In his book, The Distributor’s Fee Based Services Manifesto: Why You Need to Consider Charging for Your Services, distribution expert Frank Hurtte argues that distributors face a tough challenge. As market forces, demographics, alternative channels and the internet push against their half-century-old model of wrapping value-added services charges into product margins, distributors must change their revenue model or perish.
Hurtte joined us on The Wholesale Change show so we could learn why he’s so passionate about value-added services in the distribution industry.
Distribution Strategy Group: Why did you write this book? Can you summarize the thinking you put forward in it?
Frank Hurtte: First of all, it is a manifesto. It is not a ‘how-to’ book, but rather a ‘why you need to do it or you’re going to go out of business’ book. I wrote it because I kept running into situation after situation of people giving away value, and oftentimes giving it to exactly the wrong kind of people.
We as distributors face a tsunami of change. For example, we have Amazon and Amazon-like companies. The one thing they cannot provide is service, so their play is to drive down the margins. We have to do something to build a fence around our business that protects us. Also, the products we sell are becoming cheaper and, overall, the things that we sell are becoming a better value for our customers. Products last longer as well.
We’ve got all of these things and higher wages for the people delivering these services. The thinking was, “If we provide some services to our customers, it will make us competitor-proof.” That wasn’t necessarily true.
DSG: Customers aren’t going to be willing to pay for it if they can get it for free from numerous competitors–so this becomes an industry problem. Value-added services are often the worst of all worlds for a distributor, value-added services are utilized by their largest customers who are also their highest cost to serve and their lowest gross margin.
By putting a fee on a service, you could actually create value. Then you can begin to use it in negotiations. What do you think about that, Frank?
Hurtte: Let’s talk about an example where you sell a product which requires some expertise tied to it and there is such a shortage of qualified people that training becomes recommended. Time after time, distributor clients and friends we’ve worked with do training for free. They’ve done it for free forever, and it was hard to get people to attend, even with a nice lunch. So, we assigned a $50 fee to come to that class. And when we signed up 12, 12 came, in spite of a pushback from salespeople who were adamant against charging for the class. With the free training, customers didn’t see any value.
DSG: You talk about how customers think of fee-based service providers differently. Would you explain that?
Hurtte: I would say absolutely when people pay you to do something, that it elevates you from just being another drive-by salesperson to being a real-life expert.
DSG: How do you start moving towards monetization in terms of which services you choose and how you manage the internal change so people understand the importance of it?
Hurtte: The easiest and first thing to start charging for is training. If you read the magazines our customers read, you will discover in article after article that the people who make things run and the people who are overseeing the workers cannot find qualified employees.
As an example, here is Acme Anvil Company. They buy mass quantities of our stuff, they’re not particularly price sensitive, and they buy a quantity that pays for services. Maybe you’d give it to them, or maybe you start off by giving them 20 training slots, knowing full well that if the training is good, they’re going to want to send 40 people.
Go through and create a list of the services. Ask yourself, “What do we do for our customer besides just shipping them a brown box every Tuesday?” Then everything that we do for the customer aside from shipping them that box needs to be listed out with the associated cost. Truly understand what these things cost and what it’s costing you.
Then determine, does the customer value it? If you’re providing a service that the customer thinks, “You know, I don’t know why, but he constantly gives me more stuff than I asked for,” then that’s not a good thing. Another point to ask yourself is, “If I quit doing this, who will do it instead?” At this point, everybody says, “Oh, the competition will.” But don’t buy into that line of thinking. You have customer intimacy and knowledge of the customer’s operations. Will your competitor really be able to figure it out?
DSG: How do you change this thinking in an industry where a lot of people are committing the same sin?
Hurtte: A message to all distributors out there: Somebody is first in every market, and this leap cannot be done without forethought and planning. If you are a good distributor, there are some services you provide better than your competition.
Another thing we have discovered is that if you are someone who provides a service for free, sometimes it becomes unprofessional and a bit sloppy. If you charge, not only does it change the impression that your customer has of you, but it changes the mindset of the person who’s delivering that service, because now they become a professional in delivering that service. And that translates to your services becoming better. You have extra money to invest in doing it better. You have more money to invest in equipment and resources to drive cost out of providing the service. That’s an important factor too, because once you start looking and measuring things, then you start going, “Well, this is kind of a waste.”
DSG: Are we referring to the value in the customer’s eyes or our cost to serve that customer for that service?
Hurtte: You need to understand what the services are costing you because, if you truly understand it, you may decide to throttle back on some of those services. If you find out that this service costs you almost nothing because you’ve done it through technology or electronically or figured out some other way, then it becomes a moot point. Also, be sure to ask yourself, “What is its value to the customer?” Also, you need to be realistic. You can’t charge them the sky, but it’s usually a higher charge than the average distributor thinks.
DSG: How do you apply this approach to the non-durable goods side of the distribution world?
Hurtte: When I wrote my book on distributor specialists, I spoke to several people in those industries. A lot of the things people in those sectors do are exactly the same as what we do, and the services are similar. For instance, if you develop menu items, is that something that’s worth value? I think it might be if you come up with a signature service, because that’s where you come to them with a plan and say, “Okay, you’re getting deliveries twice a week.” If you’re providing something like that, then you can perhaps figure out a way to eliminate waste for your customers. Are all of these things of value to your customer? I think so.
Now, if you’re just delivering products and not providing any value-add, it might be more difficult. But what I’ve found is that a lot of people are helping customers eliminate waste, or do more with a smaller staff. All of those things have value to the customer. I believe you should be paid for these services.
Check out The Distributor’s Fee Based Services Manifesto: Why You Need to Consider Charging for Your Services, by Frank Hurtte. Since founding River Heights Consulting in 2005, Hurtte has written over 500 trade articles. and his River Heights Consulting Firm has become synonymous with target-driven distribution sales.
Watch our conversation with Hurtte on Wholesale Change: