True confession: I started my career working in the electrical industry in 1977. No, this isn’t going to be some old-timer’s story of the good old days. Instead, it’s a personal observation of four decades of selling styles. While going through an 18-month factory training program designed for future sales engineers, I had the opportunity to attend some of the best sales training programs a big company’s money could buy.
Features and Benefits…
The state-of-the-art selling technique of 1977 can be summed up in two words: features and benefits. After the aforementioned training, I became a master of features and benefits. In a time before massive competition and the ensuing price squeezes, it worked. The recession changed things.
Many folks don’t recall the “big recession” of the Carter administration and the 1980s, but it was bad. On a personal side note, of my top 25 accounts in 1980, seven went bellyup and the others struggled to survive. Along the way, customers discovered they could put price pressure on everybody.
While this turmoil struck the nation, a new selling strategy emerged: value-added selling. The brand-new concept was simple—provide extra services to your customers along with the products sold. The concept spread like wildfire. Over the next decade, distributors broadcasted value-added messaging far and wide. The concept worked.
The Trouble with Value-Added Selling
Into the 1990s, value-added selling grew in its importance to distributor sales efforts. Along with the popularity came a game of one-upmanship in which distributors matched their competitors and raised the bar with even more service. For example, logistics-based distributors’ special emergency deliveries turned into emergency deliveries plus put-away programs, which soon turned into emergency delivery, putaway and consignment. On the knowledge-based distribution side, product training, troubleshooting, configuration and even panel assistance were all “thrown into the deal.” Sellers spread the concept from a few key customers to every account with a warm body and a modest purchasing budget. Why? Sales managers and distributor leadership pushed the point at every sales meeting. Many a distributor’s motto was “nobody provides the level of service we do.” This further propagated a macho image around throwing in free service with orders large and small. It became a free service bonanza for customers; distributors fared well for a while.
As we eased into the latter half of the 1990s, strange things happened. First, our service-addicted customers wanted more. Second, the cost of providing those services began to rise. This mix was further exacerbated by trends in American manufacturing organizations toward “right sizing” to achieve operational efficiencies. Demand for distributor services outpaced gross margin gains.
Fast forward to the present. As more qualified baby boomertype employees leave customers, the demand will further accelerate. Meanwhile on the distributor side, companies discover the cost of technically qualified people to be expanding at a rate nearing 30 percent.
Simply stated, distributors can no longer take the posture of providing free service to all.
Fee-Based Services: The Gross Margin Offset Model
Often when distributors think of fee-based services, visions of managing a “stable of engineers and technicians” send them crashing into oblivion. It’s not uncommon to hear horror stories of distributors who decided to open a systems-integration business only to find themselves walking through a minefield of management, scheduling and project-related issues. They lose tons of money and vividly share their experiences within their network of friends. That’s not what we have in mind.
In this model, distributors simply begin charging for services they already provide. While one would expect some natural customer pushback, this needs to be viewed as a good thing. Let’s explore this a bit more deeply. Most distributors provide training in some form. While most offer free training as a marketing tool and service to their customers, a recent survey conducted by Plant Engineering Magazine indicates more than 50 percent of a broad spectrum of manufacturing companies budget for necessary additional training for their teams.
Complimentary training sessions are frequently viewed as potential day-long advertisements for products. Instead of channeling training dollars to the distributor, they head to a training company or technical college. Since the training company and/or tech school provides generic and often outdated training materials, the distributor still ends up answering brand specific questions…for free. I am open to arguments as to why the distributor can’t charge for this service! Training is not the only service worth considering. I selected it because everyone understands the nature of training and it crosses over several distribution industries. The same argument could be made for product inspection, programming assistance, troubleshooting and a host of other technical services currently provided on the house.
What About Customer Pushback?
A couple of paragraphs ago, I made a bold statement about customer pushback—it is a “good thing.” Let’s explore this topic. First, distributor financial guru Al Bates of the Profit Planning Group shared an important point, “More than a third of a distributor’s customers are costing you 45 percent of your profits…” Currently, you are giving free service to customers who contribute nothing, nada, zippo to your bottom line. Some of these customers are too small to channel enough business your way. Others have made a conscious decision to partner with others. They probably still need some of your services, so why shouldn’t they pay? Consider this point—your best customers are subsidizing the costs associated with your worst customers.
Clarifying the situation positions you to re-explain the importance of your services and to have frank discussions about the cost of the services you provide. If they continue to buy a la carte, they can expect to pay for service.
For your top customers, the story is slightly different. Setting a price on services provides you with two things: a firm foundation for setting your value and an opportunity to gauge how important the service is to the customer. Let’s drill into these points separately.
Set a foundation for your service value. This creates a negotiation point. Again, let me illustrate with training. Consider what happens when the customer places a large order and asks for price concessions. If training is free, you find yourself discounting the price. However, if training is a fee-based service, it becomes part of the bargain; as in, “buy 100 units and I will throw in five slots in our future training class.”
Gauge the importance of a service. Recalling the earlier conversation on the machismo attitude of sellers toward services, it’s not uncommon for sellers to provide expensive value-add extras to customers who neither need nor value the service. For instance, we uncovered a situation where a distributor made daily deliveries to an industrial facility. Many of the orders went into plant stores where a rush was unnecessary. The daily receiving work was customer hassle. The result was expensive service (to the distributor) that did not tie to any value to the customer. Attaching a fee opens the door to better understand what’s important to the customer.
Expect Seller Pushback
The value-added, free service giveaway has become a selling crutch for distributor sales teams. Most recognize neither the cost to deliver nor the actual value of the service to the customer. Intellectually, they know people and equipment cost money, but emotionally, sellers don’t believe their service is a good deal for customers even with a fee attached. Expect some convincing arguments as to why the customer in “their territory” can’t/won’t pay. Some will even try to short-circuit the system.
Many of our salespeople have technical backgrounds. Some are already distracted from selling activities; overly involved in providing services better provided by others in specialist or administrative positions in the organization. Further, many times they spend their time with that subset of customers unwilling or unable to pay for the service by way of the gross margins they generate. Fee-based services provide a tool for focusing their efforts.
Let Me Convince You…
I started off with the intent of convincing you to consider moving to a fee-based service model. Allow me to list five points to consider:
- Customers need our services. Whether free or fee-based, distributors have unique skills which are in short supply. The demand exists. Further, if the customer finds others (like systems integrators, lighting designers, engineering houses) to do the service, there will be a fee attached.
- Some customers consume more service than their business (and gross margins) justify. They still need our service. Fee-based service improves their profitability to your organization.
- Key customers need and already rely on your services. Tying service to a fee positions you for better price negotiations and allows for a place to increase revenues.
- Sales teams improve in their skills to segment customers. Now there is a clear management-driven differentiation between targeted customers and those who don’t truly justify your efforts.
- Your company develops the revenues to build new and improved services. Better services further endear you to existing customers. You have extra money to invest in demo equipment, formal training and new people who drive sales forward.
One More Thought…
There is magic in being viewed as the expert in your field. Customers see you differently. They openly share information with experts; outlining their issues and the financial drivers just under the surface. Experts are more than just another salesperson. Amazon and other online distributors will never be positioned to deliver the customized services you provide.
Top-quality and localized fee-based services help your customers increase efficiency. Fee-based services allow them to be more competitive in their market space. Your services are your customer’s competitive edge. It makes sense for you to be compensated. The icing on the cake is that you will be able to afford to invest in even better services in the future and that is a competitive differentiator.