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Experts weigh in on increasing your margins

By Bridget McCrea

Shrinking margins are an endless source of stress for distributors in all market conditions. Add economic uncertainty to the mix and the distributor’s position in the supply chain becomes even more challenging. On one side of the equation, customers demand better product quality and top-notch service at lower prices. On the other side of it, vendors cut back on discounts, rebates, and other incentives in an effort to stem their own revenue losses. 

“Distributors are getting beat up on price from both sides right now and it’s slamming their margins,” says Curtis Alexander, an online marketing strategist in Billings, Mt., and author of How to Boost Profits in a Down Economy. “The problem is that many distributors work with a price-based mindset and they have a tough time breaking out of that.”

One of the best ways to break out of the price-centric mold is by simply looking at what’s keeping your customers up at night, says Alexander. Figure out what their pain points are, come up with solutions, and then attach a pricing structure to those value-added services. “Even in a recessionary climate, price isn’t paramount on your customers’ minds,” says Alexander, “value is.”

Take the industrial distributor that in 2011 came to Alexander for help managing its shrinking margins, for example. After a few informal interviews with its customers, the distributor zeroed in on the fact that delivery times were a consistent point of pain for those companies. 

To raise its value proposition in the eyes of its time-sensitive customers, the distributor instituted an overnight delivery option.  The company was then able to charge a premium for its products – due to the speedy delivery option – thus enhancing margins even further. “The distributor kicked off that program in 2011,” says Alexander, “and its margins are up just over 70 percent compared to a year earlier.”

Alexander sees product and service guarantees as another area where distributors can add value for customers. “Customers are willing to pay a little more if they feel that they’re going to be taken care of if something goes wrong, or if they’re unhappy with their product selection,” says Alexander, who urges distributors to put their guarantees in highly visible locations (on catalogs, marketing materials, front counters, websites, and so forth) where customers can read and understand them. “Sure most companies offer guarantees, but not many businesses display them for everyone to see.”

Breaking it Down

Kim Wilkerson, president at organizational consulting firm Wilkerson Consulting Group in Cedar Rapids, Iowa, sees emergency 24-hour contact phone lines, product kitting, and project financing assistance as three areas where distributors can add value for customers and enhance their own profit margins. And don’t keep these “extras” a secret, warns Wilkerson. Instead, create a menu of services, update it regularly, and publish it (on marketing materials, brochures, in catalogs, etc.) to ensure that both existing and prospective customers know the extra mile that you’re willing to go for them.

“This menu can serve as your firm’s competitive advantage or distinction in a market where customers are especially price conscious,” says Wilkerson. The age-old “good, better, best” philosophy is also effective for distributors that want to up their margins, particularly in situations where customer reception to value-added offerings – and their associated costs – are lackluster. She says a sales force that can effectively communicate the value of “best” versus “good” can make the difference in these situations.

“It’s up to the sales rep or manager to present information to convey how, for example, a higher price for a product that lasts longer translates into real return on investment in the long run,” says Wilkerson, who also sees add-on sales (to go with the original order) and upselling (getting the customer to think beyond the initial product request) as other viable ways for distributors to combat margin shrinkage in today’s competitive environment. “Once you take the order, find out what else the customer needs or what higher quality, longer-lasting option you can provide.”

Giving Them Peace of Mind

It’s not enough to develop a list of value-added services and assume that customers will request them – or, that they even know they exist. “Many distributors have value-added services, but neglect to position them as such with their customers,” Wilkerson points out. “Don’t expect customers to automatically know what services you offer and the value of such services.”

For value-added programs to have the most impact, distributors must educate their customers on the “value” of those services and how that value translates into less cost, time, or hassle for the buyer. “Each value-added service becomes the customer’s ROI in some fashion, either through increased revenue, decreased cost, increased efficiency, improved quality,” says Wilkerson, “and last but not least – peace of mind.”

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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