Founding Partner, River Heights Consulting
The Death of Value-Added?
Distributor expert Frank Hurtte believes the time to start charging for service has arrived. In his
book The Distributors Fee-Based Services Manifesto: Why you need to consider charging for ser-
vices, Hurtte thoughtfully outlines why the “Value-Added” sales model most distributors follow
is irreparably broken. Outlining what he refers to as the Margin Recovery Model, he builds a case for charging for many of the services
currently provided for free.
Hurtte carefully spells out why distributors without a plan for recouping the cost of their service will be forced to either unilaterally
reduce the quantity of service (sometimes via layoffs) or absorb the cost. The distributor without a fee plan makes less money during the
good times, grows slower in relation to their competitors, and over time becomes less resilient in the market space.
ID: In your opinion, what is wrong with the traditional concept of
FH: It’s a fifty year old model. Value-added services and value-added selling was a cool concept in the 1970s and 1980s, but
back then margins were higher, and people didn’t cost quite so
much. Back then, our customers had more people on staff.
Plants that used to have 60-some plant engineers now have five
– and at the same time, they make more, the products are more
complex – everything about the product is crying for the need for
more services and over the course of time, distributors have filled
in the gaps. If you look at this deal that we’ve gotten ourselves
into, we’ve just done more and more and more. We’ve got a
whole group of sellers out there who have never seen it the old
way, and it’s like a game of who can be more aggressive: like, ‘if
that guy is going to deliver your products for free, I’ll deliver them
and put them away for free.’ The next guy says, ‘not only will I put
them away, but I’ll bolt them on for you.’ It’s incredible.
The stuff we sell, besides its being more complicated, lasts
longer. The sale of light bulbs used to comprise about six percent
of an electrical distributor’s sales. The light bulbs would last for a
year and so there was a repeating margin – so they could invest
some money into helping the customer select the right ones. Fast
forward: Now we’re selling LEDs and the life expectancy is 25
years. How can we possibly afford to give away the same kinds of
services in the same quantity, on something we’re not going to see
any flow business off of?
It’s not going to be easy to make the transition from value-add-
ed. The big question is: We’ve been giving these services away
for all these years, how are we ever going to go to our customers
and say we’re going to start charging? My answer for that is,
if we listen to the analysts in activity-based costing, they tell us
that about half of our customers aren’t profitable. I think every
distributor has some of those people who are really nice folks but
who demand more in the way of service than they could ever pay
for through buying stuff. But most distributors have a tough time
turning people away.
ID: Do you feel that a lot of distributors understand how to evaluate their customer base critically as it relates to true profitability?
FH: Most distributors have the capability of doing that — however, most have delegated the decision-making authority on this to
the sales rep. And sales guys, as a rule, do not think logically about
this kind of stuff. To them, a sale is a sale. But companies who
have a pricing strategy need to take the decision away from the
salesperson in determining which account is a small, medium, or
large account. Number one: when they do that, their margin goes
up. Number two: the distributors who have put that in place have
also been on the forefront of charging for services, and on the
forefront of marketing. They’ve taken the decision away from the
emotional parties involved, and started putting it into the hands
ID: Typical push back on this way of thinking is probably, “I don’t
want to be the first business to do this.” Is there a right way to
make this transition in order for everyone to stay in business?
FH: That is probably the second most cited point. The first one
is, ‘we’re already giving it away for free,’ and the second is ‘if
we start charging, our competitors will have a field day.’ Here’s
what I recommend: There are a certain number of small customers where, if they went away, it would have almost no impact on
your business. As a matter of fact, if they went away it might have