Over the last 20 years, there has been a broad movement by distributors to make operational improvements such as supply chain management, process standardization, lean production, and others. These practices, though not universally deployed among distributors, have created tangible efficiencies that manifest at the bottom line. While there is still more benefit to be realized from operational improvements, for most companies, these benefits represent incremental rather than quantum improvement.
I believe the next major frontier for distributors is in the development of more significant marketing capabilities, and the companies embracing this challenge will outperform the market and their peers, even—or perhaps especially—in downtimes. As noted by a senior vice president at a major electronics distributor in a 2011 survey conducted by Distribution Strategy Group, “True B2B marketing is fairly young in distribution, only 20 to 25 years. The type of sophistication that distribution has in B2B marketing pales in comparison to other industries.” Based on survey analysis, interviews with distributor marketing executives and experience providing marketing consulting to distributors, I agree with the SVP quoted above.
As I see it, the four moves for distributors to increase profit through marketing are:
- Integrated marketing channels
- Sweet spot and customer lifecycle management
- Positioning and messaging
Integrated Marketing Channels
The vast majority of distributors have good direct sales people without whom they would not be in business. Yet, the distribution world is changing—it’s not your grandfather’s distribution business anymore. Your grandfather’s distribution business relied almost exclusively on the strength of relationships between direct or in-store salespeople and customers. But, the world is changing. Companies that rely too significantly on direct sales are losing business to other distributors that have integrated marketing channels.
Distributors who compete successfully in the new landscape have successfully done at least one of the following three things:
- Proactive inside sales: True inside salespeople are skilled hunters. They are motivated by capturing new accounts and rewarded accordingly. They can reach 20 to 30 customers per day. This is in contrast to customer service people who are better at gathering. When the proper structures are set up for proactive inside sales, distributors can cost effectively serve mid-market and smaller accounts in a manner that was previously infeasible.
- E-commerce: The most successful distributors are generating 15 to 30 percent of total revenue from e-commerce. They view e-commerce as a strategic opportunity rather than a tactical requirement dictated by their largest customers. They combine push and pull marketing techniques to get customers and prospects of all sizes to purchase from their e-commerce platform.
- Direct response marketing: Direct response marketing includes both traditional print media such as catalogs, brochures and flyers as well digital marketing through email and marketing automation tools. Direct response marketing will not only increase sales of items featured in offers, but it also increases sales of other products. The rising tide lifts all boats.
Many distributors with more than $500 million in sales have achieved good levels of integration across the channel and have developed more sophisticated marketing effectiveness measurements. The imperative for distributors of all sizes is to create and continually refine multi-channel offerings.
Sweet Spot Analysis and Customer Lifecycle Management
When my company asks distributor executives about the sweet spots in their market, they typically provide a confident and ready answer. However, their intuitive answer is often at odds with an analytic view of their customer base and transactions. There are three problems with the intuitive, “gut” response:
- Markets shift: In the last five years, there has been at least one significant market downturn and at least one market recovery. The sweet spots in the market may have changed more than once.
- Sampling bias is present: When executives visit customers, they usually prioritize their largest accounts. Yet, these large customers are rarely representative of the executive’s entire customer base.
- It lacks actionable detail: The intuitive approach may be correct, but not sufficiently detailed to permit meaningful action.
Accurate and detailed understanding of your market’s sweet spots dramatically improves the efficiency and the effectiveness of customer acquisition campaigns, by allowing the targeting of segments where the likelihood of success is much higher. In turn, this improves sales efficiency and effectiveness.
When reviewing a distributor’s customers and classifying them by how recently they have purchased and how much they have purchased, we gain great insight into how well the company is performing customer lifecycle management. Inevitably, we find one or both of the following trends:
- High percentage of one-and-done customers: These are customers who buy once and never return. Before we have implemented customer lifecycle management approaches for our distributor clients, we usually see 15 to 25 percent of customers are one-and-done. Within these one-time buyers, usually half or more of them are in the sweet spot and could become ongoing customers.
- High percentage of customer churn: At the other end of the customer lifecycle are mature customers who have bought a lot but have either defected or are at risk of defection. Improving retention among these customers, even by a small percentage, will pour profit to the bottom line.
As with customer lifecycle management interviews, when asking executives for the value proposition of their business, they usually provide a ready, confident and well-rehearsed answer. The answer typically consists of a few claims about what they believe they do well. Overwhelmingly, these claims have been derived through executive intuition or anecdotal feedback from sales rather than through rigorous market testing.
When it comes to positioning and messaging, the vast majority of our distributor clients have the following three things in common:
- About 90 percent believe that they deliver more value than their competitors for a comparable price.
- More than 88 percent of distributors place a large emphasis in their messaging on a handful of attributes: product selection, availability, speed of delivery, pre-sales technical support and professional sales representatives. If everybody is messaging on the same attributes, it means that nobody is really differentiating.
- Nearly 70 percent of distributors use informal methods for positioning and messaging.
The fundamental issue is that most distributors have a limited understanding of what really constitutes value to their customer. Without understanding what customers value and how that value can be created and delivered, many distributors are at a profound disadvantage to sell to a buyer who looks at a purchase through the lens of economic value, not just price. This buyer is influenced less by relationships today than 20 years ago. This buyer is also the target of multi-channel sales, not just field sales. With your competition coming from across the country, not just from your back yard, it has never been more important to understand and communicate value.
Once positioning and messaging have been determined, the final area where distributors can improve the bottom line through marketing is in product pricing. Distributors can improve the bottom line not only through better list price setting, but more importantly through better discount management and contract pricing. Proper price management can increase selling price by 2 to 4 percent.
For a typical distributor with an Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) of 4 percent, increasing the average selling price by just 2 percent results in a 50 percent net increase to EBITDA. By contrast, increasing sales volume by 2 percent will only improve EBITDA by 15 percent. Similarly, reducing operating expense by 2 percent will only improve EBITDA by 13 percent. So, price improvement is the most powerful lever to increase profit.
There are several keys to realizing price improvement:
- Compensation: Many distributors compensate only on top-line metrics. Compensating on top-line and bottom-line metrics—or bottom-line only—will better align sales representatives with company profit goals.
- Maintain price on C and D items: There is rarely a reason to discount on C and D items. Yet, distributors often discount here without thinking.
- Maintain price with smaller customers: Everybody knows that they need to discount with large customers, but small customers can provide higher margins if price is maintained. Volume discounts should be earned, not given.
I have seen dramatic results in a short time for companies that pursue price improvement. Given the potential inflation and other pricing challenges that are emerging, mastery of pricing, and the other marketing moves listed here are essential for success now and in the future.