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The Value-Added Distributor Series: Getting Out of the Value-Added Trap

By Bridget McCrea

As the author of The Distributor’s Fee-Based Manifesto: Why you need to consider charging for services and founder of coaching and leadership firm River Heights Consulting in Davenport, Ia., Frank Hurtte knows a thing or two about the importance of value-added services for electrical distribution firms. In fact, Hurtte sees such services as a game-changer for distributors in the post-recessionary business world.

Consider, for example, that activity-based costing within the distributor world reveals 50 percent of the industry’s customers contribute nothing to the distributor’s bottom line. “On close examination, we find the top 20 percent of customers actually produce over 100 percent of profits,” says Hurtte. “The remainder of the customer list actually sucks profits in a downward direction by requiring more services than they can pay for in gross margin revenues. This point alone demands that [distributors] take a fresh look at how they dole out their services.”

In an exclusive Q&A with tED Magazine, Hurtte discusses the critical nature of value-added services in today’s business world, explains why most customers should be paying for them, and shows distributors how to turn these services into profitable ventures.

Bridget McCrea:  Why should NAED members be thinking about value-added services for their customers right now?

Hurtte:  I can’t think of a single electrical distributor in the country that doesn’t offer some form of value-added services. Some of them are managing their customers’ inventory, some of them are providing specialist services (where a technical professional sits down with a customer’s engineers to come up with solutions to problems), and still others are helping clients troubleshoot their pain points. Since the 1980’s distributors have gotten on this bandwagon of, “I can do more. I can turn that screwdriver for you.”   

McCrea:  How have these efforts impacted distributor profits?

Hurtte:  Distributors are caught in a trap because their sales teams have made value-added a huge portion of their sales process. It’s no longer enough to have the right product, good credit terms, or a wide selection of items for sale. It’s about the services that go along with those products and credit terms. Many firms give these services away and this practice is cutting into the distributor’s profit stream.

McCrea:  How can distributors free themselves from this “trap?”

Hurtte: First they need to recognize that not all customers are created equal. We have a 250-year-old mentality (set forth by Thomas Jefferson, who said “All men are created equal”) in America that the mega-customer that buys hundreds of thousands of dollars in merchandise annually is equal to the small client that doesn’t have the budget to cover all of the services that a distributorship provides. As a starting point on the path out of this trap, companies need to segment their customer lists into buckets such as, “Clients that I will consider giving services to in the future,” and “Customers that from this point forward must pay for their services (with an explanation as to why).” By culling through this list, distributors will quickly realize that about 50 percent of their customers aren’t profitable because they consume more services than they actually cover with their business/buying habits.

McCrea:  So I know which customers will yield the best returns from value-added services…what next?

Hurtte:  When distributors start segmenting their customer databases, they’ll find that they’re running systems that they (the distributors) know inside and out. In fact, no one else knows those customer systems as well as the electrical distributor does. Recognizing this, distributors can start charging their smaller clients for the value-added services that they’re offering. Concurrently, management needs to get involved and let the sales team know that the company is moving in this direction. They may not like it, but getting sales onboard is important because in most cases they are on the front lines offering these services to customers. 

McCrea:  What are some of the services that distributors can charge for?

Hurtte:   They can start charging for any type of training that they offer – even just a 30-minute walk through a brochure with a Q&A session. As distributors have migrated from handling product pitches to conducting real, valuable training on energy, safety, and automation topics, the need to charge for these services has become crucial. The minimum charge should be about $90 to $105 per hour for the training (check around locally for more specific rates), with the understanding that attaching a cost to the service will help customers take it more seriously, show up on time, and arrive at the sessions ready to learn.

McCrea:  So let’s say an NAED member follows your advice concerning value-added services. What kind of benefits can the distributor expect in return?

Hurtte:  The minute you say, “I’m going to charge someone for something,” the customer will look at you in a different light. It will click in his or her mind that yes, you are a true professional. And as the profits begin to come in from these services, distributors can start to incorporate professional tools into the mix. For example, a plan that’s sketched out on a piece of paper by a salesperson during an impromptu meeting can be replaced by a digital design that’s plotted out on a computer and printed out in a professional manner. The same holds true for demo equipment, which will be financially within reach for even small distributors that take the time to attach prices to the value-added services that they offer. With electrical distribution being such a small, incremental business these days, it’s imperative that companies operating in the field learn how to leverage those extra bits of income and revenue to their advantage. That way, when the next economic downturn rears its head, your firm will be in a much better position than the company that doesn’t charge for value-added services.

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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