Why are distributors more careful giving away a $40 Jacket than $400 in services?

I just finished reading a great article in The Electrical

Distributor online called “BOOSTING YOUR DISTRIBUTOR'S VALUE-ADDED PROPOSITION”. As I started to read, I was attracted to a distributor comment which stated, “(Our) company knows that it may not always be able to compete on price, so it focuses on helping customers run their businesses better.” I liked the message, step away from pricing and instead work on providing the kinds of services customers value. The article went forward with a number of great examples of the non-product services provided by distributors in the electrical segment.

Here’s the deal: Since Tom Reilly’s ground breaking book by the same title back in 1985, distributors have embraced the concept of Value-Added Selling. They have let their creative juices run wild with new and innovative ways to help customers. In the process they have further endeared their product offerings to customers throughout their territories. But we have a problem, Houston…

These cool “value-adds” cost money. For most knowledge-based distributors, these little extras are tied to people rather than some automated process. Also, the costs associated with even the simplest of people-centric services are escalating. Here’s an example.

In the electrical space, many distributors have added a person titled Switch Gear Specialist. For the distributor without an electrical background, switch gear consists of the very large circuit breakers used in factories and large commercial projects. It is a technical product. The folks filling

this position typically have a pedigree, most with engineering degrees. Many once worked for major switch gear manufacturers. They are highly compensated.

An electrical engineer straight out of college with little knowledge of practical applications expects to earn just north of $60,000 per year. A Switch Gear Specialist, on the other hand, typically carries seven plus years of experience and a demonstrated earning power. Not to talk purely about compensation, but it is part of our discussion, it is common for one of these guys to achieve six figure compensation levels. Here’s what that means.

The distributor’s total cost for a Switch Gear Specialist could be calculated this way:

Commission/Salary	$100,000
Benefits package	$  30,000
Company car	$   8,000
Ongoing training w/ travel	$   3,000
Total Cost (conservative)	$141,000

Subtracting out administrative non-selling and other typical time factors, it would be reasonable to assume this person costs their company well over $100 per hour.

This example of a specialist is only the tip of the iceberg. Virtually all the value-add services we provide for our customers come with a price tag. With just a few outliers, the front-line sellers of distribution have no clue as to the price of the value-added service. Extending further, appears no one truly monitors who receives the service or why. I have only seen a handful of distributors where management has a process or policy tied to the business justification of the freebie going to the customer.

Distribution compensation policies, where commissions are mostly the norm, are designed in ways which almost

encourage the freewheeling give away of service. Allow me to elaborate. Sellers can give services to customers who buy on price without taking a commission hit. The same thing goes for tiny customers whose gross margin dollars barely justify the transactional piece of their business. In both instances the distributorship may actually be both losing money and throwing costly services into the pot – thus accelerating a bottom line profitability drain.

The average distributor has more control over who receives a $40 jacket than they do on the giveaway of thousands of dollars’ worth of free service.

When speaking to distributor management teams, I always ask what they keep in their “trash and treasures room” (you know the locked closet full of koozies, golf balls, coolers and jackets). Most are quite proud to show off their pricey promotional items. The stories I hear are generally the same; the room is kept under lock and key and sellers are required to produce a story to get the goods. The distributors can identify exactly who gets the nice jacket down to the level of business potential and the occasion for the gifting.

The “gifting” of value-add services are not so well defined. Typically, the messaging seems to be the sales team is charged with growing the business and they will put them in the right spot. Yet on the flip side, we hear countless stories of customers taking advantage of the free stuff but buying from others when their price is lower. You can’t have it both ways.

Fixing the system
Think of value-added services as money not an adjunct selling resource. It remains management’s duty to insure money is spent on the right things, or at least in this case, spent on the right customers. How do we do that?

1) Segment customers by size and profitability to the company. Then specify which group of customers has earned the service.
2) Establish and regularly review your list of auditioning customers. These are folks who have the potential to earn your services. Perhaps their buying potential or an upcoming project justifies offering them services to prove your abilities. Put them on the list temporarily. If someone is on this list for more than a year or 18 months without swinging business your way, pull them off the list.
3) Review your free service list at least once a year. If a customer has downsized their purchases from you, perhaps you need to withhold your stream of freebies.
4) Put together a plan for charging some of your smaller customers for your service. If they need your service and are willing to offset some of your costs, sell them services. It’s a good idea because charging at least some of your customers for a service validates the value to your own team.

Shuffling down the road
Before we go, allow me to congratulate those who made the first step in understanding the value of their services. The

article had quotes from several distributors who seem to get it. Even greater kudos to the distributors who charge at least some of their customers for some of their services. To me, this is where distributors need to be. In fact, I feel so strongly about the topic, I wrote a manifesto on the subject. You can find it here.