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The Time to Start Charging for Services has arrived!

by Frank Hurtte

The Distributor's Fee Based Services ManifestoBaby boomers march into retirement 10,000 abreast. Technology drives down the cost of everything we sell. Global competitors utilize Internet tricks to challenge our customers’ thought process. Meanwhile, back at the ranch, distributors give away services using a half-century old model called “Value-Added” sales.

I believe the time to start charging for your service has arrived. It’s here, right now. You can stake a position to some imaginary high ground and insist your customers, market and competitors are different, but the big bad wolf of megatrends is huffing, puffing and about to blow your house down.

I am thoroughly, unequivocally and totally convinced the “value-added” model most distributors follow is not just breaking down; it’s irreparably broken. Distributors must change or go the way of the dinosaur. I envision distributors moving to a new model. I call it the Margin Recovery Model and, under its directive, select customers are charged for services we already provide for free.

Unlike many conversations about fee-based services, I don’t see distributors establishing profit centers around service work.

Managing a stable of engineers, technicians or service people requires an outlook (and skillset) most distributors lack. And, once headed down the “profit center” path, it becomes very easy for distributors to find themselves taking on business “just to keep the team busy.” This creates conflict with potential customers and vendors alike.

Instead, I see the need for existing logistics people, specialists and other product experts to attach a fee to the work they do for select groups of customers. Let’s review why margin recovery makes so much sense.

Margin erosion revisited
First, margins are under pressure. After interviews with over 1,000 distributor leaders over the past eight years, I have yet to find a person willing to tell me they’re not facing margin pressure. Whether spawned by the explosive growth of the Internet, new competitors, or by way of new offshore manufacturers that take business outside of the traditional distributor chain, disruption abounds.

The cost of everything is going down
Margin pressure isn’t the only thing working against distributor revenues. If you happen to sell a product that is electronic in nature (this ranges from building control systems to residential programmable thermostats), you understand how technology breakthroughs have adversely impacted product sell price. A product once selling for $100 may now go to market at $10. Even if gross margin percentage remains the same; net revenue is decreased.

The stuff we sell lasts longer
On top of the technology phenomenon, manufacturers are continuously discovering new manufacturing methodologies. Products last longer, cost less, and require very little customization. Let me use an example from a related industry; distributors selling lighting will soon come to grips with a new economy. LED “light bulbs,” with a life expectancy of 20 years, are replacing older technology lamps with 750-hour lifespans. Obviously, at some point, a slower flowing revenue stream will become the new normal. Unless we build a plan to recoup the costs of supporting equipment with a very long life span, the ranks of distributors are set for shrinkage.

Demographics have to be considered
Now let’s toss demographics into the mix. Users of our products will require more and longer termed hand holding. Training needs expand as customers choose to invest more into equipment than into training a potentially mobile employee pool. When products fail to work as advertised or are misapplied, troubleshooting assistance will be required to get the maximum value from the customer’s investment. Failure to understand how worker demographics affect our business is a recipe for lost opportunity and future financial hardship.

Customers are outsourcing their work
If you sell into North American corporations, you might observe outsourced IT departments, engineering groups, maintenance and other areas that directly touch against the number of trained experts at all of our customers. Distributors have filled a portion of the worker gap.

It’s worth repeating, change impacts the demand for more and enhanced services from someone. The line of demarcation between the work done by customer and distributor has become cloudy. Presently, the only difference appears to be distributors that provide the work for free.

Thinking about this makes one wonder whether or not there is a need to realign some of the ways we do business.

It is essentially this realignment that provides us with both opportunity and threat. Moving into a hybrid space – where distributors provide more than brown boxes shipped from Point A to Point B – has already happened. We are providing real and valuable services today. The question becomes, can we continue to make money without assigning some monetary worth to existing services?

Will we go out of business if we don’t immediately shift our policies? Realistically, the answer is probably not. But, as we move through the next recession, those without a platform for recouping a portion of their services costs via fees will feel a greater pinch than their fee-charging brethren. The distributors with a fee-based services margin recovery plan will have more dollars to invest in growth. Distributors without a plan for recouping the cost of their service will be forced to either unilaterally reduce the quantity of service (sometimes via layoffs) or absorb the cost. The distributor without a fee plan makes less money during the good times, grows slower in relation to their competitors and, over time, becomes less resilient in the market space.

Ask the dinosaurs how extinction works. It’s not sudden death. Slow gradual decline will kill of the species, perhaps not in my lifetime, maybe not in yours. But any thoughts of legacy turn to dust.

A final note…
Writing a book isn’t some massive money making proposition for a consultant. They’re a labor of love. My father was a distributor. His company and hundreds of others like his went the way of the dinosaur. In their case, they couldn’t imagine how quickly the industry would change. The Distributor’s Fee-Based Services Manifesto is a heart-felt message to my friends and colleagues in an industry that I love. I want to see you and your companies thrive into the next generation. It’s available on Amazon at http://tinyurl.com/FrankonAmazon.

Frank HurtteFrank Hurtte provides Strategic Insight for New Times. He speaks and consults on the new reality facing distribution in a post-recession world. Contact Frank at River Heights Consulting via email at frank@riverheightsconsulting.com or at (563) 514-1104.

COMMENTS: 4
Fee Based Service
Posted from: Ken Rogus, 10/30/13 at 8:42 AM CDT
Should a seller of industrial safety products have a safety contractor/consultant on staff to support their customer/end-user safety training & initiatives ?
The truth
Posted from: Marcus Aldrin Andrsson, 9/13/13 at 9:56 AM CDT
The fact is that this process Is happening right now. If you like myself have the great pleasure to sometimes run into the occasional Customer it is very clear. Even customers are today searching for businessmodels to survive in the long run. Transparency Of pricing beeing the main motivator here but regardless the reason it is happening. Charging for service and therefore charging for something that can not without trouble be copied "straight up" Will be our future. Brilliant article!
Fee Based Pricing
Posted from: Chuck, 9/12/13 at 1:22 PM CDT
I first saw this idea floated about 15 years ago and it scared me silly. In the real world, fee based services will end up eroding the distributors margin instead of enhancing it. Imagine this scenario... A distributor enters into a contract with a customer who choses to forego any service in order to obtain the lowest possible price for the products. At the end of the contract period, the customer says, Mr. Distributor, we really like this contract but we want you to include xyz service in it. We expect you to hold the price on your products to only verifiable price increases from you supplier though." Now the distributor is hooked and each year he is providing more service at the same relative price. I say as a group, distributors pour all their services over their customers and charge them with additional margin. If you are truly providing outstanding service, the customer will be willing to pay your price. If we cannot prove we are worth those additional margin points then we are doomed anyway.
Charging fees for services
Posted from: Patrick, 9/12/13 at 8:47 AM CDT
Good luck to everybody as far as charging fees for provided and expected services to customers. They don't expect to pay for anything but the product and they don't want to pay much for the product either. As long as there is so much competition that is willing to not charge for the services, the customer will go there because they in turn have so much price pressure on their product or service that they have to do everything possible to hold down costs. We spend more time asking for and rebating special pricing today than we actually do selling.

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