In order to transition from offering free services to a fee-based service provider, distributors have to undo old customer relationships.

by Mark Dancer

Distributors seeking to sell services face a significant challenge. Your customers do not think of you as a service company. They value the support that distributors provide, but that help has always been provided “for free” in the price of the product.

To become a seller of fee-based services, distributors will have to first undo the relationship that has been created with customers. Distributors have long been in the service business, but they have never had a service business model. Service businesses not only charge explicitly for their services, but they define their business in terms of billing rates, utilization and fees, not inventory turns, mark-up and product sales.

Your customers have a story to tell about buying fee-based services. Ignore what they have to say and you run the risk of abdicating a leadership position. You may likely survive, but on the terms set by others. Listen to your customers, looking for opportunities to serve them better, and you may find a path to grow your business.

To help distributors make the transition to selling fee-based services, we have developed a seven-step process for use in conducting conversations with customers.

Before you talk to customers, have a plan
Every process must begin with a plan. Before you start talking with customers, take time to flesh out a plan for what you hope to accomplish. Here are a few ideas to get you started.

Company objectives. Take the time to write down what you want to achieve as a company. How much growth do you want? Is it measured in sales, market share, new account penetration or something else? How profitable do you want to be? What other metrics do you use to evaluate your business success? Where do you want to be in three years? Five years?

Conversation objectives. Similarly, write down your objectives for your customer conversations. What do you want to learn? What do you think you already know? What current thinking do you want to challenge? Again, it’s a straightforward exercise, but one that should not be skipped.

Customer contact list. Who do you want to talk to? Your list should include customers that are large and small. You should talk to your best customers and those where your relationship is not as strong. You should talk to customers who are served by your competitors. You should talk to customers who are demanding and set high expectations as well as those who seem to be easy.

Discussion guide and key questions. Write down your questions in advance. Your conversation should start with kick-off comments that state the objectives of the meeting and close with next steps. What can the customer expect you to do with this information? Will they hear from you? When?

An important question is, “What questions should I ask?” In part, that depends on what you hear. You should start off with open-ended questions and inquire about the customer’s business challenges and opportunities, new solutions they are seeking from their suppliers, offerings they have heard about from other distributors, etc.

As the conversation develops, move on to other questions you thought of in advance.

Create a list of new customer offerings
Your assignment in Step 2 is to create a list of activities you currently perform and then add activities you do not now perform. Give the service a name, know the activities it includes and don’t lose sight of the benefit it offers to customers. For each service, you will need to understand whether you or your competitors currently provide it for free — that is, in the price of the product. If you do or they do, that will be a critical factor in Step 4.

Sort your new offerings for 
importance and competitive advantage
Think about the countless research results you have seen that ask customers to rank their expectations of their suppliers. Then list all the deliverables expected of a supplier and rank them by importance. Price, quality and availability typically head the list, sometimes changing their order from one product or industry to the next. This is interesting information, but it is not particularly useful. It doesn’t help you compete and it doesn’t help you make your customers happier.

The list can become an action plan if a separate variable is applied to each item. The second variable is competitive advantage, and you can rate each support by considering two questions. Can you be better than your competition at performing the activity? Can you exceed your customer’s expectations in a way that really helps his business?

Take each of the services listed in Step 2 and rank them along a continuum from high to low for each of our two criteria: customer importance and competitive advantage. Plot your findings on a graph and you will have the start of a service strategy that can lead to growth for your business.

Factor in customer adoption rates
Step 3 helped you sort what the customer says he wants vs. what he really needs. It also helped you think about whether your strategies will exceed customer expectations or enable you to be better than your competition. It was an important step, yet something is still missing.

Service strategies ask customers to change the way they buy. This is a critical change, and it interjects a new risk into the buyer’s decision process. Each purchase includes product risk and source risk. Will the product work? Will the supplier deliver it on time and stand behind it?

After you have sorted service offerings against customer importance and competitive advantage, you must assess them on an adoption-rate continuum. This is easy to do if you truly listened to your customers. If you tested a new service and the customer responded with a “Huh?” there is a very low awareness for your new offering. That may be all right, but you will have to educate him. That takes time and money.

As you move across the continuum, you will find that customer responses evolve, as do your implementation requirements and timing issues. Implementation requirements point to the investments you must make; timing points to how soon you can expect to see returns in sales, share or profitability.

Create a “straw man” business model
After four steps, we are finally down to what you might do to leverage services trends. Step 5 asks you to apply discipline in fleshing out your new services offerings. We are now asking you to build a “straw man” that you can run with or shoot down.

A straw man is a working model. It has all the characteristics of a real business, and with work, you can see how they all come together. Your business is both simple and complex, and your straw man should be, also. You’ll know you are headed for success when your straw man can pass the red-face test. Go out to lunch with a peer, or stand up in front of an audience of peers, and explain what you want to do. If you can accomplish that without your face turning crimson, then you are ready to go.

Straw men built around buying behavior changes have at least seven elements.

Target customer. Which customers will be offered the new buying option? For which purchase occasion? Our suggestion is to name names. Write down the actual customers, by company, job title or individual name. Not everyone will want your new service offerings. Your job is to target the customer who will reap the benefits of your new offering.

Value proposition. What does the customer you named get out of the new service option you want to provide? How does it help that individual meet his or her personal objectives? How does this help meet his departmental objective? How does it help meet the customer’s company objectives? What value does it add? If you can’t figure it out or if you think your answer is too simplistic, take a step back. Write down the target customer’s decision criteria: How does he select products and suppliers? Then, think through how you will win more frequently given how the customer makes decisions. That’s your new offering’s value proposition.

Activities. What new (or ongoing) activities will your company perform? This is simply the output of Step 2, sorted and prioritized in steps 3 and 4. Building a straw man is simply helping you flesh out logic for what you are doing and to begin to build the business case for doing it.

Competencies and resources. Who will perform the activities? What skills are required? How many years of experience are required to do them well? Do you need new assets? Will you leverage existing assets?

Costs. The activities expended (or freed up) by the people and assets identified above come with a cost (or savings). You should quantify this. If that effort appears to be at all hard, take an activity-based costing approach. Who will perform the activity? How much time is required? How much do you pay that individual? Then, do the math: Effort (measured in time) multiplied by cost per time equals cost.

Opportunity assessment. How often will you perform the new service for the customer? You must put a stake in the ground.

Customer-driven, activity-based P&L. Now, tie together all of the previous steps and strive to think of the result as a component of your overall business. What costs are incurred? What revenue is generated? How much profit is left over at the end of the day?

Screen for gaps and strengths
When you put together your list of service initiatives, you will be making a list of current and new activities that you will perform for customers. That’s simple. What is not simple is how to make money at it.

Most distributors understand how to make money at a macro level, and they understand the details in terms of products they sell. Earns and turns; that’s where it has been for decades. In the world of fee-based services, however, things change.

Selling services is going to cause you to break your business apart and put it back together again. You will need to understand the costs of your processes in great detail, then put them all together in a way that allows you to turn a profit, most likely with different objectives and metrics than you have used in the past.

Think about your straw man business model for each of your service initiatives. For each functional area, define five or six competencies. Rank each competency as a “needs work” or “works well.” If a given functional area needs immediate attention, create a list of action items to get your business there. Is training required? Some new hires? Reassignment of key participants in the company? Some other activity or action?

If you are at the other end and you believe you have a competitive advantage in the new offerings you are taking to market, create a plan to exploit those strengths today. Can you pitch this competency to a customer? Should you turn a competency into a repeatable process? Can you start a customer working group to leverage your competencies?

Act, learn and adjust
Uncertainty kills market innovation. In our experience, the vast majority of distributors (and manufacturers too, for that matter) are in a “wait and see” mode. They know that change is coming to the way products go to market, but they want to read a few more tea leaves before they commit.

The new rules under which products will go to market and by which market players will compete are being written daily. We are asking you to get in the game nevertheless. If you are already in the game, we are challenging you to make sure that your initiatives are truly customer-driven. The current period of market change that is now upon us is more about the customer than any transition we have gone through in the past.

Remember, though, that speed can kill. This is perhaps best evidenced by the dot-coms that burned their financing faster than the rate of change in customer buying behavior. We are pushing for speed, but only if you are armed with deep and fresh knowledge of customer needs. The dot-coms may have moved too fast, but the need for speed remains undeniable.

Here are several key attributes of distribution companies that are attempting to innovate their go-to-market strategies:

Start the planning process with experienced managers; do not “bubble up” strategy from entry-level employees. Few of the activities we have discussed should be assigned to your newest and least experienced people. Talk is not cheap and you should not under-invest with people who don’t have the business experience to make meaningful recommendations.

Flesh out three to five future go-to-market strategies. Keep the list of service initiatives you are pursuing short. In reality, you may do many things. But only a few will stand up as company initiatives.

Cover a range from merely extending today’s channels to a complete reinvention of business and market models. The options you consider should stretch you to define your current business model. You may not implement or pursue all of them, but leading and innovative distributors are rethinking their business model, and you should, too.

Work backward to draw conclusions and to set strategy. The entire process we have described looks to the future (what you might do) and then asks you to look backward to your company (what you have to do to get there).

This is a process for building on real market and customer insights, and then thinking out of the box, that is, avoiding the constraints of how you believe the market to work today, your key managers’ current objectives and compensation structure, and the group-think of similar companies implementing similar solutions.

Not everyone believes that services will help distributors grow. The naysayers describe these initiatives as simply about changing your business systems to keep up with other distributors and customers. Services are thought to be inappropriate for distributors and best left to services companies. We are biased in the other direction. We are always looking for growth opportunities. We ask you to do so, too. If you don’t look for them, you won’t find them.

This article originally appeared in the ISMA/I.D.A. 2001 issue of Progressive Distributor magazine. Copyright 2001.

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