2 Proven Ways to Add Real Value for Customers Instead of Just Cutting Prices

Written by McKinnon Shisko on Wednesday, 23 September 2020. Posted in Business Strategy, Distribution

Price Value IRCGWhen asked how you can provide them with more value, most customers will instantly suggest a price cut. After all, it is the easiest way to compare multiple vendors and as the old adage goes, “It never hurts to ask!” For a distributor though, discounts are the surest way to erode margins and start the all-too-frequent race to the bottom.

Realizing this, well-intentioned distributors look for other ways to provide value, offering things like "load up and buy now" programs or back-end rebates instead. But promotions like these – which can lower customer inventory turns and hold back customer margins – do not always provide real value. Here are two better ways to provide customer value that do not focus on traditional price cuts and instead leverage the growing trend of data analytics.

Provide documented cost savings.

Most distributors are not actively documenting customer cost savings, which is a big mistake, because customers tend to discount the impact of a distributor’s efforts unless they are quantified. Whether you've enabled your customer to avoid costly downtime through safety initiatives, heroic recoveries or other programs, or helped them cut holding and shipping costs through vendor-managed inventory engagements, you've had a quantifiable impact whether you've measured it or not.

For example, let’s say distributor X is a supplier of consumable-based products to an industrial market. When it came time for customer A’s multi-annual contract to be rebid, many competitors low-balled the SKUs on a per-item basis as the traditional “large bid” process typically goes. This time, distributor X took a vastly different approach. Instead of racing to the bottom with an apples-to-apples price war, the distributor strategically adjusted its per-item pricing based on caveats tied directly to supply chain behaviors for the various items. (Some prices went up while others went down.) The drivers behind these behaviors were assigned tangible and relevant values that were to be tracked and reported on throughout the engagement to demonstrate the total value provided to the customer by distributor X.

Despite submitting a bid that was noticeably higher than the competition (and well above its previous contract value for the same items with similar annual volumes), distributor X was awarded the business. How did they do this? Knowing that they would surely lose the contract if item price was the main comparative factor, distributor X made proactive efforts to set the stage for a conscious apples-to-oranges comparison by the customer during bid evaluation.

Before the RFQ was released, distributor X began Total Cost of Ownership (TCO) conversations with customer A’s key decision-makers and explained how their upcoming bid submittal would likely be higher than the competitors, but for good reasons that would ultimately improve the net value enjoyed by customer A.

By proactively estimating the number of labor hours that could be saved (or even repurposed) and demonstrating the potential reduction in downtime based on prescribed behavioral changes, distributor X was able to offer a TCO with actual documentation of savings that outweighed the product price cuts being offered by the competition. Just a few months into their renewed term as the incumbent supplier, distributor X was able to show how their supply chain management innovations had put two hours per day back into the hands of a purchasing agent, one hour per day for both of the shift managers, and four hours per week for a payables coordinator. In addition, they were also able to prevent the stock-out of a critical item that would have halted all production for at least the better half of a day.

Share what you know.

What hard-earned knowledge do you have that your customers lack? Could you give them guidance in terms of succession planning, supply chain management or data analytics? Alternatively, what have you experienced or seen work with businesses that look like theirs? Specifically keep in mind where you could share best practices to add value without impeding your other clients’ existing competitive advantage. 

Thinking back to the industrial consumables example from earlier, what other accounts (existing or new) consume similar items but do not manufacture competitive equipment nor provide like-services to similar end-users in overlapping geographies? As a distributor, you can build a solution once and sell it multiple times, providing cumulative customer value that far exceeds your initial investment.

In today’s world of big data, it is becoming more frequent for a distributor to collect, analyze and share activity and consumption reports directly with customers. This introduces an entirely different topic into the normal conversation that for so long lived on the combination of widget features, benefits and price. In fact, it can even give you a relevant touchpoint for customers who are not interested in the old-school dog and pony show or same day same time next week milk-run visit.

Providing fact-based and customer-specific information such as order, category and product insights around spend, frequency and consistency can deliver new and increased value to your customers, especially if they do not have easy access to this information on their own. Getting this information into the hands of the right folks at an account can ultimately help them make better-informed decisions about running their business, which can in turn quickly make you their supplier of choice.

For example, distributor Y, a leader in the plumbing and PVF market, has been working with customer B, a large service and repair contractor, for many years. Since the beginning, the relationship has revolved around product availability and fair prices. The typical day sees all 10 of customer B’s service trucks visiting any one of distributor Y’s counter locations at least once, but typically two times or more to get the needed materials.

As experts in their field, distributor Y recognized that to continue growing and become more profitable themselves, they had to deliver enhanced value beyond pricing and availability to customers like customer B. After some internal analysis of order frequency and product consistency, distributor Y developed a program for customer B that would reduce the time their service trucks spent procuring material at the counters (away from job sites) and increase their time and capacity for billable hours.

Though there were initial challenges to getting the solution implemented, both sides of the equation realized tangible benefits. Over the next several weeks, customer B increased their average billable hours per day by 25% across all 10 trucks which equates to 25% top-line growth coupled with a highly accretive bottom-line impact. At the same time, distributor Y was able to reduce its cost to serve for this account, which in turn provided increased capacity to service additional customers, with no increase in required resources.

Distributor Y replicated the approach with other similar accounts and achieved scale by launching a formal program offering for service contractors with an attractive ROI for all participants.

Given the moderate complexity of the above examples, your sales reps may need training, new skills, new relationships at accounts and possibly even a new compensation plan to inspire them to find and deliver new ways to provide customer value. But doing so may inspire more productive customer conversations and even increase joint efforts among your internal teams for tackling opportunities and increasing customer-stickiness together.

At the end of the day, it is important to recognize that customers are not gullible. You cannot trick them into thinking you provide value by offering them worthless promotions, bling, trash or trinkets. Only by providing them with real value can you help them grow and earn your place as their preferred supplier. Regardless of market conditions, and whether before, during or after Covid-19, best-of-breed distributors have and will continue to gain market share at an above-average rate by being transparent, innovative and collaborative while leveraging available data to drive informed decisions.

About the Author

McKinnon Shisko

McKinnon Shisko

McKinnon Shisko joined IRCG in 2019. McKinnon leverages his diverse experience and wide range of expertise to help organizations and teams effectively and efficiently achieve their desired results.

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