No strangers to disruption and industry shifts, today’s distributors are working their way through a host of challenges in their quest to maintain their positions in the value chain.
In the first part of this article series we explored the key threats that distributors are dealing with in the current business environment and showed how technology can be a double-edged sword for companies that aren’t differentiating themselves. In the second half of this series we take an in-depth look at how distributors can combine customer segmentation with value-added offerings to come up with a winning business proposition.
Don’t Go to Extremes
Anyone who has heard the phrase “going to extremes” knows it’s not a very effective approach to life or business. Yet, this is exactly what many distributors are doing in their attempt to navigate the current business environment. “Many of them view that market in a very uniform or monolithic manner,” says Andrew Horvath, co-leader of Alexander Group, Inc.’s Distribution Practice and principal of the Chicago-based firm.
By that, Horvath means one distributor might assume that it needs to double down on pricing, terms, and delivery times in an attempt to beat Amazon Business at its own game. Another company might put an all-out effort into ramping up its value-added and consultative service offerings in order to “blanket” the market, assuming that customers seeking those offerings will gravitate toward it.
“Both of those extremes are wrong for many reasons,” says Horvath. For instance, piling value-added services on without figuring out how to effectively charge for those add-ons can hurt the distributor’s bottom line. “There’s only a certain percentage of the market that’s going to pay for those services,” says Horvath, who tells distributors to circumvent this problem by forming “partnering” relationships with customers that need the value-added services (rather than just giving them away to anyone who asks for them).
Intelligently-Designed Customer Segments
Distributors should also take the time to segment their target markets into what Horvath calls “intelligently-designed segments” that factor in more than just basic metrics like sales and profitability. Once those segments are determined, you can figure out how to serve them in a way that no one else can. “Don’t reorient your whole commercial model to a particular part of the electrical distribution business,” he says. “Instead, reorient a specific part of your model to address a specific customer segment.”
By doing this, distributors can avoid the broad-brush selling approach and make themselves extremely valuable to the customers that count. Take, for example, those buyers who by their very nature are transactional and price-focused. They’re comparing your prices to Amazon Business and making decisions based on the results. “You need to treat them differently,” says Horvath, “by not allocating anything beyond a transactional sales model to them.”
Doing this requires a combination of science and art. For the former, distributors can look at historical metrics like revenue and growth profit thresholds for specific customers. Determine how much a particular buyer is worth to your distributorship, says Horvath, and be sure to factor in historical spend. “This will help you pinpoint large potential customers that you already have a substantial wallet-share with, and those contractors that have large potential but small wallet-share,” says Horvath. “Knowing these metrics will change how you address these buyers.”
On the art side of the equation, ask yourself questions like: Is this buyer in tune with our value proposition? Do they like to work side-by-side with us to help co-create solutions? Are they committed to us? Do they accept our training offerings? Do they try to work with us to lower our cost to serve by, say, using our digital customer service request platform (versus demanding in-person service)? The answers to these questions will quickly surface those customers that are (and aren’t) aware of and benefitting from your company’s value proposition.
“As you go down the list from your largest to smallest customers, you’ll be able to pinpoint certain factors and then choose how you want to address them with those buyers,” says Horvath. “Once companies get this segmentation piece figured out, they can better align their service levels to specific customer segments.”
When FOMO Sets In
Horvath works with distributors that have huge customers that are simply not profitable, and that eat up way too many of the company’s resources. The cost of servicing these customers is high, but distributors are reluctant to give them up. “They’re hesitant to pull away some of the resources or tools they’ve dedicated to these customers for fear of losing that business,” Horvath says. His message to these distributors is straightforward: If the value from the customers isn’t there, and if they’re not paying for the support, why are you giving it to them?
This argument also applies in the value-added services realm, where far too many distributors give away their kitting, cable assembly, design support, and even vendor-managed inventory offerings in order to get the business. “For electrical distributors, in particular, the end game is to sell the product,” Horvath points out. “To do that, they often have to fold in services that they don’t typically get paid for.”
To get out of this trap, Horvath says it pays to tells customers upfront that a service is being offered and that it’s going to be monetized. Get the sales team onboard by incentivizing them to sell those added services (e.g., a bonus on top of straight commissions), and then figure out what the dollar cost is of the value-added offering that you’re providing. “Have the confidence to get out there and put a price tag on it,” he says, “and incent salespeople to act on it.”
Winning the Day
In a consolidating market, the company that offers no differentiation beyond product and price will soon find itself struggling to keep its head above water. That’s because customers have a lot of choices at their fingertips, and a lot of different channels to select from. “We’re in a market where product alone isn’t going to win the day,” says Horvath. “If there’s no relationship or overall solution behind that random SKU, then there’s really no staying power or stickiness between that distributor and customer.”
Tagged with best practices, supply chain