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A few years back, we were asked to review the e-commerce efforts of a sizable distributor/manufacturer serving the MRO/Industrial sector. The firm covered most of the Continental U.S. with some 30-plus branches. The growth strategy was, largely, acquisitive and, once the customer was onboard, the firm positioned itself as a value-added player with significant engineering, design, and technical resources.
Compared to peers, the company was highly profitable. However, it had two previous starts in e-commerce with both being rather dismal failures.
We offer a fairly standard audit of e-commerce efforts for B2B firms and wrote a go-forward plan for this client from the results. The major categories of the audit, as expected, showed low scores. Software technology, marketing talent, financial support – all extremely important to successful online commerce – were in need of upgrades and investment. The rationalization for not investing in these areas was creative and incredibly arrogant.
On a hunch, we reviewed commodity sales over the course of several years. In our experience, if a firm is losing sales to online competition, we find it first and foremost in commodity sales. When looking at sales activity, however, we look first at piece volume and then sales volume. For our client, the company was acquisitive and sales volume in commodities was rising, ergo all was fine. Our analysis, however, showed a substantial decline in piece volume of commodities. It seemed that as the firm acquired, it tended to raise prices on commodities to a level that funded its more costly service platform. Company officials never bothered to review piece sales of commodities over time and outside the pricing changes. The sales trend of commodities was bothersome to us and to them. Something just wasn’t right – and this is where the story gets really interesting.
Ask the customer
When posed with the problem of declining commodity sales, the sales force blamed the firm’s pricing strategy. After all, if commodities aren’t competitively priced, sales will decline. As mentioned, however, the firm prided itself for adding high value. As a result, it required a bit extra in pricing to support the engineering and technical staff. Furthermore, if there was a challenge to commodity pricing, we found where management made concessions on a case-by-case basis. But the sales loss in commodity piece volume was pervasive and not for select customers. What was going on?
When established firms lose commodity sales, it is often due to a low-sustained price and an acceptable service platform. This is becoming more common as low-cost specialists who limit sales support and brick-and-mortar locations take that cost advantage to the street. They do this with a superior online site and great logistics. If you know what you want, you can usually get it at a price that is 10 percent or more less than a full-service supplier.
We call these firms “transactional distributors,” and we’ve written about them since the early days of e-commerce. You can find examples in many of the four-dozen distribution (product-market) sectors in North America.
We proposed, for an additional fee, to survey the firm’s customers to determine what they were buying online, how much, from whom and why. These were basic questions, and they were not answered with any clarity and authority from sales management. In fact, sales management tried to halt the research, but executive management approved the expense. The rationale was straightforward: “We know our customers, and they don’t really buy that much online.”
Our survey, a simple 15-question affair, got responses from close to 300 MRO customers across the nation. For our client, the results were astounding.
Approximately 23 percent of competitive products were purchased online. Winners included heavyweights, such as Grainger and MSC Industrial, but also transactional distributors and local firms with great online tech and well-designed websites. Some of the customers purchased on price, but many purchased because of convenience. As one plant engineer said: “They’ve cut my staff to the quick. I can get online at night or during a slow period at work, and buy what I need when it’s convenient.”
Where’s the research?
Online market research software has made getting customer input for many marketing and sales investment decisions a cinch. For e-commerce, we implore distributors to research their own markets before making costly decisions for software and specialist employee investments. A little Survey Monkey goes a long way. However, we find most distributors simply do not heed our warning; instead they rely on questionable advice from their peers who, too often, don’t sell that much online either. It’s akin to asking a duffer how to play scratch golf.
Research for distributors has been in a funk since the Great Recession. Research budgets for associations were, largely, wiped out in the downturn and have never really recovered. We do significant research for the distributors and manufacturers and get funding from private sources – often technology firms selling into distribution and manufacturing sectors. We’ve all but given up on traditional industry associations for meaningful research. However, there are plenty of buying groups, professional associations, and vendors who would be willing to fund research. We tend to dismiss the expense of research as an excuse. The cost of good research to understand where, what, how and how much is a pittance compared to the six and seven figures needed to fund e-commerce.
When researching your customers for online activity, take a look at their customers also. In essence, it may not be simply the contractor who needs researching, but the end-user making the buying decision. I’d recommend forming a group of advisors who are familiar with e-commerce technology and digital transformations. And, by all means, find a professional who has done the work. These folks can help significantly in designing a quality research instrument and aiming it to the right place(s) in the channel.
Whatever you do, don’t rely on off-the-cuff comments regarding e-commerce usage from sellers and owner-operators who say, “We know our customers … ” simply because they have taken orders from them for the past decade or so.
Getting good information
Our client never really got off the ground in e-commerce. Management continues to rationalize the need for the expense. For all we know, they continue to lose sales and cover it up with acquisitions. Someday, probably sooner than later, they will run out of acquisitions. Then what?
We encourage distributors to research customers on e-commerce usage. We encourage them to design surveys specific to customer segments over a broad-based, generalist project. Different customers have very different needs and wants when it comes to online offerings. Finally, get with your buying groups, vendors and local experts on the costs of a good research effort and putting it into a learning vehicle for the membership. Knowing what to do in e-commerce based on what the customers’ want and need, is a better starting point than most, and it is not all that difficult to find good information.