1. Take ownership.
2. Adopt an expertise habit.
3. Become a professional at developing relationships … especially with people who are difficult for you.
4. Get paid what you are worth (not more and not less).
5. Communication … beginning with mastering listening. 

Monte says, “I see those things in every successful business and individual.”

In this episode, our hosts spoke with profitability expert Jonathan Byrnes, senior lecturer at MIT and author of Islands of Profit in a Sea of Red Ink and Choose Your Customer: How to Compete Against the Digital Giants and Thrive. They discussed how distributors can take back control in this unpredictable market – slowing the profit drain and bolstering their bottom line with Enterprise Profit Management.

Learn how distributors can evaluate and categorize their customer base – profit peaks, profit drains and profit deserts – and make a plan to act. Treating all customers the same won’t cut it.

John Schweig, Chairman of the Board at BlackHawk Industrial and Operating Partner at private equity firm Snow Phipps, joined hosts Ian Heller and Jonathan Bein for a peek under the covers of how these firms evaluate distributors, from people and processes to market opportunities. Schweig was previously President of Grainger International and Chief Strategy Officer for Grainger and was the former Chairman of both Board of Kele, Inc. and Service Champ.

In a recent episode of our weekly live show, Wholesale Change, we posed a better solution for handling returns: Prevent as many returns as possible in the first place.

Don’t just “accept” returns, solve them

A return in the B2B industry has greater consequences than one in the B2C realm. If a customer returns a T-shirt to Target, it doesn’t keep her from going about her daily life. If a B2B customer returns a part for a vital piece of equipment, it could stop production and cost the company money. If that return is linked to a poor customer experience issue, that customer will be less motivated to buy from you again.

Don’t place blame, own the problem

Manufacturers and distributors get tangled up in debates over who owns the return — in essence, who takes the loss. That’s missing the point. You as the distributor must own the problem if you want to reduce future returns.

Implement a process to analyze returns and identify primary causes. This will direct your efforts to reduce returns long-term.

You’ll likely find returns are more often attributed to user error than a fault with the product.

The growth in online purchasing has also likely contributed to an increase in returns for distributors, and a portion of that increase is owed to buyers not having all of the information he needs. 

Remember: Every credit memo you write represents something that went wrong for the customer. There’s no end to the benefits of getting the return process right, one of which is an overall improvement in customer experience.

• Quality of assortment
• Staff knowledge
• Support
• Customer service
• Reliability
• Delivery speed

To determine if you’re stuck in a holding pattern, first look at the characteristics of your average transactions with customers:

• Do they only buy a small number of product categories?
• Do they buy big products from you but not their accessories?
• Do they buy infrequently?

Next, look more closely at your customer research. It’s easy to be fooled into thinking customers know what you offer and you’re capturing as much as you can from them when customers think they’re bigger than they are. They’re buying everything they can within the paradigm of what they think you sell. Your customers may love you, but again, when you look at the numbers, they’re probably buying a small number of product categories or infrequently.

You must get customers’ attention if you want out of the brand graveyard. Strategize to put your products in front of customers in bold ways that break the mold of what they think they know about your brand.

These two companies are, by far, the largest distributors in the concrete construction supplies industry. Together, they enjoy more than $4 billion in annual sales through 400 branches to 265,000 customers and employ about 7,500 people. White Cap’s John Stegeman and Alan Sollenberger will serve as CEO and president, respectively, of the combined company, which no doubt means its headquarters will be in Atlanta instead of Denver, where CSG is located today. I expect the combined entity to be called White Cap.

In my writing, keynotes and webinars, I’ve been forecasting increased consolidation as outside disruptors continue to invade wholesale distribution. The industry has been spared the waves of disruption that have rolled through retail, but now the barbarians are at the gates.

If you’re a distributor, keep an eye on White Cap, which – thanks to the help of CD&R and The Sterling Group – is modeling one of the only viable paths to a successful future. If you’re an investor, pay attention to the distributors who have a plan to lead through the disruption instead of following. If you’re a regulator, look at the challengers distributors are trying to fend off instead of smaller competitors, many of which won’t make it anyway if they don’t develop their own plans for consolidation.

Consolidation is coming. You can lead, follow or get out of the way but you cannot stop it. This merger reveals how aggressive companies plan to build the scale necessary to compete in the future, and I suggest you watch it closely to understand as you build your own long-term plans.

What makes great independent marketplaces work? And could you achieve similar results if you built a marketplace of your own?

As defined so well on Wikipedia, a marketplace is an ecommerce site where products or services are provided by third parties and transactions are processed by marketplace operators. Instead of a classic retailor/distributor model, where you have one seller managing the inventory and the fulfillment, you instead have many sellers transacting in one location. Outside of Amazon, a few popular marketplaces include:

• Craigslist
• Etsy
• Airbnb
• Uber
• Upwork
• eBay

A few examples of emerging successful B2B marketplaces include:

• Digi-Key has built an electronic components industry marketplace on Mirakl software. They’ve become a destination for people looking for electronics, even just as an informational resource. 
• Culitrade is a marketplace for the food equipment buying group SEFA (Supply and Equipment Foodservice Alliance). They offer a broad selection of products and services that couldn’t be offered by an individual company. 
• Zoro, an online division of Grainger, and its Zoro supplier partner program for industrial supplies is up-and-coming, touting a collaborative relationship “to reach new customers and increase sales.”

Not every distributor can build its own marketplace – nor should they. This would take us back to everyone running their own ecommerce websites and wouldn’t make much of a difference. Here are a few options for entering into or building a marketplace with others in the industry:

• Multiple distributors can collaborate to build a marketplace. 
• Marketplaces require collaboration. 
• Marketplaces with the widest assortment may be the best candidates. 
• Buying groups are perfect for marketplaces. 

While you segment customers, customers also segment you. They have an opinion about what you do and what they can get from you, and it’s hard to change that perspective once it’s established. 

When you frequently send relevant messages to targeted customers, you’ll see:

• More frequent purchases 
• More first-time buyers
• Better customer retention
• Improved customer lifetime value

Your customers want to hear from you more than you know, especially if you’ve captured a niche and positioned yourself as a helpful, problem-solving resource. It’s all about relevance. If you understand them and send them things they’re interested in, you won’t oversaturate them. 

Frequent, targeted sends capture more first-time buyers. And broadening your identity with current customers will encourage them to buy from more categories, which makes the relationship stickier. You’ll see better retention and improved customer lifetime value. 

Know where the co-op is coming from.

Identifying the source of your funds is essential to an effective strategy.

Optimize your product mix.

Optimizing which products and suppliers you’ll carry is the first step toward concentrating your spend.

Conduct line reviews to leverage spend.

Find the most optimal supplier relationship, affecting everything from pricing to rebates and co-op. Then, do regular line reviews. But be careful. Know your channel power.

Have three tiers of suppliers.

Divide your suppliers into three tiers: strategic, secondary and tertiary.

Use strategic purchasing agreements (SPAs).

You should have SPAs with all your key vendors to maximize price, rebates and co-op funds. 

Build annual plans with strategic vendors.

When you have annual planning sessions with your strategic vendors, you get to lay out your separate objectives and align your efforts to be more successful. 

Develop a marketing plan with company-wide buy-in.

A company-wide buy-in to your marketing plan will reach your suppliers and instill confidence in you for them.

Conduct an annual supplier summit.

Host all strategic and most secondary suppliers for an annual summit and deliver your plans for the next year in terms of events, merchandising, sales collateral and support, online training, ecommerce and more. 

Involve suppliers in promotions and discounts.

When you involve your suppliers in promotions, you’ll:

• Get reimbursed by the supplier.
• Get special pricing vs. your competitors.
• Show the supplier you’re effective with promotions and marketing.
• Learn which suppliers will come to the table with you.

Use supplier resources.

Suppliers offer many resources apart from co-op funding, such as training, technical support, marketing support and joint calls. These are valuable to distributors. 

More manufacturers are also leveraging ecommerce to go direct to the end-user, rather than through the distributor.

How concerned should distributors be? And how can you avoid being eclipsed?

Distributors add a great deal of value in the supply chain between suppliers and customers.

With these functions in mind, let’s take a look at why distributors’ traditional roles in the channel may be at risk of being replaced entirely.

Distributors selling through marketplaces.  In this scenario, distributors surrender much of their value-add and openly share data that Amazon could use to replace them. This is an especially significant risk if the marketplace is also a merchant.

Manufacturers selling through marketplaces. Many manufacturers are prepared for this because distributors have demanded more drop-shipping over the years.

Manufacturers selling direct. Many manufacturers are selling directly through their own websites. 

Fulfillment by Amazon. In this scenario, it would easy for Amazon to go directly to your supplier and cut you out entirely.

By outsourcing distribution functions to marketplaces, distributors are heading down a slippery slope toward extinction.

Learn the power of 1%.

A McKinsey study from a number of years ago showed the power of 1% price adjustments. According to their analysis, a 1% increase in price, assuming volume remains steady, would generate an 8% increase or more in operating profits. What’s more, the authors point out that an increase in revenues at the expense of a price cut does not have nearly the same impact: Volumes would have to rise by 18.7% to offset the profit impact of a 5% price cut.

Push up prices on C and D items to small customers.

One powerful technique to gain margin is to increase prices on low-frequency C and D class inventory items for small customers. The premise of this technique is that small customers who purchase these items may not pay much attention to the price increase since they purchase them infrequently and do not have much buying power with the distributor. 

Avoid round markups or discounts.

So if you can do a 3.75% discount, instead of 5%, you just got another point and a quarter for your company. 

Centralize purchasing to buy better.

Centralizing purchasing improves your margin opportunity. Start by understanding what you’re buying and from whom, and build a plan to minimize one-off purchases from your team.

Make web pricing consistent with contract pricing.

The key here is to avoid a situation where the price your customers see online is better than their contract pricing, which could result in losing the customer. You can’t eliminate channel conflict, but you can minimize situations where your web pricing is better than your contract pricing. 

Put strategic purchasing agreements (SPA) in place with all suppliers.

Be sure to have professional purchasers in your organization who understand how to negotiate SPAs, a joint agreement between a distributor and manufacturing that includes rebates, marketing co-op and pricing terms. 

Learn how to get and take advantage of marketing co-op.

Consider having a category manager in charge of putting together a plan for co-op. Promotions that can be supported by co-op can be planned out months in advance.

Tie sales rep comp to gross margin percentage growth.

This is a powerful way to get alignment between what the company wants and what the reps are doing on the street.

Limit pricing authority.

Another best practice is for companies to centralize pricing authority; any movement in this direction is usually a win. Take pricing authority away from field sales reps as much as you can.

Proactive inside salespeople, on the other hand, are set apart from customer service reps. These are trained sales agents who love to take a more active, leading role in customer interactions. They are all about managing accounts, finding opportunities and building relationships in a proactive way. They’re just like field sales reps, but instead of working behind the wheel and physically visiting their customers, they work from behind a desk and use the phone to connect.

Having the right people in the right positions is critical. For inside sales, you want a sales-oriented skill set — someone who is going to pick up the phone day after day, create relationships and look for opportunities.

Assign inside sales reps to accounts that have opportunity to grow and may not be getting touched by field salespeople. These accounts will typically be the B and C accounts within the organization. An additional strategy is to take the bottom few accounts from field sales rep bases as they are probably not being contacted anyway.

As with any program, it’s important for leaders to define goals and benchmarks for success. 

For a proactive inside sales program to be successful, it’s critical to devote the right resources to it. Make sure that all reps have the proper training, background and support to be successful at an inside sales job. Don’t try to split inside sales reps’ responsibilities between customer service and sales, because these are different skill sets. 

Distributors are looking for the payoff in an ecommerce investment and, if they don’t see one, they count it as unsuccessful. The problem with this way of thinking is that if distributors make plans based on forecasts that show limited ROI, they might decide to spend less and limit the site’s functionality and integration, dooming themselves from the start.

If you let potential ROI determine how much you’ll invest in your website and how you’ll measure its success, you’re going about it all wrong and you will not succeed.

A proposed website budget shouldn’t be treated like other capital expenditures because most ROI models can’t measure the effects of eroded long-term competitiveness from a failure to invest. This equation doesn’t account for the fact that digital capabilities are simply a survival requirement.

And since the COVID-19 crisis, it’s increased even more as customers have moved online out of necessity. This risk is not worth taking.

ROI models also typically don’t account for revenue results outside of shopping cart revenue. If you have a great e-commerce site with lots of information and customers are using it to research before ordering via a different mechanism, the e-commerce initiative isn’t getting proper credit for the potential revenue it’s bringing in. Customers may search online and then call in or talk to their account manager. Or they may be getting product data from your website to put together bids. None of that potential revenue is credited to the website in a standard ROI model.

Sometimes your capability requirements are defined by what competitors offer – not based on whether an ROI model can prove closing gaps is a profitable decision for your firm.

Have you subscribed yet to Wholesale Change? Subscribe now.

Marketplaces offer enormous product range from many suppliers while allowing customers to process transactions in one place. In B2B, Amazon Business is growing at a ferocious rate, with close to 350 million active SKUs, and some analysts think that Amazon Business is going to hit more than $200 billion in gross merchandise revenue by 2029. Amazon is the most obvious example of marketplaces that carry B2B SKUs, but you can find them on Google Shopping, Walmart.com, Alibaba, eBay Business & Industrial, Zoro and other websites, too.

These are some of the largest, most well-capitalized, aggressive and sophisticated companies in the world — and they’re coming after distributors’ customers.

We’re not predicting that distributors are going to go out of business as a result, but these new rivals are going to take major market share. We discussed why distributors need a marketplace strategy now to stay competitive.

With this encroachment into their back yards, distributors must figure out how to compete. Here are three ways to do that:

You must go digital. Distributors need a world-class digital presence, period. 

Produce an outstanding services menu. Consider the value you can add as a distributor outside the items you sell. 

Build a marketplace strategy.  You can’t not respond to what’s going on with marketplaces today. Take some time to consider how you want to respond, then form a plan and execute it.

Subscribe to Wholesale Change now.

Follow Distribution Strategy Group on LinkedIn.

Understanding and monetizing value-added services in distribution is becoming more important because:

• What were differentiators in distribution have become commoditized, such as getting products to customers quickly and conveniently, and offering a wide assortment of inventory.
• Simpler transactions with high margins and low service costs are increasingly moving to marketplaces.
• More manufacturers are distributing directly via e-commerce because delivery is more affordable and accessible.
• Local manufacturers, and even customers, can increasingly make items themselves using 3D printing, bypassing the supply chain.

If you want to differentiate in this market, you must look at what you can offer that others cannot or will not. We believe value-added services are a perfect solution.

What distributors get wrong about value-added services

Most distributors don’t understand the actual cost and value of their services. Their offerings are the result of ad hoc, structureless aggregation according to need. Therefore, they can’t establish, prove, communicate or monetize the value their services provide.

How to choose, monetize and sell your value-added services

The number of services distributors currently provide hardly scratches the surface of what they could. This means there’s great opportunity for growth. However, with hundreds of potential services, how do you identify the right ones for your business? We cover this in this episode.

We divide services into three categories: logistics, informational and value-added processing. Logistics services are often related to the supply chain, as in bin replenishment and kitting. Information services include such offerings as design, configuration, technical support and training. Value-added processing services are hands-on, such as product setup, software setup and repairs.

To identify the most useful services and build your service offerings, perform quantitative and qualitative research to find out what your customers need. This could include focus groups and/or surveys. It could also include research on your competition and suppliers. 

Once you’ve established which services to offer, estimate the actual cost to deliver them and the potential value for the customer. This will help you monetize your services and prove their worth.

In estimating the potential value for the customer, draw from those customer surveys, interviews and focus groups. How are the services you currently offer helping your customers? Are they saving on cost, efficiency, labor or materials? Quantify the economic value, even if it’s imprecise.

Now that you’ve built and monetized your offerings, make them easy to find and understand, and make their value known.

As you build and promote your services, it’s important that you’re thoughtful about your offerings. There’s a big opportunity here. Use it to choose the right services, communicate them, understand their value and turn them into a profitable part of your business.

Don’t miss out! Subscribe to the weekly Wholesale Change show for more from Ian Heller and Jonathan Bein.

Follow Distribution Strategy Group on LinkedIn.