What if I told you you are losing 5-10% of revenue a year? Furthermore, you might not have even noticed. In this blog post, I’m going to explain why it is alarmingly easy to lose an obscene amount of revenue, without doing anything. Here are the 4 problems your business could be suffering from.
Absent or Inadequate E-Commerce Site
At Distribution Strategy Group, we’re big on E-Commerce. We’ve done plenty of studies to back up our assertion that this is a vital part of business in the 21st century, and it is surprising how much this matters. In our research, we investigated how shopping and buying works with e-commerce. A quick explanation of shopping and buying: Shopping is browsing, perusing, looking to see what’s there. Buying is when the customer likes what you are offering and makes a purchase. Shopping is a stop on the way to buying. The research showed that customers overwhelmingly prefer to shop electronically. The top three options were search, (by a wide margin), then manufacturer website, very closely followed by distributor website. If you have e-commerce, you just bought yourself front row tickets to options #1 and #3, which are the highest available to you. Just having the e-commerce website isn’t enough however. If you have poor e-commerce, your search availability, key to option #1, will leave customers dissatisfied, and will often result in them finding your website. And then leaving… Our research shows that this could easily be a loss of 3% to 5% per year.
Price Buyers Shifting to Amazon
In the world of marketing, we examine different types of customers:
- Value buyers who find the best value for what they spend.
- Relationship buyers about whom we will talk later.
- Price buyers only care about the price of what they are buying. Nothing else. Value is not a factor, all they seek is a cheap price.
One might think that losing price buyers is unimportant. “Jonathan, they don’t buy much from me anyway! They don’t spend much money, why should I care?” There is something you might be missing. While price buyers aren’t going to rack up huge totals, they’ll fulfill a different purpose: they increase volume that you purchase from your suppliers resulting in better pricing, rebates, etc.. Price buyers are living in the best day and age they could have ever asked for. They have the Internet so that they can find the best price, anywhere. Prices sometimes that just can’t be matched by your business. Amazon Business has brought price buyers to their site in droves, because of the ease with which they can find cheap goods. You have to ask yourself, “How much volume value am I losing to price buyers who stop buying from me?”
Relationship Buyers Becoming Value Buyers
Relationship buyers often play a huge role in the revenue of your business. These customers come back to your business because they like your business, they appreciate what you do, and they trust that you can help them get what they need. While they may not have a large portion of your customer base, they often have a disproportionately large portion of your revenue. In some businesses we examined, relationship buyers were 5% of the customer base, and 30% to 40% of the revenue. Relationship buyers are very disinterested in what is going on with other businesses. They like you, like what you do, and want to buy from you. Value buyers are very different. They will ask for more competitive bids, give you less wallet share, and pretty generally create more problems than relationship buyers. As time goes on, and new generations enter the workforce, relationship buyers are becoming less and less prevalent. If 20% of your relationship buyers evolve to value buyers, you will lose revenue, margin, and have a higher cost to serve. Is this happening in your business?
Manufacturers Selling Directly to End-Users
It is well accepted that manufacturers sell to the very largest end users. But that isn’t stopping them from selling to more end users. While this practice is generally agreed upon, research suggests otherwise. Research suggests that only 40% are adhering entirely to this practice of selling to distributors. 60% prefer to send a little, some, a lot, or even all of their business to end-users. 60% of the time, you’re losing business. For many years, there has been talk of manufacturers going direct. It’s happening right now. I spoke to a CMO at a multi-billion dollar distributor, who mentioned that one of their largest manufacturers is selling to an alarmingly deeper swath of end users than ever before. It’s very important to mention that this revenue loss is recurring. You are losing money every year because manufacturers no longer feel obligated to sell through distribution. We estimate the percentage lost at 1% to 2.5% per year and growing.
Eat Lunch, Be Lunch, or Die
What does this all mean? It means that you could be losing a recurring 5-10% of revenue and margin per year. With all of this in mind, you need to assess your options. Eat lunch means you are now large enough to start acquiring other companies at a value that is attractive to you. You are absorbing them. Being lunch, is not necessarily bad, though it can be. It means your company is getting bought. You have provided enough value to be absorbed. If you don’t address the problems in this post well enough, you’re going to be a cheap lunch. Think gas station sushi. Die, as you might have guessed, is your truly bad option. Going out of business due to recurring revenue and margin loss is a very real possibility if you don’t address these four problems.