Stop commodity war now
by Joan Adams
These days, companies of all stripes are getting squeezed pretty hard from all sides. Customers no longer accept any price. They know the vendors' price and will pay only a low mark-up. Vendors are facing higher manufacturing and distribution costs — so they're raising prices. The result? Companies' margins are eroding, costs are going up and profits are flat or worse. The typical response to these grim circumstances is to exhort the sales force to "get out there and bring in new accounts."
The "We will sell our way out of trouble" approach is exactly the wrong response. Here's why:
- You're paying those sales folks, every week. Until new customers are found, this is pure expense.
- When a potential new customer is found, often the only way to make the sale is to cut the price (and the margins were too low already, remember?)
- Say this new account wants three deliveries per week; now it is tying up your trucks and drivers, and consuming gas, all to deliver low-margin goods.
- Meanwhile, your loyal clients are not getting what they need and deserve.
- To finally make it worse (yes it can get worse), this new account needs products you don't carry — requiring new sourcing, increased inventory and a host of other problems.
Talk about winning the battle (acquiring new accounts and increasing sales) and losing the war (rising expenses with profits nowhere to be seen)
A BETTER WAY
There's a better way to go. Sell more to your existing customers. You say, "That's impossible — we already sell as much as we can to our customers" or "Even if we could — we still make more deliveries, incur more expense, resulting in thinner margins." The answer is add services to the mix and you can sell more to your customers while increasing your profits to boot. The simple truth is too many companies are product
obsessed, and all products eventually become commodities, selling exclusively on price. Your customers don't come to you simply for your product; they can get that exact same item elsewhere. They buy from you because of service. So, offer them more service and they will buy even more. Also, with services, you can justify higher prices and the customer will be less likely to defect to another distributor.
For starters, you have to know what services your customers need, expect and are willing to pay for. The better you know your customers, the more targeted the services you can offer. All companies think they know their customers. It is sad to say but, too often, they don't.
CUSTOMER EXPERTS
Getting close to your customers is the best way to escape the commodity wars. It's time for your salespeople to become customer experts. They need to visit customer locations regularly, walk the plant floor, see what's going on. They need to know which projects are on the docket. They need to read the company newsletter. They need to visit the loading docks so they know which truck to send, the best crating / packaging for the fastest and easiest unloading. Customer experts also get close to the customer's business. For food processing, the experts need to know the latest FDA regulations concerning coatings or trace element restrictions. For utilities, they need to learn about heat degradation of certain parts. They bring vendor experts in to visit plants. Soon the experts will be the company's advisor concerning many industrial purchases. Back at the distribution house, these experts can advise purchasing on what type of items to stock and the warehouse on stocking levels. Your experts are the primary interface with your customers. I know what you're thinking: "But that's not what my guys do!"
Here are six steps toward turning your distribution house into a true service organization, peopled with an army of customer experts and not merely a distributor of commodity goods.
1) Do a customer analysis. Rank your customers by: revenue, profit and days to pay. This will give you a short list of those companies that bring in the bulk of your revenue, the most profit, and are financially healthy. These customers are your perfect customers. Your goal is to make and keep them happy.
2) Survey these top customers. Find out what gives them fits and what they want. You may be surprised to learn what customers want vis-à-vis billing, packaging and delivery schedules.
3) Eliminate errors. Errors on quotes, in shipping and invoicing cost your customers a bundle, not to mention irritate them immensely. Running an error-free distribution house will inspire untold customer loyalty and in turn will make you plenty of money. You have to get your own house in order to deliver impeccable service.
4) Make sure all top accounts are covered by your customer experts. Assign one or more to each expert and make it their job to learn everything about these customers.
5) Spend money on these guys. Train them to develop new skills. This is a different kind of selling. They are no longer selling products, items or things; now they selling expertise and solutions.
6) Develop a bonus system. The system should reward your experts for increasing high margin sales. Good incentives always help focus people to do the right thing.
You can't just give the sales folks an inspired "rah-rah" speech about the importance of being customer experts, then sit back and expect to see sales (and profits) jump. Instead, start the process of developing customer experts and a tight service organization right now. You have to. If not, you will remain stuck in the commodity wars, trying to get and keep clients on price alone.
Joan S. Adams has consulted for industrial clients for more than 20 years. She headed DITT, the consultancy arm of the French National Utility, Electricité de France, and was a managing consultant at ATKearney. Later, she started Pierian, a consultancy that brings sustained and measurable success through operational excellence, customer focus and competitive market strategy. She has engineering degrees from the UW-Madison and MIT. She also has an MBA from the Wharton School. E-mail her at adams@pierian.net.
This article originally appeared in the May/June 2010 issue of Industrial Supply magazine. Copyright, 2010 Direct Business Media.
INDUSTRIAL SUPPLY MAGAZINE
The November/December issue of Industrial Supply magazine features an in-depth cover story about Kimball Midwest. Plus, we're featuring articles by contributing writers Dirk Beveridge, Frank Hurtte, and Mike Marks, as well as interviews with numerous product and distribution industry experts.
