The Value Of Separation for HD Distributors

Unbundling product offerings may lead to increased profitability

February 2013, - WebXclusive

by Denise Rondini, Aftermarket Contributing Editor - Also by this author

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If airlines can charge extra to handle your baggage, Workman says, distributors should charge extra for services like delivery.
If airlines can charge extra to handle your baggage, Workman says, distributors should charge extra for services like delivery.
In today’s competitive environment, many distributors have made it a practice to add services to their products believing they are adding value that customers are willing to pay for.

“We continue to add services on top of services to justify margins, but most [of these services] have limited lifespans," said Michael Workman, principal, Michael E. Workman Associates, speaking at the recent Heavy Duty Aftermarket Week in Las Vegas.

During his hour-long presentation, Workman spoke about the idea of separating products and services as well as a number of other topics impacting today’s distributors.

Workman argued that perhaps it is time for distributors to look at reducing services, and in essence unbundle their offerings. Rather than packaging a number of services with their products, they should offer the product and services separately.

He cited several industries that have been successful with unbundling. The most notable ones are airlines, the legal profession, publishing and education.

Distributors can charge for things related to convenience, time and information, according to Workman.

Each Customer is an Opportunity

He contends that today’s customers do not want to pay for things they don’t need. If bundled offering are offered to customers, there is room for the customer to negotiate price because they do not want to pay for what they do not need.

For example, if you justify a higher price for a product because it includes free delivery, the customer who is willing to come to your location to pick it up does not want to pay for that delivery. If you separate the delivery charge out from the price of the product, you can charge an additional fee to customers who need delivery.

This is similar to the airlines charging customers extra to check a bag rather than factoring baggage handling fees into the cost of the ticket for all customers. And it allows for a premium to be charged to customers who need a particular service.

When considering unbundling, distributors should look at each customer as an opportunity. Keep in mind that a typical distributor gets 100% of its profits from 12% to 16% of its customers, and the rest cost him money. Focus on customers who are most profitable to help you determine what to unbundle.

“Stop saying yes to all customers,” Workman advises.

Tips for Success

In order to be successful at unbundling, distributors need quicker response times, a defined value, a consistent process, opportunity identification, channel alignment and metrics sharing.

Customers are the ones who determine which services provide value to them. Find our what they want. This will be a clue as to what they are willing to pay for.

“Service is defined by the customers, never by the provider,” he says. “What business you think you are in is not as relevant as what business your customer thinks you are in.”

Things that typically have value are reliability, responsiveness, competence, accessibility, communication, credibility and security, Workman says.

He also says it is important to make a distinction between customers and consumers.

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