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.[PAGEBREAK]
Customer or Consumer?
“Consumers buy things; customers pay you for what you do.”
In addition, he says that customers judge you against yourself and not against your competition, so you need to make sure they have a consistent experience when they interact with you.
“For most customers, unbundled services are something to brag about. People like to buy just what they need,” he says. “They will try to talk you into a lower price if you have a package that includes something they do not want.”
Workman reminded the distributors in the audience that their cost to service a customer was not a concern to the customer. “Only when something is performance-based can you charge more for it as an unbundled service.”
He also believes there is more opportunity for unbundling between the distributor and the supplier than between the distributor and the end-user customer.
Working with Suppliers
Distributors need to look at ways to collaborate with their suppliers in order for unbundling to be successful. One area where distributors can be of value to their manufacturers is in new product introductions. It takes time to launch a new product, and distributors who can offer accelerated new product acceptance can leverage that with their suppliers.
Another opportunity for unbundling occurs with customer data. The value of detailed customer information has skyrocketed. Suppliers want real-time information about customers and are willing to pay for it, according to Workman.
“Knowledge has no value in storage. It only has value coming in or going out,” he adds.
In addition, anything a distributor can do to simplify the process between itself and its supplier will be of value to that supplier.
Whether a distributor is unbundling to the consumer or to the supplier, he needs to look at processes that are not product related. For the airlines this was items like baggage and food service.
Workman went on to speak about concerns for 2013, which include recruiting and retaining the right people, the ability to keep up with technology, channel consolidation and inventory management.
He says distributors need to ensure their people make more effective decisions faster and that takes education.
He reminded the audience that technology will not solve a problem. If you have a bad inventory management system in place, for example, unless you fix the problem first, “all technology will do is allow you to do is grow worse faster.”
Distributors must focus on optimizing their pricing practices, Workman cautions. “Distributors are very inconsistent in their pricing. If I call three people in the same branch, I will get three different prices for the same product. Pricing optimization is a big opportunity for distributors."