I have had the incredible opportunity to travel and meet distributors around the country for more than 25 years. Distributors have been offering value-added services ranging from kitting, construction equipment rental and lighting design services to full-service supply chain solutions. In the past few years, I have seen a rise in value-added services as a strategic move to create stickiness with customers and, more importantly, to drive margins and growth. 

Since the pandemic, labor and expertise shortages have forced customers to consider outsourcing some of their functions. Additionally, customers are also looking for opportunities to be efficient and profitable. Customers expect more from distributors, beyond the traditional product, delivery and credit. 

It’s an opportunity. Successful distributors are increasingly competing on speed, expertise and workflow support rather than only inventory availability and price. Successful distributors use their product knowledge and local presence to reduce project delays, simplify procurement and lower total costs for their customers. 

Today’s successful distributors are service-driven, supply-chain and job-site-execution partners. Recurring service income and higher margins are becoming central to the service-led growth model.

Why value-added services?

Typical distributor’s product gross margins are in the 25% to 35% range. Many value-added service margins are in the 40% to 60% range if managed correctly and related investments are deployed effectively. Contractors are under time and margin pressure to deliver value to end-users. They are looking to distributors to absorb functions, up and down the value chain, to make them effective. 

Contractors, often small companies, will be willing to pay for value-added services that save time, reduce cost and help them land projects and expedite completion. These services also embed the distributor deeply into the customer’s operations, so switching costs exceed any price differential a competitor could offer.

The biggest gaps are usually not in product offerings but in workflow support. That includes quick quoting, approvals, substitution guidance, warranty processing, rebate management, project tracking, field coordination and post-sale service management. There is also a clear gap in digital integration, with many distributors still operating transactional websites but lacking end-to-end customer workflow tools. 

Distributors who drive growth and profitability are the ones who move from being suppliers to operating partners.

Types of value-added services

Many of the distributor’s services, such as technical support, e-commerce ordering, fast fulfillment and digital tools, have become common services and are expected by customers. These are no longer considered value-added services and cannot be monetized. New service should add value in terms of increased speed, reduced execution costs or helping win business, to be compensated by customers. 

Value-added services can be in the areas of new capability (design and engineering), product-focused (repair and maintenance), or logistical and fulfillment (vendor-managed inventory or integrated supply). New service areas, such as digital and data services, can help customers work more effectively and efficiently. 

Monetizing value-added services 

It is important that distributors conduct a customer survey (Voice of the Customer) or get buy-in from major customers before investing in developing value-added services. Some services, such as rental and vending machines, have a high upfront cost. 

1. Pricing the services. The services can be priced as bundled with product or unbundled. Typically, services such as design, repair and testing can be priced on a fee-for-service basis. Services such as kitting, vending machines, logistical and supply chain solutions can be bundled with product. 

Pricing for services should be based on the value created, not on cost-plus. Articulating value is an important part of getting premium margins on these value-added services. 

2. Selling the services. It is important to get the sales force buy-in to sell services. Incentivizing at a higher commission rate than products can help, as value-added services should generate a higher gross margin. It is also in the best interest of the sales force to increase customer stickiness and success. 

3. ROI on services. Measure investments in value-added services using a small set of key performance indicators such as revenue, gross margin and gross profit for services. Measuring the percentage of customers using individual services, as well as customer retention and satisfaction, will provide metrics for services valued by customers. 

With intense competition and margin pressure, most distributors competing on products have reached a point of low/no differentiation and diminishing value proposition. It is a risk. Economic headwinds such as inflation and global conflicts signal weak distributor growth. Developing value-added services that customers value and gladly pay for will not only help distributors capture service-led growth, but also future-proof their businesses. 

Dr. Bharani Nagarathnam is the director of the Master of Industrial Distribution and an associate professor of instruction at the Industrial Distribution Program at Texas A&M University. He has more than 25 years of distribution experience in teaching and applied research. He is the co-founder of the Talent Development Council and works with distributors on talent acquisition, management, development and retention practices.