For the past 20 years, I have been on a one-man crusade to encourage distributors to migrate to a fee-based model. Back in 2013, I wrote the book on distributor services titled “The Distributor’s Fee Based Services Manifesto: Why You Need to Consider Charging for Your Services.” This year the folks at Distribution Strategy Group asked me to update my ideas on services in a presentation and in a whitepaper.
Here’s a 50,000-foot overview:
- Distributors provide a plethora of services.
- Services that involve people are nearly impossible for Amazon (or others) to duplicate.
- Some of the services customers expect, like credit or shipping, are available for free everywhere else.
- Many services go beyond the “cost of doing business.”
- The services most distributors added were put in place without a real strategic plan as to how they fit into the total business.
- Distributors lack an understanding of both the internal cost of providing the services and the value to the customer.
- Little management oversight is applied to services – sellers control who receives their services and when.
- Distributors face significant roadblocks to establishing a strategy for services.
- A strategy around services can create competitive advantage.
During the presentation, we received a comment from the audience that begs to be addressed in detail. Here’s the comment/question:
“When we provide a service, we add a line item to the invoice and mark it ‘No Charge.’ Should the customer ever question our pricing, we provide them with copies of these invoices. Do you see this as an alternative to fee-based services?”
Let’s explore this idea.
The idea has merit. Each time we provide a service for a customer, we send them a bill for the value of the service, except we mark the bill as “No Charge.” The premise being the service has value but because the customer was kind enough to order their parts from our company, we are absorbing the cost.
Here’s an example.
We sell a motion control drive to the customer and send them an invoice for the cost of the drive unit and a $500 start-up charge for assistance with making the thing work, but the start-up charge is marked – No Charge.
Should the distributor ever get into a price competition with another supplier, they would use the list of invoice items granted as no charge to justify their higher price.
So far, I am nodding along with this reasoning. But I have some questions.
Is the “comped” price reasonable for the service?
The price needs to match the cost of acquiring the service from someone besides the distributor. This might be the cost of providing the service internally – as in the customer does the work themselves. The price could also reflect hiring an outside company to do the work.
This means the price needs to be periodically adjusted for market conditions. With inflation and shortages of qualified people, the price has risen in the past few months. Further, the distributor must find examples from outside their own organization to justify the comped price to the customer.
In our experience, very few distributors using this method (of N/C billing) take the time to perform these exercises. Why? Because they are giving it away, the service isn’t viewed as a high enough on their priority list to warrant extra examination.
Does the customer see value in the service you are providing?
What would happen if you quit providing the service? If the customer would just move on without it rather than taking it on internally or outsourcing, it has no value. You are simply wasting your money and the customer’s time. Without asking this question, distributors are blindly throwing a handful of dollar bills into every box they ship.
If fees are involved, there is a give and take and feedback from the customer on how they value what you are doing.
Are unworthy customers receiving the service for free?
This is a major question. Because gross margin is paying for your services, are there customers with buying patterns that do not warrant free service? Consider a tiny customer who purchases a few thousand dollars a year: Do they get your services for free?
How about the customer who purchases a lot of product but constantly beats you up on price? Have these customers earned your free services?
Because there is no service-related penalty or advantage to sellers, it might be argued they will follow the path of least resistance and offer free services to everyone. Chances are, every customer will get your services for free, whether deserved or not.
How is management involved in service-related issues?
Does management review customers and situations where services are offered to customers? Does management regularly review the cost/benefit ratio of the services offered? Is management strategically determining where to invest in additional people and equipment to increase the value of services?
Do you know how much your services cost to provide?
Ironically, most distributors don’t realize the true price of the services they provide. Can you imagine selling products without understanding the into-stock cost? In the case of no-charge services, distributors lack solid information on what they are giving away and have no idea as to whether this is a successful strategy.
Does your margin percentage demonstrate you are receiving a premium price?
Members of any of the distributor associations who publish a profit analysis report (PAR) are able to track the gross margins of other distributors working in their space. How do your margins compare to those reported by your peers? Theoretically, they should be higher. If you understand the costs of your services, you might subtract the costs of services from the “premium” gross margins you receive. Do the numbers work out?
How diligent is your sales team in adding the service to every invoice, every time?
For this system to work, salespeople must add the no-charge item in every situation for all affected customers. This execution is paramount. However, distributors report difficulty executing CRM strategies when sellers see little value for themselves without a commission premium or penalty for the time invested in loading the data. Because the services are “free” in this process, taking the extra step of adding a no-charge item to each invoice might fall to the wayside.
Recalling a similar strategy from the past
Years ago, one of my major supply partners began printing a $50 price tag on each of the user’s manuals they provided to their customers. These were mostly 50- to 100-page instruction manuals on how to program and maintain their devices. The plan was to allow distributors and their local sales teams to hand out the manuals when customers requested them with one caveat – if the customer requested 20 copies of the manuals for a larger project, they were to be added with a price shown and then used as negotiation leverage.
Understanding the cost to create and publish the manuals, I thought it was a great idea. We instituted the right policies to begin creating no-charge adders for all customers who received the manuals. However, the policy and subsequent procedures were difficult to track.
Salespeople from both the manufacturer and my company would short-circuit the policy by requesting the manuals and hand-delivering them to the customer. They did so to elevate paperwork. The plan flopped even though (to my knowledge) the prices remain on printed copies.
Your experience may be different, but I wonder if deep scrutiny may reveal major gaps in the plan.
I still believe distributors need to migrate toward fee-based services.
Perhaps you see my arguments as one sided. Maybe your business execution is so finely tuned that my arguments don’t make sense. But I challenge you to consider each point and objectively decide if at least some adjustments should be made.
Or read the whitepaper (free): Competing and Winning with Value-Added Services
If you still have questions, give me a call or send me an email.
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.