Showing the customer how much you’re worth.
I hear it all the time: “We keep providing emergency services to customers who only call us in emergency situations—and expect our best pricing on top of it. Why don’t they understand what this costs us?” It is a problem in all areas of distribution and especially in material handling situations. Most young managers take great pride in doing anything and everything they can to keep their customer’s operations running. That’s not always the best idea.
To illustrate this, I usually start out by asking the manager a simple question like: “Why don’t you charge for this extraordinary service?” The answer is usually, “I can’t due to competitive pressures. That is what is expected in our sector of the market. Our customers demand it.”
The follow-up question just brings blank stares: “What does it cost you to provide this service?”
Figuring the Cost
There are two issues here. The first is many distributors have no idea how much some of the special services that they provide cost. It is very difficult to charge for value delivered if we have no idea what that value is, what it costs or what it is really worth. While one does not need to calculate the answers to the penny, it would be very helpful if there was some idea. For example, what would someone be paid to open the warehouse in the middle of the night to pull an emergency order? If it is the owner who does it, there is still a cost. Figure out what the time is worth (including driving). What does it cost to get a special delivery truck (or your own car if that is what you use)? It is not difficult to come up with a general idea of the cost.
Use your standard markup to figure out the gross value to the customer. Add a “kicker” for outside of ordinary business hours and any special charges that should be included. “Worth” is a bit more difficult. Many operations can tell you the cost of a shutdown. Getting them back up in a matter of an hour has a tremendous worth, over 8 to 12 hours if they had to wait until the next business day. The number may not be exact, but it is a worthwhile measurement.
Perception Equals Reality
Next, you have to realize that the customer’s perception of value on any service is equal to what they are charged. An emergency service that is not invoiced has no value. If the cost is zero, the value is zero. Again, we hear all the time that in a competitive situation we have to do it.
I disagree. If opening the warehouse in the middle of the night to keep a plant operating costs you $300, then it is reasonable to charge $450 for the service. If it is for an “A” customer who rarely takes advantage of the service, then on the invoice, show the Emergency Service Charge, but right below it have a “Best Customer Discount” of an equal amount. It does not change the cost to your “A” customer, but it does establish a value for the service and reinforces that the customer is important.
For all others, tell them in advance what your policy is. They are calling you because it is an emergency. They are still buying most of their supplies from someone else (or they would be an “A” customer), so they deserve to pay the extra charge. If everyone knows your policy, they will gladly pay the fee when they need it. You will at least be rewarded for providing a service your competitor is not able to do. In the long run, you may even gain new “A” customers when your sales team explains the process.
The Next Step
Do the same thing for education programs you provide, engineering services and all other forms of customer support. More importantly, keep track of everything you do. At the end of the year (or any time the salesperson is going to call on the customer), print out a report card on the customer.
Make sure you know the value of all of the free services you have provided. Know the volume the customer purchases and the number of dollars they contribute to gross margin. Now the sales team is in a position to justify your pricing. You can always offer to reduce their purchase price, but then charge them for all of the free service you provide.
There will always be someone who decides to do that. Make sure you have a signed contract that specifies the individual charges for each service they have used in the past. The contract should specify their new pricing and provide for an automatic charge of the incremental costs anytime they request a service without needing a separate purchase order. You will be surprised how many customers will come back to the old process, or you will find you make more money providing fewer free services.