As more distributors adopt a fee-based service offering, how do you handle customers who push back against the effort?
Let’s start with the premise many of our customers have grown accustomed to: Distributors providing services. Many of your customers have become dependent on the services you provide. However, the costs of providing these services have grown at rates far exceeding typical inflation.
As distributors move forward, many will find themselves talking with customers about the need for fees to be tied to their services.
Experience with dozens of distributors that are on the vanguard of fee-based work indicates at least some customers will object. This presents a dilemma; either continue to give services away or enter some form of negotiations with the customer. Preparing for these negotiations is key to success.
Follow these steps in preparing for the negotiations include:
Understand the customer’s profitability to your organization.
According to Dr. Al Bates, over half of most distributor customers contribute negative profitability to the distributor organization. At first glance, this may be a startling statement. How can 50% of our customers be unprofitable? Simply stated, the services they consume cost more to provide than the gross margin generated by their business.
This deficit may be tied to traditional and essential services, such as order entry, delivery and credit terms. For example, a customer who places many small orders may be on this list because the cost of processing non-ecommerce orders may exceed the gross margin dollars produced. Stepping away from traditional services, a small customer who requires a great deal of technical support could easily consume more service than the gross margin justifies. Price-sensitive customers may also fall into this category by consuming a large number of services and still calling for high support levels.
If the customer is not a profit generator, they most likely do not deserve your services without a fee tied to them. What’s more, many distributors have used fee-based services as a tool for moving the customer from a negative to a positive profit-generating position.
Determine who else can provide the service besides your company.
This who else question has three answers:
- The customer takes on the task themselves.
- A third-party service provider, such as an engineering firm, systems integrator or panel builder fills the void.
- A competitor performs the service.
Looking at these three options, both one and two require the customer to assume the expense. The only real threat comes from a competitor offering to replace the service for free. But is their free service really equivalent to yours?
Assess whether your competitor with free services has equivalent offerings.
As in a product-selling situation, one must determine if the situation is an apples-to-apples comparison. Are there things that differentiate your service from the competitor? Things like certifications, documentation, packaging and speed of completion make a difference.
If you feel your service is better, take the time to prepare a side-by-side comparison.
Now for the customer meeting
Come prepared to outline why you are migrating to a fee-based model. The reasons are many. Here is a short list:
- Shortage of skilled workers in your industry
- Escalating costs of the tools required to provide the level of quality you feel customers need/expect
- The need for better and more professional services to the market
- Trends in technology pricing (for example, electronic equipment has gone down in costs when factored against inflation)
- A need to hold the line on parts prices by breaking services out of the cost
The negotiation resembles a price negotiation.
Hopefully, the thoughts we have explored together point to a couple of things.
- Services provided to unprofitable customers must be attached to a fee, otherwise the customer will continue to be a profit drag for your organization.
- Services provided that would require the use of a third party would require a similar cash outlay for the customer. Adding a fee to these services makes sense in nearly every situation.
When competitors offer comparable services, there may be situations where fee-based services are not immediately applied because the action has the possibility of triggering a loss of business. In these cases, the decision on services must be made following the same process as those centered around customer discounting.
When should you consider a price attack?
- Aside from a price reduction, are there other reasons for the customer to switch suppliers?
- Does the current gross margin and customer profitability give us room to discount and still make money?
- Are the products being offered of the same quality as those sold by our company?
- Are there other products that we do not sell that the customer would be willing to switch to us if we matched the price and reduced our margin on the products in question?
- Does the competitor have a strategic reason for going after this business?
Amazon-Proof Your Business
Every service provided costs the distributor money. Most distributors don’t have a good understanding of this cost. If you happen to be one of the distributors who does know, you can make better decisions on the impact of free services to your customers. For those who do not understand the internal costs of providing the services, please consider making it a priority. Analytics are an important part of distributor management of the future.
Distributors who apply fee-based services discover they can improve the profitability profile of many of their smaller customers. At the same time, the distributor’s professional standing improves with larger customers. Companies with professional services groups are more highly regarded and seen as solution providers as opposed to just a parts guy. In the long run, being a solution provider creates a protective barrier around your business. I call it Amazon Proof.
Frank Hurtte, Founding Partner of River Heights Consulting brings 28 years of distribution industry experience and a lifetime of sales background. Frank grew up in a family owned business where he was selling car and truck tires wholesale before he turned 14. During his career, Hurtte has gone through nearly every aspect of the wholes business. He served as manager of a rapidly growing start-up location ran a cluster of branches where he worked to develop future leaders and was called on to build a winning team after the merger of two companies with dissimilar cultures. Frank successfully established sale strategies in emerging markets and coordinated the efforts of a diverse group of distributor specialists to establish a corporate-wide blueprint for success. In his role as VP Technical Sales, Frank developed and implemented a model for tracking and measuring the “value-adds” provided to customers and pivoting the company to a fee-based services model.