An Extension of your Services

Last week I had the opportunity to meet with a number of distributors at the EPICOR INSIGHTS conference in Las Vegas.  Actually, I had the honor of speaking to the group on the future of distribution.  

Just to give you an idea of the content, we covered four main topics:

⦁ Technology Power and the need for distributors to quickly embrace cloud computing technology.
⦁ Artificial Intelligence and how to start using it today instead of waiting five years.
⦁ Demographic Trends and how to profitably ride the shifting tides.
⦁ Positioning for the next Recession.  The economists are saying 2022, so we have a couple of years to prepare.

During conversations, I had the chance to meet up with several distributors who had read my book, The Distributors Fee-based Service Manifesto, and followed the principles laid out in the book.   These folks had successfully moved low-profit customers to the right side of the profitability charts and were enjoying the extra bottom line.  

They asked two questions:
⦁ How do we migrate more customers from free to fee?
⦁ On what other sources of revenue do you feel we are missing out?

Let’s concentrate on the latter of these questions.

Rentals can offset margins and drive profitability
How did we come to this conclusion?  First, we had a chance to study distributors in the air gas and welding supply industry.  What we discovered was striking.  A large percentage of these distributors’ bottom line comes from renting the cylinders and tanks used to hold the gas.  While the concept of renting tanks doesn’t apply directly to most distributors, it got my head spinning.  

Asking the question:  “What do other distributors have that could be rented?”,  we came up with a pretty extensive list of items which might be rented rather than simply loaned to customers.  
Here is a partial list:

⦁ Demo/Lab Units – How many times have you loaned out that $10,000 demo/lab unit to a customer so they could work on a concept, figure out how to make something work or simply educate themselves on the technology?  We hear horror stories of this kind of equipment being sent to a customer and languishing for weeks before the customer “gets around” to using it.  What’s even worse, more than a few distributors admit to this kind of equipment eventually being lost in the shuffle.  One even confessed that their company had nearly $80,000 in equipment, which was currently unaccounted for but would eventually find its way home.

⦁ Programming terminals (or laptops set up for configuration) – While the old-fashioned programming terminals are becoming a thing of the past, we still hear of them being loaned out to support geriatric equipment.  Today, the loaning generally comes in the way of a laptop being loaned out to a customer for some form of configuration or setup of a programmable device.  Mostly this arises because the customer chose not to purchase the right support software.  It’s a valuable service and I believe a place ripe for rental fees.

⦁ Test equipment – Do you have scopes, electrical noise, gas, noise or vibration meters in your inventory of support equipment?  Many times these were originally purchased for internal use, but salespeople have a way of loaning them out.  Again, these often get lost or held for longer than necessary.  It’s time to start renting.

⦁ Special tools – Similar to the test equipment above, these are only occasionally needed by the customer, so they opted not to purchase them.  

⦁ Samples to try (formerly called try before you buy) – Everyone calls these try before you buy items, but lots of time the same thing happens as with our Demo/Lab equipment.  I believe renting solves the problem with the added benefit of creating a sense of urgency for the customer to make a decision.  If you strongly object, you might consider applying rental fees to the final purchase.

⦁ Shelving and storage bins – Many distributors are being asked to provide shelving and storage bins for the products provided to their customers.  In most instances, the distributor is promised additional business, new opportunities to sell products and sometimes enhanced margin levels.  Sadly, in a lot of cases, the customer promises do not match reality.  Other times, the customer’s buying habits change while the distributor’s shelving and bins remain.  Again, there exists an opportunity to charge rent.  If the customer provides a certain level of business, refund a portion of the rent.  Doing such keeps everybody honest.


Migrating from free to fee always receives a lot of pushback.  Our experience is salespeople are continually against charging for anything outside of the contents of those brown boxes coming out of the warehouse door.  Most use free services and free use of equipment as a crutch in their selling process.  

I am not against giving sellers every tool possible.  But, giving services and other things away without regard for their cost and value to the company or customer is where I balk.  Why provide valuable incentives to customers who contribute little (or negatively) to the distributor’s bottom line?  Applying a cost to some of the things you do for or loan to customers makes sense.  

Below is a chart demonstrating the profitability of customers to the average Knowledge-based Distributor.  

This chart shows the top 30 percent of the typical distributor’s customer base creates 150 percent of the profits.  What happens to the extra 50 percent?  Simply put, distributors give it away to customers who consume more services than their gross margin covers.  

I believe every single customer on the negative half of the chart should rent rather than borrow equipment, meters, tools and everything else.  Making this move will only strengthen your profit picture and charging this group a rental fee only reinforces the value provided customers.  Eventually, you might migrate the rental fee to bigger and more profitable customers, but laying down a rental policy will be tested and part of your company’s operating process.  

One final thought
Thankfully, the ERP suppliers to our industry are catching up and perhaps even leading the charge on fees associated with services AND rentals.  Last week I was asked to speak at the Epicor Insights gathering in Las Vegas.  While there, I had the chance to “kick the tires” with their sales teams.  They have rental and services built into their ERP offering.  

Bookkeeping and logistics of handling fee-based servicing and rentals are not an excuse to postpone your launch.










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