If you’re not having the tough conversations with your customers about why they’re getting their products and services from other suppliers, then your distributorship is missing out on a real opportunity to expand revenues without adding new customers.
It’s no secret that B2B customers shop around for the best price, product availability, and delivery terms. In an effort to “spread the wealth” while also getting the best deals, most of them also work with multiple suppliers, and even within the same product categories. An electrical contractor working on a big project, for instance, may buy cable from a local distributor, switches from an online seller, and conduits from yet another source.
If your distributor sells all three at a competitive price while also meeting that customer’s delivery expectations, then why isn’t it supplying all of that buyer’s needs…and more? That’s the question that many companies ask themselves, but without knowing exactly that contractor’s spending capacity or “purchasing power,” getting the answer isn’t always easy or straightforward.
More Wallet Share, Please
Writing to an audience of HVAC suppliers, Devin Ferreira discusses the Three Challenges Distributors Face While Capturing Market Share and acknowledges the difficulties of figuring out exactly how much capital buyers have at their avail for specific product categories. Despite these challenges, he says distributors can’t possibly know how much more wallet share they can have if they don’t know how much there was in the first place.
“Getting a handle on your customers’ spending capacity is a common problem for distributors, especially when you know that most customers in your industry are probably buying from between three to five distributors total, including your own,” Ferreira writes. “Once you figure out how much capacity is available for you to acquire, you can start to create opportunities to acquire it.”
Customer surveys are one good starting point. An HVAC distributor, for instance, can ask customers how many trucks they own. “If you estimate a certain number of HVAC supply purchases per truck, then, based on each customer’s number of trucks,” Ferreira writes, “you can extrapolate their overall spending capacity (and deduce how much of that capacity you’re currently getting).”
The payoff is usually worth it because it’s easier to expand an existing account—where you already have the relationship, the trust, and the existing operational infrastructure around billing, sales, and customer service, says Phil Strazzulla, a former venture capitalist, Harvard MBA, and founder of SelectSoftware, “than it is to go out and prospect and get mindshare with a totally new potential customer that you have to start from ground zero with.”
The problem is that a lot of companies steer clear of the whole “how can we do more business with you?” customer conversation for fear of appearing greedy or creating issues with a relationship that’s been otherwise moving along smoothly. “No one wants to rock the boat and potentially lose a customer over this,” says Strazzulla. “When things are going pretty well, why risk it when you’ve been doing okay up until this point?”
This complacency might be warranted for the distributor that just wants to maintain status quo. However, if the goal is to grow revenues, then it’s time to dig a little deeper and find out 1) what your customers are buying from other sources and 2) how your electrical distributorship can meet some or all of those additional customer needs.
These conversations needn’t be confrontational or awkward. “One of the best ways to do this is by asking your customers how they’re solving problems that are tangential to the ones that your company is solving for them,” Strazzulla recommends, “in the name of understanding the inner workings of how that decision was made and why a certain vendor was selected.”
Another challenge is that companies tend to view this exercise as a “zero sum” game. In other words, they think that expanded business opportunities come directly out of their customers’ pockets. “It almost feels devious, like you’re stealing from your customers by selling them more products and services,” says Strazzulla, who tells distributors to look at the situation from a “win-win” approach. Instead of just selling an expanded selection of products to an electrical contractor, for instance, focus on adding more value for that customer.
“Find ways to expand that ‘pie’ by potentially solving more of your customers’ pain points, and in a way that’s beneficial to both parties,” says Strazzulla. Known for providing value-added services like technical support, application expertise, and jobsite support, electrical contractors are well-positioned to do exactly that.
It’s Pure Economics
To get a better handle on a particular customer’s spending capacity for additional products and services, Strazzulla says distributors should look closely at what customers are willing to pay for certain items. This will help pinpoint some of the “higher needs” that those customers have for specific items (i.e., tangential products to those that you are already selling to them). Learn what matters most to those buyers, what the process is behind their budget approvals, and then figure out how you can expand your selling footprint with those companies.
“Most distributors probably go through this process with customers at the get-go,” says Strazzulla, “but three to five years later there are going to be opportunities to increase the amount of money that you’re extracting from those accounts.” Getting the necessary information can be as simple as asking questions about current and future projects; changes in your customer’s business; or even current needs. A quick walk around the jobsite, for example, may turn up some clues as to what products a contractor is procuring elsewhere.
In return, Strazzulla says distributors—most of which operate on fairly low margins—can effectively up their bottom lines without having to hit the streets in search of new business. They also make themselves more valuable to their current customers, who now know that their electrical needs can be managed by a smaller pool of reliable suppliers.
“It’s pure economics. The distributorship that’s operating with 5% earnings before interest, tax, depreciation and amortization (EBITDA) and increases its revenues by just 1% suddenly has a 6% EBITDA operation,” says Strazzulla. “On the customer side, it’s a way to reengage them and better understand them—both of which will ultimately help strengthen your business.”
Acknowledging that these conversations may be somewhat painful, Strazzulla says they often lead to one of the most attainable “free lunches” in the business world: more revenues from existing clients. “Once the conversations take place and you better understand your buyer’s spending capacity, your job is pretty much done,” he adds. “You’re doing the same stuff operationally, but more money is now showing up in your bank account. How great is that?”
Tagged with B2B, best practices, sales