By Bridget McCrea
How to make value-added services a viable part of your electrical distributorship's business plan.
The industrial markets are in the midst of a 30-year slump, and there's no clear “light” at the end of the tunnel at this point. At the same time, increased competition from e-tailers like Amazon Business and electrical contractors' overall push to find the lowest possible price are forcing electrical distributors to rethink the way they approach the market.
“For a lot of customers, price tends to be the fifth or sixth most important criteria, but they'll move it up 'higher' as needed,” says Matt Middendorp, owner of Durand, Wis.-based Sales Math Consulting. “This is a clear sign that customers are more and more putting price first when shopping around.” This reality puts independent electrical distributors in an interesting and challenging position. Well known for their technical capabilities, product expertise, and strong ties to their supplier-partners, these distributors must find a way to actually make money off these “intangibles” that customers have come to take for granted.
Kitting products, modifying equipment, training customers on how to use the latest electrical products, or offering vendor managed inventory (VMI), for example, all create value for the electrical contractor (or other customer). The problem is that this value isn't always accounted for financially. In other words, a distributorship's bottom line doesn't always reflect the added services, support, and training that customers expect and even demand in today's competitive business environment.
“In addition to the traditional services provided by wholesalers (sorting, assembly, break-bulk, repackaging, and distribution), we see wholesalers expanding to offer services such as light manufacturing, offering direct-to-consumer fulfillment, and supporting trade promotion and assortment planning,” IDC reports in its Wholesale Distribution 2016-2017 Investment Guide.
“While the core of the business remains, these value-added services are providing wholesalers new avenues to generate revenue, and they typically are doing so at a higher margin than the traditional wholesale services,” Infor reports, “where returns typically cluster in the two to five percent range.”
Turning Value-Added into $$
Turning value-added services into a profitable venture is comparable to walking a tightrope, Middendorp says, namely because so many customers do tend to focus narrowly on price. That, in turn, pushes distributors to measure themselves against one another based on price—a trap that can easily push value-added services even further down that “must have” criteria list that a buyer is using. “Here's the truth,” says Middendorp, “for most of us, it comes down to comparing our price to our competitor's price; that's how we determine our worth.”
“Customers are frequently unaware of the special perks they receive from distributors,” writes Richard Vurva in If it's free, where's the value? “The reason is because many distributors do a poor job of measuring the value of the services they promise. What's worse, if distributor salespeople don't know how much it costs their company to provide all the intangible extras they offer customers, the company can lose money on the sale.”
And while salespeople say they have “adopted a value-added approach with customers,” Vurva says very few “put a real dollar value on the services their companies provide. Even if they can quantify their company's value-added services, they're often careless in giving them away to customers who don't deserve or need them.”
To break out of this mindset, Middendorp says distributors need to be very intentional about the value that they're providing. Then, communicate that intention to your customers via your sales team, for example, which should be trained to offer (in exchange for a fee) these add-ons as part of a complete package. “If the sales reps don't see the value in the products being sold,” says Middendorp pointed out in tED's 8 Strategies for Making Money with Value-Added Services,“then they'll start giving stuff away instead of creating an environment for selling an even bigger package that includes both products and services.”
Here are more steps that you can take to encourage customers to invest in value-added services and to avoid the “race to the bottom” on price:
- Develop a plan of action. Don't just decide that your company is going to offer specific technical expertise just because your competitor across town is doing it. Instead, look at your firm's own offerings, strengths, and market advantages and develop a complete value-added plan around those elements.
- Be intentional about communicating this plan…both internally and to external customers and partners. “Make sure contractors understand the value that you're providing, and communicate that message in a very strong and convincing manner,” says Middendorp. Demonstrations, testimonials from customers that have used the service, and beta-testing (to see if the service adds to the customer's bottom line), can all help convey this message. “When you communicate with intent, you'll find that price—at least for your real customers—will become less of an issue,” says Middendorp.
- Don't waste too much time on the tire kickers. An all-out effort to monetize value-added services should be reserved for those customers who will truly appreciate the services and expertise that you're offering. “There are always going to be customers who are nibbling at the periphery and just shopping around on price,” Middendorp points out. “While you may be able to help them understand that the best deal isn't necessarily related to price, your true customers will comprehend that message and realize that your goal is to help them build and grow their businesses.
- Put yourself in your customer's shoes. Consider the mental process that an electrical contractor goes through when he needs a product order for the following day. What's his top priority? Is it price, getting the goods delivered the next-day, having the follow-up support on those items, or all of the above? As you ponder these questions, also consider how that person buys, when he buys, and what products he needs the most. From there, you can come up with ways to engage that customer throughout the entire job process—and not just when he needs something in a pinch. This opens the door for numerous value-added opportunities. “Understand the mental triggers that your customer goes through along the way,” says Middendorp, “and the process that they're working through to buy from you. Then, help them do that more often.”
- Use value-added to set yourself apart. It's no secret that Amazon Business has taken a keen interest in the electrical distribution field, and that national distributors have invested millions of dollars in e-commerce sites that offer deals galore, but this doesn't mean you have to join the party. “If everyone is offering the same products and in most cases selling the same way, the question becomes, how do you create a brand that sets itself apart from what everyone else is doing?” Middendorp asks. “That's where the value-added proposition comes into focus, and helps independent distributors position themselves as the “go-to” sources for more than just the lowest-priced products.”
- Understand your own value. This is a tricky one for distributors that are used to giving customers the “complete package” while only really charging for the products themselves. An electrical distributor that provides consulting, builds out kits, and “comes to the rescue” every time a contractor calls, for example, has to understand its own value. In absence of this self-awareness, value-added becomes nothing more than a time- and money-suck for the distributor itself. “Practice communicating that value in a way that customers understand (e.g., if we do THIS for you, your company will save THIS much time or money),” Middendorp advises. “Customers need to understand the value that they're getting. If they don't, then you can't charge for it.”
Ultimately, turning value-added services into revenue-generating entities takes time, and the process itself may be painful—both for your company and its reps, and for the customers who are being asked to pay for these “extras.” The good news is that with the right level of intent, and some customer education, contractors will come to see the value that you're providing with those additional services. “Instead of just throwing a bunch of value-added options against the wall and hoping that something sticks,” says Middendorp, “come up with a real plan of action that creates a win-win situation for both you and your customer.”
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 email@example.com or visit her website at www.expertghostwriter.net.
Tagged with customer, distributor, profit, services, tED, value-added