Practice your shooting

A fee-for-service pricing model can benefit many.

“Shoot some dumb customers” is a term I have often used during sales seminars when the topic of customer equality and the cost of doing business with specific, usually smaller accounts centers on the question “Are we really making any money on these accounts?”

This type of customer generally demands all the privileges of larger accounts, including special promotions and lower margins. The answer to that question can be addressed very easily with a customer-specific, activity-based cost analysis. In most cases you will find these smaller, demanding accounts do not provide an acceptable return. What do you do?

“Shooting a dumb customer” simply means making them pay for the services received. In other words, raise their prices. Your good customers will praise you. You will lose some unprofitable customers, but many of those smaller customers will pay your price and you can become profitable.

Fee-for-service

“Shooting some dumb suppliers” also is a tactic that shouldn’t be ignored. Large multi-location distributors and others have used activity-based costing models to determine the costs of ordering, receiving, warehousing, selecting, loading and delivering in an analysis to determine real partnerships with their vendors.

This analysis often leads some to determine that a “fee-for-service” pricing model is the answer to shrinking margins with some suppliers. Obviously, this is not a new discussion or a new topic for many vendors. This issue has been around awhile. Unfortunately, answers to shrinking profits have not been satisfactory and may be the driving force behind fee-for-service popularity.

The shift to a fee-for-service pricing model may start slowly, but could steadily gain momentum. The wholesale channel will not change overnight but as evolution occurs, the contribution of wholesalers to sales, marketing, customer service and logistics requirements also can change.

Some manufacturers must learn how to use fee structures to leverage their influence and encourage true supply chain partnerships. Otherwise, they risk missing an opportunity to think strategically about this new compensation model. Channel compensation models should become tools of change that drive business results and not policies that aggravate or damage the channel partnership.

There are many ways to leverage a fee-for-service model that can create a platform for establishing long-term channel strategies. The key lies in addressing this model as part of the partner relationship between the manufacturer and the distributor.<

Don't take distributors for granted

Some manufacturers take it for granted that all services provided by distribution are specific to their role in the channel without regard for the compensation received for those services. The competitive nature of the market often negates the ability of the distributor to recoup all or most of those costs. As a result, margins suffer. A fee-for-service model employed across the supply chain could solve that issue by limiting the leverage the customers in the channel now enjoy.

There is little doubt that the FFS model could create tension in the relationships that exist. The question becomes how will they react? Ultimately, someone has to pay for this and it may very well be the customer that carries the burden if the manufacturer refuses to absorb this cost into its margins. This could mean an increase in prices; an increase the distributor will not have to justify as aggressively if it created that increase.

For this model to really work and contribute to the channel partnership and become a positive experience for all parties involved including the end customer, the first thing the manufacturer must do is to develop a true understanding of the fundamental principles of distribution. This includes a thorough understanding of how the distributor makes money.

Not a time for panic

It could take time for this entire situation to finally play out. Customers may very well share the burden, but the old model of “buy, hold, sell” may seriously need this challenge to keep distribution healthy in the long term. Adequate economics in the manufacturer/distributor partnership is mandatory. The relationship will not survive without it. Manufacturers know this even though they tend to acknowledge it far too infrequently.

Fee-for-service is not a brand-new concept even though it may be for many industries. Both distributors and manufacturers could learn from the pharmaceutical industry, which went through this exercise years ago.

Many distributors face very tight margins. This suppressed profitability can be life-threatening for some and a policy amongst others that discourages internal investments for future growth.

The underlying strength of distributors to face this challenge and many others head-on lies in the dynamic leadership that permeates the ownership and management groups throughout this industry.

For a sample customer letter that can be sent to those smaller-type accounts I referenced earlier, email me at rick@ceostrategist.com.