Value Exchange Equation (VEE) model:
GM – CTS = Profitability (GM:- gross margin; CTS:- Cost to Service)
This model explains that why always the high GM SKUs/project/customers do not necessarily lead to highly profitable SKUs/project/customers. It’s been a general trend among the distributors to focus more on the high GM projects accumulating high cost of service which eats up the GM and leaves them with less than expected profitability. To make it worse, one-size-fits-all service model has been invariably used for all sorts of customers, line items and distribution projects regardless of the GM. The perpetual drive to have 100% utilization of the fixed cost resources, which 90% of the distributors are laden with, more less profitable projects are taken up with the same service level model. It all keeps feeding the CTS to increase in size leading to lower profitability! Study shows that almost 70% of the projects have negative profitability for a typical US distributor who fall under 90 percentile!
Customer Life Time Value (CLV)
While it’s important to understand how VEE affects the profitability for each of the distribution service contract, it’s also equally significant to orient the internal culture and the service level towards delivering Customer Life-time Value (CLV). Though CLV is neither a new concept, nor the distributors are alien to it, significance of this concept in new-age industrial distribution has got momentum and traction. One-size-fits-all service model does not drive the optimal CLV but most of the cases settles down with sub-optimal CLV. Adopting different service model for the different segments of the customer profiles, is proving to be one of the key strategies to solve the profitability problem. Survey shows that, 80% of the customers don’t need high touch service model whereas only the top 1% of the customers need high-touch resource utilization to achieve optimal CLV. But that doesn’t drive home the fact that, medium or low touch service model is poor on customer service. “Optimal service level” is what drives the required revenue and profitability for the distributor.
Role of E-Commerce (EC):
EC is invariably the only “Tool” to implement this strategy like any other technology-enabled tools & techniques which have always been the key driver for efficiency, productivity in all kinds of business models and industries. It’s an enabler for the distributors to upgrade to higher level of profitability and overall growth. It helps them deliver optimal service level to different segments of customers without losing the focus of being customer-centric to all segments. It also helps achieve optimal resource utilization across the different service models without eroding the Value Exchange Equations (VEE)
Case Study of Grainger: (Slicing & Serving strategy)
Grainger has adopted this strategy quite well to maintain its leadership in $ 200+ billion US business & Industrial Supplies market. The EC arm of Grainger: grainger.com serves the 30% of the market mainly catering to the large customers, whereas, Zoro.com, the 4 years old strategic off-shoot of Grainger is targeted to the 70% of the potential market comprising mainly SME customers, contractors and others. Listing of Zoro.com in 3rd party online marketplaces like Amazon and eBay is helping it grow by 100+% year-on-year with a healthy % of profitability being pumped into the overall portfolio of Grainger. This “Slicing & Serving” strategy has worked well for Grainger and has an immense potential to work positively for the 100,000+ distributors in Business & Industrial Supplies market of US and across North America
(Inputs, data, statistics and business model strategy taken from the iconic thought leader Mr. Bruce Merrifield, president of Merrifield Consulting and the thought provoking executive editor Ms. Anna Wells, Industrial Distribution Media)