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The Value-Added Distributor Series: Building Value-Added into the Cost Equation

By Bridget McCrea

As the number of online purchase points continues to proliferate, companies like Electric Supply, Inc., in Phoenix have sought out new ways to differentiate themselves from general outlets like Amazon, Google, and the many other web-based retailers currently doing business in the virtual world. And while it’s not necessarily a new business strategy for distributors, the “value-added” concept is experiencing a rebirth of sorts as firms work to stand out in an increasingly crowded marketplace.

“NAED members have been talking about and thinking about value-added for years,” says Bill Morlan, president of the firm, which serves both industrial and institutional customers. Along with the traditional electrical products that Electric Supply carries, the distributor also offers expertise in motor control, lighting retrofits, energy savings, and automation. “We don’t just sell products,” says Morlan, “we aim to help our customers save money and use their power more efficiently.”

Netting Online Shoppers
Morlan views value-added services as “must-haves” in today’s operating environment, where distributors go head-to-head with huge online conglomerates that offer a wide breadth of product offerings, low prices, and cheap or free delivery. Add in the huge numbers of consumers who are shopping online daily and the idea that industrial customers would shop around at general, web-based outlets becomes more plausible than ever. That fact alone, says Morlan, should push distributors to think harder about what their customers need that those online outlets can’t provide.

“For distributors, offering services is becoming more and more important,” says Morlan. That means going beyond common offerings like early-morning deliveries, late deliveries, and technical support – most of which distributors offer at no additional charge, or for very low fees – to ferret out the deeper pain points that customers are dealing with. Once those needs are identified, distributors are left with the onerous task of creating fee structures that support the value-added services. That’s not always easy to achieve in today’s budget-conscious business environment.

“In many cases distributors are left handling the more difficult and expensive value-added services and they have to be able to charge for these options or wind up losing money in the process,” says Morlan. For example, the expense associated with late-night deliveries and defective product returns are often “buried in the overall profit generated by the customer,” says Morlan, but that arrangement can backfire quickly if the order flow dries up. “The day-in and day-out type orders usually generate profits that can be spread out to cover the expenses you incur on special value-added services.”

In some cases, borrowing a page from retail’s “loss leader” philosophy can help offset some of the costs associated with value-added services. So where the company may not make direct sales by providing technical support, for example, it can make up any losses incurred by signing long-term, ongoing purchase contracts with the large customers that require such services. At Electric Supply, for example, Morlan and his team take a “holistic” view of their customer relationships. “We look at the profitability of the relationship as a whole,” says Morlan, “rather than picking apart every single order to figure out if it makes sense.”

If an electrical contractor that buys regularly from Electric Supply is doing a job in a remote area, for example, and needs a $5 part – the company will deliver it, knowing that it will make up the expense of gas and labor on a future order. “We don’t charge them $100 for the service because we know that we’re making money on that customer as a whole,” says Morlan. “That’s better than having them log onto Amazon, order the part, and have it shipped to them next-day.”

Fees for Service
Although his company’s current value-added philosophy is working well, Morlan admits that electrical distributors need to do a better job of attaching fees to specific services. “Distributors either need to figure out how to get paid for the special things that they do,” says Morlan, “or figure how to not get cut out on the other things that someone else (like an online retailer) can do.”

That said, Morlan feels that in some cases it can be nearly impossible for distributors to set fees for services. A customer that’s been receiving new product training or kitting services at no additional charge for the last 10 years, for example, probably won’t be willing to start paying an additional fee for such services. Two ways around this issue are to either start offering new and improved value-added services at a fee to that same customer, or create a price list that salespeople can use when courting new customers with value-added services.

“Try to bring up the issue of pricing value-added early in the relationship and get customers to agree to it,” Morlan suggests. Keep in mind that some companies will be more apt to accept a “built-in” charge for the services as opposed to a standalone fee. “If you can build the fee into the overall cost of the products and services, the odds that your customers will go for it will be higher.”

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