership for these “extras”:

  1. Revenues:  The impact you have on your customer's revenue stream.
    Example: Industrial controls enable faster production.
  2. Assets:  Your ability to reduce your customer's possession cost for assets.
    Example: Consignment –possession cost is often 20% of the asset value.
  3. Processes:  Your ability to reduce your customer's personnel costs.
    Example: Electronic Data Interchange – reduces personnel time involved for processing invoices.
  4. Expenditures:  Reductions in expected annual purchase cost requirements.
    Example: Substitution – the difference in price paid and the price that would have been paid.
  5. Service:  The value of the technical expertise that you provide.
    Example: Training – if provided at no cost and is important to the customer.
  6. Other:  Not every cost that you impact falls neatly into the above categories, although for most companies these categories will account for 95% of the impact.
    Example: Legal Cost Reduction -your ability to reduce legal liability.

Read more about how to develop a profitable value-added plan in NAED's Value Added Services:  A Distributor Guide on Monitoring & Recovering Costs.

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.



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