Why Services Differentiate Distributors from Digital Players
Distributors must become more effective at offering and managing value-added services because some of the most aggressive disruptors are taking share with marketplaces and comprehensive and efficient ecommerce websites.
These competitors tend to minimize their services offerings and focus primarily on sales of relatively non-complex products. They do this for two closely related reasons:
- People must provide most services. This requires distributors to incur variable costs. Marketplaces, and to some degree, pure ecommerce players, try to scale with minimal variable expenses.
- It’s much more difficult to market and deliver value-added services online compared with products.
How to Formulate Your Value-Added Services Strategy
We have produced two detailed research reports and webinars with NAW on the strategic importance of value-added services for distributors. This excerpted chapter from our Handbook provides a synopsis of both.
In Value-Added Services as a Survival Strategy: Real Value Isn’t Free, we reviewed how distributors develop and manage value-added services. In a survey of NAW members, we learned that while 70% of distributors believe their value-added services are an “Extremely” or “Very” important part of their competitive advantage, most of them do not:
- Have a service-development process
- Document, standardize, or measure the effectiveness of how they deliver services to customers
- Have a services general manager
- Attempt to monetize their services
- Operate a P&L for services
In The Distributor Services Imperative, we provided a guide to developing, implementing, managing and measuring value-added services.
Develop Your List of Services to Evaluate
We have visited distributor websites from all over the world to document hundreds of value-added services they offer their customers. These services often vary by industry, company size and business model. For our purposes, we can organize distributor services into these 13 categories (Y axis), which we have correlated to various steps in the customer’s journey (X axis).
Because wholesale distribution is a vast and complex industry, you should develop your own categorization of services, using our approach as a guide. Start by documenting value-added services available from other distributors to build a comprehensive list to use as a starting point.
Vet Your Services List
Prioritize services by scoring individual items on three attributes:
- How important is this service to customers?
- Are customers willing to pay for this service?
- How well do we perform (or could we perform) at delivering this service vs. competitors?
You can get answers to the first two questions by administering a customer survey. The third question requires a frank assessment of your capabilities along with a careful investigation of how well your competitors perform each service.
Price Your Services
In our December 2020 research on services, two-thirds of the respondents to our survey reported that their companies do not pay commissions for the sales of services. Of course, to pay commissions, distributors must also charge for services – not just bundle them into product prices.
On this topic, distribution and private equity veteran John Schweig told us: “This has been a ‘worst-of-all-worlds’ scenario. Reps are seldom hit by the cost of services and so they give them away like candy. That raises costs and cheapens/commoditizes the service in the eyes of the customer.”
Distributors often find it challenging to begin charging for services they’ve given away for years. Here are your options for pricing value-added services:
Free for all customers
Many distributors give valuable services away to any customers who asks for them. A common example is a technical support hotline, which any customer can call to reach trained employees who answer technical questions.
Not surprisingly, queue times for such hotlines are often very long and customers can be so frustrated that this attempt does more harm than good to the distributor’s brand.
New fee: Start charging for a previously free service
Some distributors will attempt to begin charging for a service they used to provide for free. The best way to accomplish this is to ensure that the quality of the service is significantly better than it was when it was offered at no charge. However, customers often feel entitled to a service that has been free for a long time, so this can be risky, and distributors should proceed carefully.
Freemium: Add a fee-based, premium version of an existing service
This is usually a better approach than either of the previous methods. As an example, a distributor facing a large volume of traffic to its technical support hotline might choose to keep its free service but also offer customers fee-based faster access to more highly qualified technical personnel. This will not only generate new revenues but take some of the pressure off the free version.
Limited to qualified customers: Tie access to factors like sales volume
Another good approach is to set a requirement, such as a sales threshold, that customers must meet to gain access to the service. This limits demand for the service while encouraging customers to buy more throughout the year. This is often more acceptable to customers than simply converting a free service to a fee-based service because it seems more equitable.
For example, one distributor used to offer free, 24×7 emergency service. Customers could call a special number and – even on weekends or in the middle of the night – a distributor employee would meet them at a local branch within an hour.
When the volume became overwhelming, the company began charging a fee for this service for customers who were not under an annual purchasing contract. This preserved the service but eliminated many nuisance calls that were not really emergencies. It also made the service seem much more valuable to large customers. Adding a price changed it from a commodity to an important capability that major account reps used during negotiations.
Fixed volume of a free service
If the service is tied to assets, a common way of controlling consumption is to limit capacity. For example, if a distributor offers free loaner tools, they can be reserved on a first-come, first-serve basis.
The Final Word on Services
In our December 2020 research report, John Schweig nicely summed up the strategic imperative for distributors when it comes to value-added services:
“Bring the rigor, discipline, and project management expertise to your services that you apply to your product-line management. It’s not just important as a means of offering more and better services – it really is part of the answer to disruption.”
Ian Heller is the Founder and Chief Strategist for Distribution Strategy Group. He has more than 30 years of experience executing marketing and e-business strategy in the wholesale distribution industry, starting as a truck unloader at a Grainger branch while in college. He’s since held executive roles at GE Capital, Corporate Express, Newark Electronics and HD Supply. Ian has written and spoken extensively on the impact of digital disruption on distributors, and would love to start that conversation with you, your team or group. Reach out today at iheller@distributionstrategy.com.