Beware the profit vampires
These monsters are trying to kill your business
by Frank Hurtte
You may not know it, but vampires are plotting a diabolical strategy. Their evil aim: suck the precious life’s blood from your unsuspecting business. Like a hungry swarm of vampire bats menacing overhead, they’re everywhere. And, based on the latest “as seen on TV vampirology,” they can feed for years before they finally finish you off.
Before you start stringing up garlic necklaces for your staff and reading ancient, musty lore of Transylvania past, let me say these aren’t physical forms. Rather, they come in the way of old-time myths disguised as modern business practices. Join me as we talk our way through the vampires in the industrial supply business.
The most feared vampire is Count Purchasing. The evil deeds of this dastardly fellow are legendary. You could probably add a few anecdotal stories of your own. But in our world, the greatest disaster to innocents with salesperson business cards comes when Count Purchasing transmutes into the shape of our best friend.
You’ve probably heard his sweet siren song a thousand times and didn’t recognize it. It goes something like this: “You’re really a great company. We really think you have worked hard . . . and because of all this, I am going to let you have the order . . . assuming you can match the price.” To the uninformed it sweetly rings with a too-good-to-pass-up message. At least until you analyze its hidden meaning.
Deep in the cavernous hideout of his castle office, Count Purchasing has an engraved plaque bearing the motto “Buy from the best supplier, but pay the price of the worst on the planet.” In our case, he may be touting the ill-conceived price of that organization down the street with no post-sale support, poor delivery and terrible accounting practices. Or in the case of our technology driven products, he may use the price of a company without specialists. After your motion control, abrasives or cutting tool specialist invested days and dozens of phone calls helping his engineering team develop detailed specifications, bills of materials and all the rest, he opts for the lowest price. Simply put, you do the work and get paid like the guys who did nothing.
Vampire killing tip No. 1: you must recognize that Count Purchasing was trained to sing this verse. But that’s not his only tune.
Another sweet song comes in the form of exaggerated quantities. “I will be acquiring zillions of these over the next few years. Give me the price level for your largest quantity break.” Strangely, the large order never comes. What’s worse, we often lock their organization into large quantity pricing without setting expectations for lack of quantity or periodically reviewing the results. Years pass and they continually feed on our goodwill. Once again, a “trick of the trade” pulls the life’s blood from our organization. Vampire killing tip No. 2: develop quotes that allow for periodic quantity reviews.
Not every vampire in our industry has a cubical in the Procurement Department. Some of them dwell like invisible demons in the minds of our own folks. When we substitute “nice guy” thoughts in place of business sense, they flourish. Each and every time we give a really friendly small customer the same pricing as the gigantic user down the street, they put the bite on our bottom line. Research by David Bauders of Strategic Pricing Associates demonstrates thousands of examples of this phenomenon. Tiny customers are given sub-market pricing. They buy quantities of one or two at levels equal to or lower than your biggest customer who purchases hundreds at a time. Drop by precious drop, the life’s blood of your business is drained from your bottom line. How much can this be? These are tiny droplets. But the red cells add up. David’s team has a track record of adding two points of added margin to distributors’ businesses.
A trip to the musty crypt of the undead reveals a menacing claw fiendishly refusing to die.
This monster goes by the name of free service. Let’s bravely explore the situation. We sold the customer a system back in 2000. Strangely, a decade later, we find ourselves mesmerized into believing post-sale service is responsibility. What’s worse, we think we’re obligated to do it for free. In spite of expert advice to drive a stake through the beast’s black heart, the darn thing just won’t die.
The practice of free service is a time-honored tradition in the distribution world. It is reinforced by some supply partners. They would have you believe it’s the duty of every red-blooded prey . . . I mean distributor. And systems integrators, contractors and installers echoed the message like sound bouncing in Dracula’s tomb. For some unholy reason, there’s not an issue with our service, just as long as we never, ever charge for the privilege.
Distributors face a growing crisis as our margins are squeezed at exactly the same time as the demand for our services is increasing. Add the factoid that many of our products are going down in price. New technology requires even more configurability and expertise to operate. Additionally, demographic data eerily screams that thousands of highly skilled Baby Boomers are opting for the sandy shores of some retirement communities. Their replacements will require even more assistance from our trained people. That further complicates our position.
For years, our salespeople have expounded the extraordinary support available through their back-up teams – specialists, application engineers, project managers and proactive expeditors. On more than a couple of occasions, I have even heard these guys say that “no sale is ever final” at their company. Unknowingly they expose their necks and our profits to the hypodermic fangs of this monster.
During the last recession, many of our supply partners “pulled in the reins.” Cutting or eliminating manufacturer supported post-sale service and support was the word of the day.
The first time they experienced a 47-minute hold time to have a question answered, customers by the dozens added us to their speed dial. Still others demanded more from their local distributor when the other manufacturers instituted a fee-based extended support fee. Either way, we found ourselves on the tooth.
My visits to the specialist room across distributor-land shows more of this highly paid sales resource tethered to their phones rather than out assisting in closing orders. The problem is, many of them receive positive reinforcement from customer and supply partner alike for this work. So many have lost sight of their true value and the revenue creating tasks associated with sales generation.
The Wooden Stake
Bram Stoker gave us Count Dracula. I can still remember the terror as my 12-year-old eyes witnessed Bela Lugosi threatening everything good and pure in that 1931 scary movie classic. As I left the theater that dark Friday the 13th night to trudge home with my little brother in tow, I recall the solace of understanding the proper methodology for dispatching Dracula. Allow me for a moment to don my very own Professor Van Helsing hat and share a couple chapters on vampire killing.
Spend a little time at your next sales meeting talking about negotiation techniques. A few years ago we worked with purchasing guru Malcolm Mills on a series of sales process improvement programs. We discovered the guys on Malcolm’s side (purchasing) regularly attend classes covering negotiation strategies. They don’t lie, but developing skills to mislead our sellers seems to be worth the investment to them. Every time we stumble into one of their snares it cost us money. Insist that your sellers answer the comment “your price is too high” with a powerful value statement.
Invest a little time in understanding your value to the customer. Some of your day-to-day actions create thousands of dollars in real measurable value. Don’t let Count Purchasing hypnotize you into believing “all our vendors can do that.” First, it’s probably not true. More importantly, it doesn’t matter. If you produce real measurable value it adds to the customer’s bottom line. You should be fairly compensated.
Learn the art and science of pricing process. With tens of thousands of SKUs and thousands of customers, it’s simply too complex to be left to a spreadsheet or manually developed system. According to our research, a scientifically driven pricing system is the best investment in the distribution business. If you haven’t already explored the options, sign up for one of Strategic Pricing Associates’ many free seminars. Even if you do something now, learn about the state-of-the-art in pricing.
Brainstorm with your salespeople. Should house accounts be allowed to attend training sessions for free? Set a policy for time spent with “C” level customers. Think about this: if a customer generates $2,000 in gross margin dollars a year, does it make business sense for your in-house experts to spend a day with this account? I don’t think it does. But it happens; sometimes with good reason. Could we recoup a portion of the cost? We need to do something.
Before you venture out into the chill of the misty midnight air, beware. This time the vampires aren’t just a figment of ancient folktale. They’re real and ready to feed. Did I mention I have “Holy Water” for sale?
Frank Hurtte speaks, writes and consults with distributors on methods for adding bucks to their bottom line. He can be reached at frank@riverheightsconsulting.com or via phone at (563) 514-1104.
This article originally appeared in the July/August 2012 issue of Industrial Supply magazine. Copyright 2012, Direct Business Media.
INDUSTRIAL SUPPLY MAGAZINE
The March/April issue of Industrial Supply magazine features an in-depth cover story about Joyce Lansdale and Vallen. Plus, we're featuring articles by contributing writers Dirk Beveridge, Frank Hurtte, and David Kahle, as well as interviews with numerous product and distribution industry experts.
