Walking A Fine Line
In spite of what people say, price is always an issue. And in spite of how tempting it is to simplify matters by pitting price against value, its really a moot issue since customers take value for granted. The value you bring to the table is free as far as the customer is concerned. They expect you to go above and beyond to meet their needs.
By all means, define value, but dont expect customers to pay extra for it. Define it in terms of manpower, equipment, salaries for those sales veterans, overhead, product training, around-the-clock delivery, etc. before you go on that call. Build it into your quote and then figure out how to effectively leverage the value of your service versus that of the competition.
In other words, get a handle on the value you bring to the table. After all, much like a manufacturer manufactures products, youre manufacturing service. So says Scott Benfield, president of Benfield Consulting, Naperville, Ill., and author of the book Services That Sell, published by the National Association of Wholesaler-Distributors.
Distributors need to stand back and look at how they do business and understand how to get control of the value they add, Benfield says. The problem traditionally is that we roll up all the value and put it into the product price, and the products are commodities, so the mental association is that the value-adds are commodities.
So enough of this price versus value debate. Everyone wants great service and distributors all want to make money. Lets talk about how you can keep your margin respectable while, at the same time, dishing out value in spades to todays discernable buyer.
Tinker with the age-old question a bit. Instead of, How can I get my customers to pay more for the services I offer? how about, How can I give the customer what he or she already expects, grow and prosper all at the same time?
Finding the Leaks
Sometimes, distributors arent aware of what all these so-called services are really costing them. Figuring it out may be a pain, but it can be well worth the trouble.
Because distributors pride themselves in service, theyre often willing to do whatever it takes to ensure a customers satisfaction, occasionally at the cost of their own bottom line. For this reason, distributors need to scrutinize the cost of each account, so that any leaks can be patched. Its not always easy, according to Benfield.
Most distributors have some pretty leaky pricing systems, he says. What I find is they do a very good job of buying most probably have six to eight measures they use to buy, but generally, when you look at price, they have two measures including product cost and an estimate of what the market will bear.
Keeping tabs on the costs of each account is a first step, Benfield says.
For example, while working with one particular company, he discovered a very costly leak in the companys shipping policies.
What I found was that they were at about 40 percent capacity with their freight. The problem was that the salespeople were giving the service away to customers, he says. Because they had been allowed to dictate the time of delivery, trucks were shipping even small orders. The distributor was utilizing only $2 million of a function that was costing them $5 million annually.
The sellers were using freight as a product giveaway, Benfield concludes.
Distributors must seek out and identify these types of profit-drains in their businesses, and adjust service and/or pricing accordingly.
Pricing really sets the stage for profit, and the potential for profit, and is really, as far as Im concerned, a core competency as much as sales, purchasing or the accounting function, he says. If you dont get your price right, youre probably cheating yourself out of profit.
Building service contractor Tim Murch, CBSE, president of Mitch Murchs Maintenance Management (MMMM) in St. Louis, easily rattles off the five expectations his company has for its distributors.
Service, price, training, response and resources, he says. MMMM cleans 28-million square feet of building space annually, requiring its three suppliers to be on their toes as much as the building service contractor is.
First of all, response time ties into service, but its a key reason why MMMM does business with its suppliers, according to Murch.
On the supply end, weve got to have the service with a timely response on the order, so inventory comes into play here, Murch says.
Service also ties into delivery. Weve got one of our large suppliers that delivers to our accounts at night while our supervisor is in the building so we dont have to disrupt the customer during the day. And, we know [supplies] are going to be put away in the right place, Murch explains. Thats a very big value-added benefit. There is also a benefit to knowing he can count on his distributor in a pinch.
There are times when we screw up and one of our managers didnt get an order and theyre out of paper or a supply to clean the building. We can count on [our distributor] to get it.
Training is another big issue, and Murch claims, Theres never enough.
Finally, he relies on distributors to service equipment, set up job starts, do repairs as needed, and help with any other problems that might surface.
As far as price? According to Murch, this is a no-brainer. Theyve got to be competitive or we wont do business with them.
These services arent luxuries, as far as Murch is concerned. We insist that these things be in place before were going to consider a supplier. We need them from our partners to provide to our customers.
So how do distributors get competitive despite the inherent difficulty of assigning costs to certain services? Some distributors have found innovative ways to identify those costs so that they can price and sometimes bid accordingly.
Pacifica Consulting Services in Culver City, Calif., has a unique customer base mainly property management companies and large industrial aerospace firms in southern California. Many of the accounts bid out contracts for up to three years at a time. Laurie Sewell, president, must not only analyze costs inside and out, but also make long-term market projections when quoting a price. If she doesnt price intuitively, the long-term contracts can cost her. But she is also under the gun in that she operates in an ultra-competitive market, so price is often the decision-making factor, especially for low-margin items like paper and liners.
For Sewell, the economy has undoubtedly affected her pricing ability.
What Im finding is that the customers are driving the pricing down because theyre feeling pressure. It used to be the procurement people had more power to justify higher costs. Now theyre being evaluated by the bottom line. The downturn in the economy has pressured customers to seek the lowest price, Sewell believes, forcing a price war as competitors vie for market share.
As pricing becomes more bare-bones for southern California distributors, Sewell takes some of the services her company provides very seriously when it comes to cost and the bottom line.
Special shipping requirements can add a lot to the expense of delivery. The defense contractors Pacifica supplies require special clearances, the trucks must fulfill certain requirements, and often they have to be escorted to the drop-off site.
To even get through the gate takes awhile sometimes, Sewell says. The whole process can eat up valuable time, and take a bite out of opportunity costs.
Another of Pacificas accounts requires a delivery truck at its site two full days a month. Its a large account, but it requires delivery into every room they have. Its a very high-cost delivery service. We have to build that into the product price and take it into account when were doing the bid, she explains.
However, Internet access and a savvy client base have unavoidably led to thinner profit margins, says Sewell. And it becomes harder to justify a super-slim margin if an account requires too much time.
There are many variables that ultimately affect price. Distributors need to watch for many things, among them:
- Be careful of price matching. When you do that youve negated any fact that your service value may be better, Benfield says.
- Dont overservice. Even with great-looking margins, these accounts can be losers.
- Scrutinize free shipping policies on small accounts. Even if a small account is on the way, it may cost more than its worth.
The pricing philosophy of Bert Bellinson, president of Tangent Industries in Atlanta, mirrors his belief in his product: What we do when we develop our price is we look at what we feel we can get for it in the marketplace and we work backward the cost of the product, the cost of the box, the commission that we pay, and then the cost we assign our overhead. After we do all that, we want to make sure weve got a little bit of profit, he explains.
If all a distributors offerings are coming together for a customer and the customer is happy, they will be more likely to see the value in a relationship.
John Ezzo, CBSE, president and CEO of New Image Building Services Inc., a building service contractor in Mount Clemens, Mich., says its to the distributors benefit to partner with contractors for mutually beneficial relationships. New Image has been working with the same distributor for five years, and that salesperson even has a desk to sit at when hes here two days a week, says Ezzo.
Ezzos main distributor has worked hard to position themselves as a part of the company. Beyond the basic services, they provide extended terms for new equipment at start-ups, they provide on-site training two nights a week, offer labor-saving advice and rent equipment to the contractor when needed.
Still, the customer never loses sight of what theyre paying. Ezzo has bid out his supplies to make sure his distributors prices are competitive.
Price is very important. But its the value of the service the distributor is providing that keeps us from being overly concerned about the price. Ezzo says even a quote that showed a 2 percent to 3 percent savings wouldnt sway him. Our supplier is helping us with 65 percent of our costs, which is labor.
It Still Counts
Price is and always will be a key element in the buying decision. That said, the basic ingredients that have always characterized the jan/san business are still powerful tools in customer retention.
Dan Burrows, owner of Expert Chemical Supply in Homewood, Ill., notes that one of his customers, a rental car company, looked at the price it was paying for Experts products and decided to go straight to the manufacturer. The bright idea, backfired.
What they found out is they were waiting a week to 10 days for the product to clean their cars, Burrows says. They turned around a couple months later and found out they were running out of product because they werent watching their inventory Because of the service we could provide, they were willing to pay a little more. And Expert got the customer back.
Making It Happen
Solid business relationships notwithstanding, distributors still need to analyze the heck out of their sales numbers and overhead.
We look at our general gross margins monthly to make sure were meeting our expectations. We look at individual accounts and even invoices that we flag to investigate monthly, Sewell says. The company also looks ahead two to three months to see which contracts expire and whether pricing adjustments need to be made.
For Bellinson, sometimes pricing problems come to light when he realizes hes too low or too high.
We know when were not seeing anyone discounting, and inventory is moving quite nicely without the discount. Sometimes we overprice and we know because it doesnt move, he says.
Pricing can be a game, and according to Benfield, distributors would be wise to dissect it more closely. If they did, they might be able to break off some of these services into new products they can charge for. Benfield recommends first segmenting the customer base, then analyzing each segment to identify what that segment might find valuable.
If you really do a lot of research, and find out what customers really want, you may be able to create and sell and brand the service and make products out of it, Benfield says.
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