Monday, June 30, 2014

Amazon: Best Friend or Worst Enemy?

Bad advice disguised as a how to compete against Amazon article

Vultures circle high overhead.  Stumbling,
struggling, maybe even crawling way down below, we see the cadaverous body of the wholesale distributor.  The experts are once again predicting the demise of distribution.  Unless we heed their costly advice, our lifeless corpse of an industry will be served up as carrion caviar.  And the folks at Amazon will dance a merry jig around our tombstone.

It’s not too hard to imagine the advice these guys are tossing out.  Spend money on building your own e-commerce site.  Hire them or their company to assist you in growing your very own mini-Amazon. 

For our kind of distributor operation, this is a terrible recommendation. 

What is our kind of distribution?
A few years ago I coined the term “Knowledge-based distribution” to describe our type of business.  In this knowledge-based world, we sell a bit of our expertise with every brown box headed out the door.  Depending on the products on your line card, this could be engineering support, start-up assistance, internal logistics assistance, parts kitting or integrated solutions with parts from several manufacturers tied together to solve the customer issue.  We work hand-in-hand with our customers to establish production, maintenance or other long term strategies.  This is a far cry from logistics based wholesalers who basically toss product over the wall to their shipping departments.

If we play the Amazon game we will lose.
Think about this for a moment.  Amazon is investing hundreds of millions into their internet-based platform.  For the purposes of this discussion, we did a quick review of spending for online capabilities.  Amazon didn’t break out their budget, but their biggest competitor in this business, Grainger, reported spending $40 million for online spending in 2012 alone and industry analysts indicate this number for annual spending is going up each year.   If you happen to be a distributor with this kind of budget for e-commerce, you might want to skip the rest of this post.

We’re not saying that fighting an online guerilla war with Amazon, Grainger and the like isn’t a valiant cause.  Instead, I wonder if investing time and energy is a good use of our troops and treasure.  Why not use the effort to up our game in our real area of expertise?  Let’s focus on playing our own game so well that we take business from the giants.

Upping the ante in a game we can win.
Instead of fretting and fumbling with how to improve our online catalog, why not work to develop additional tools for your own unique knowledge-based value proposition?  No doubt your organization provides dozens of value-added services to customers.  Certainly, you provide on-site expertise which will not be delivered via the web (at least in the foreseeable future and my lifetime.)  Let’s invest in the stuff that really attracts our customers.  The list could be massive but here are a few to ponder:

1. Develop a process for measuring the value you provide to customers. 
Don’t count on technical customers to properly monetize the value of your product/service solutions.  Most technical folks lack the basic skills required to turn your last late night service call into dollars produced for their employer.  Develop and aggressively sell this customer advantage.

2. Create connections with your customer’s top brass.
These folks may be writing big checks to your company every month.  Very few of them understand precisely what you do and why you warrant the dollars they send your way.  They don’t understand the technology of your products and most don’t want to learn it.  Why they do want to understand is how you help them make money.  Learn to speak their language; talk about financial impact (see my previous comment.)

3. Build a process around your sales effort.
Good salespeople are hard to find.  Many of your top sellers may be pushing toward retirement years.  A process will help capture their expertise and allow your company to quickly and efficiently on-board the next generation.  And, the future will most likely involve some kind of team sales approach.  Done well, team selling requires a playbook.  A sales process keeps the team running in the same direction.

4. Start charging for some of your services.
A lot of what we do is so valuable, so uniquely positioned and required for customer success that we deserve to be compensated.  The Gross Margin for service model is starting to break down.  Why, because products are getting functionally cheaper and the cost of our expertise is rapidly rising.  Something has to give.  This is where I put in a shameless plug for my book, The Distributor’s Fee-based Service Manifesto.  It’s on… holy smokes, you may have guessed--

5. Sell your value to your Supply Partners.
Here’s my take on a lot of this Amazon stuff.  Some of our Supply Partners are reading the same articles I have been subjected to.  A good many of them are starting to wonder if they should be jumping aboard the midnight train to Amazon-land.  We need to stop them at the platform and before they buy the ticket.  The folks who actively sell vendor’s products into new applications aren’t hunched at a computer.  The knowledge-based advice we provide is not buried 300 pages down on some internet site.  We actively sell their products.  We create new demand for their stuff.  All of this effort costs money.  We need a much deeper margin than an online store.

I am not saying we should abandon new customer facing ideas.
Before we get back to the business of distribution, I want to make one final point.  I do believe we should constantly update our ability to interface with customers.  A dynamic website is a must have these days.  Distributors need to be able to handle electronic orders and provide logistical information to customers via e-commerce.  I like electronic invoices.  Mobile apps will play an important role in our near-term future.  Not keeping up is never good.  But….

I believe our game is solving customer problems not selling brown boxes on the internet.


DanOB said...

Frank manages to be prolific and on target with his blog. Over the years we've heard so much about the next big thing that is going to put us out of business. Chicken Little was wrong, and so are most of the folks forecasting doom. Or, in the words of my Dad, "with a pile of horse manure this big, there's got to be a pony around here somewhere!"

The Distributor Specialist said...

Dan, Our dad's must have attended the same school. I am still looking for the pony.

Christian Fell said...

For us as a manufacturer Amazon is just another sales channel. I would actually consider it more of a marketing channel for the time being because real sales is fairly limited.
Distributors and manufacturers can even join forces at Amazon by promoting the same products and customer gets choice of seller. This way costs for individual e-commerce platforms are saved.

John Pirner said...

Right on Frank.

We can't beat Amazon at their game, and they won't beat us at our game. We have completely different models.

We got a high pressure sales pitch from a company that wants to help us become a mini-Amazon. Your critique makes me think we are talking about the same company. They suggested that we are already soggy driftwood about to go over the falls, but we just don't know it yet. Sounds like the hype we heard in the 1990's all over again.

We are an unpaid member of our customers staff when we do our job at it's highest level. Not every customer wants that, but many do. Try finding a phone number to call Amazon when you have a question or a problem.

The Distributor Specialist said...

Christian, Your view of Amazon is spot on. For the progressive manufacturer, Amazon allows a channel to under served portions of the MRO and other specialty markets without the expense of "building your own" website. Further, a place on Amazon serves as a marketing tool.

I would encourage distributors looking for innovative encoder applications to check out Posital.

The Distributor Specialist said...

Just about the time I learned to spell "Web-based Disintermediation", the threat somehow disappeared.

I just Googled the term "Amazon threat" & distribution. The results show 5,190 results.

I may be the only consultant on the planet saying "don't pay me to fight off Amazon".

Diane Phillips said...

I am going to try these out with my little niece...
best workout products on amazon