Free Vs. Fee-based Services

In the jan/san supply industry, distributors are programmed to give customers just about everything away for free. Buy chemicals, get free dilution control systems. Buy paper, get free dispensers. The same goes for services such as product training, product knowledge and cleaning walk-throughs. They’re given away for free just to land a new account or stay in an existing customer’s good graces.

“We are for-profit organizations and we are giving away literally banks of information and knowledge at no cost,” says Eric Cadell, vice president of operations for Dutch Hollow Janitorial Supplies Inc., in Belleville, Ill. “From a logical, educated standpoint, that’s not a very smart business decision. But it’s what our industry does. It’s what the customers come to expect.”

As a result of providing value-added services, distributors often will start a new account and find themselves hundreds, if not thousands, of dollars in the hole after the first month. But, because the industry still values what the forefathers of the industry started, distributors have no other choice but to continue to offer services for free or watch customers take their business to a competitor down the road who does.

“Every janitorial supply company has got to do training, we’ve got to do demos, we’ve got to provide samples, cleaning walk-throughs, all of these value-adds,” says Leland Fishman, president of Fishman Supply, Petaluma, Calif. “If we want to be the leaders in our field, if we want to be the experts our customers count on, we have to do those things.”

Distributors have offered free services for many years, but in an economy where customers have tightened their belts on purchasing, distributors who continue to offer free, cash-draining services won’t be able to remain profitable if they continue down this path.

According to the distribution report, “Facing the Forces of Change: Decisive Actions for an Uncertain Economy” authored by Guy Blissett, a wholesale distribution expert for IBM’s Institute for Business Value. “Services represent the most viable way for distributors to differentiate themselves from competitors, expand margins, and grow their top line.”

Unfortunately, few distributors have yet to truly crack the code on services. Blissett says in far too many instances there remains disconnect among the costs associated with the delivery of the service, the customer’s perception of the value the service delivers and the margins realized by the distributor from the service.

“A common underlying problem is that distributors often have only a limited understanding of the true costs of providing individual services, let alone their ultimate profitability,” Blissett explains in “Facing the Forces of Change.”

Draining Profits

Distributors have built up a portfolio of services that they deliver to customers, but they don’t really have a good idea as to how many services they’re providing, which customers are getting which services, and which services are most valued by customers. With value perceptions continuously shifting, distributors must recognize that what was important three or four years ago, may no longer be important today.

Therefore, Blissett says distributors must have a good understanding of the portfolio of services that they offer and they need to implement a strategy behind their services.

According to Blissett, distributors need to ask themselves four questions: “Why are you offering these particular services? Is that reinforcing your brand image? Is it taking your business where you want it to go? Is that consistent with the messaging of your website and is there an alignment between your services and your product portfolio?”

Unfortunately, a lot of these foundational questions don’t often get asked.

“Distributors have a pretty good idea who they sell their products to and their profit margins, but nowhere near that understanding when it comes to services,” 
says Blissett.

Over time distributors can accumulate a great deal of services. But unless they sit down and spend time inventorying their service portfolio, it’s very easy to lose sight of them, including the costs associated with offering them.

“These services, if not properly managed, can drive a whole lot of cost into your business,” says Blissett. “And some of these services become less and less valuable. When was the last time you really asked customers how important that service was? Is it something that they would notice if you stopped doing it?”

According to two separate Sanitary Maintenance surveys of building service contractors (BSCs) and in-house service professionals (ISPs), the most important value-adds are product training, flexible delivery, new customer leads (BSCs) and easy access to Material Safety Data Sheets (MSDS), in that order.

Charging For Services

Customers have come to expect the services distributors offer to be free. But what would happen if distributors began asking customers to pay for these services? Could distributors possibly ever charge for these services?

“It would take a great degree of education with customers to get them comfortable with paying for services,” says Tim Feeheley, president of Davidson, N.C.-based JanPak Inc. “I don’t think it would go smoothly at this time.”

Distributors say if they were to tell customers that they will be charged for services that they traditionally have not paid for, the customer’s first response will be to price shop.

“I would love to say everything has a price tag. But customers are still expecting services to be free,” says Cadell. “Customers are not asking how much will it cost for you to come and train. They expect it to be free. And until the customer’s mindset changes, we can’t start to make that change either.”

Even though distributors say they can’t charge for free services, they may be selling themselves short. Frank Hurtte, founder of River Heights Consulting, a distribution consulting firm in Davenport, Iowa, says distributors may be too quick to write off traditional free services as something that they can charge for. He says traditional value-added services such as training and special delivery considerations are just a few areas that distributors should be charging customers for because of the high out-of-pocket costs associated with offering them. Also, any technical work done prior to a purchase made by a customer is also something that distributors should be charging a fee for.

“One of the points that I hear repeatedly from distributors is, ‘We go in and solve the customer’s problem and tell them what they need to buy and the next thing is they are sending it out for quote to everyone. We’ve done the work, we’ve got money invested in them.’ Charge for that with the option of refunding it if the customer makes 
the purchase.”

Emerging Fee-based Services

Although distributors say getting customers to pay for services that have been traditionally free is out of the question, they have found something that customers in the cleaning industry are willing to pay for — education. Getting customers to pay for education, however, means that distributors must actually provide learning tools that go beyond their traditional training offerings that customers are accustom to.

“Most distributors are used to basically saying we’re going to have an educational class, we’re going to take one of our employees and he’s going to teach you how to use microfiber. That’s not an educational course. That’s a training,” says Cadell.

Dutch Hollow recently began offering educational courses to customers as a fee-based service. The distributor partners with a third-party entity where customers can pay a fee for a day-long course taught by an industry expert instead of having an employee from the company lead the class. Cadell says the company’s customers are going through an educational process, not a training process, where they are taking tests and receive certificates at the conclusion of the course.

Cadell says this has been popular among his company’s educational and health care clientele. These customers, he says, are willing to pay for the classes because as a result of taking the course, the employee will better understand their job and learn ways to perform better.

“Customers are willing to pay for education,” says Cadell. “There is a price point that they are willing to pay to come in and take these things. And people are OK with that because you still have these community colleges and universities everywhere, people still understand to get an education costs money. Training is free. And that’s just what our industry has taught. And the nice thing is luckily distributors have not messed up the word and have not convinced people that training is education. It’s called training, education is separate. So when you come in and offer an education opportunity, people are willing to pay for that. But if I come in say I’m offering a green cleaning training, people are going to say, ‘And you’re charging me? Why?’”

Billings, Mont.-based Bruco Inc., has had success with getting customers to pay for select services over the last 20 years. Owner, Ben Uselman says his company offers services such as site surveys that customers are willing to pay for. Bruco’s trained employees will go into a customer’s facility and assess the staff, determine ways to enhance productivity through workloading and scheduling, and if needed, present the customer with formalized education and training at an additional cost.

Uselman anticipates site surveys as a fee-based service offering will only continue to grow further as facilities are cutting staff and are looking for ways to reduce overhead.

“With what’s going on in the industry, especially with K-12 [schools], you’ll find that education has been scaled back,” says Uselman. “People are cleaning up to 40,000 square feet and a lot of outsourcing is taking place. That is causing an awareness in the cleaning industry that we expect will be an increased demand for this service. There’s nobody willing to give up cleaning for health in the process.”

According to Blissett, another emerging area that distributors can capitalize on for a monetary gain is with LEED certification services. With many distributors in the jan/san industry well-versed on green cleaning and how to implement green cleaning programs into facilities, there is an opportunity to take it further — and charge for it. Distributors who have LEED accredited professionals (LEED-AP) on staff can help direct a facility towards LEED certification.

Modesto, Calif.-based Central Sanitary Supply recently had an employee gain LEED-AP accreditation. Chris Martini, the company’s director of marketing says the company hopes that this individual’s knowledge in the area will help drive some revenue into the business as more facilities pursue LEED certification.

“There’s money out there for this type of service,” says Martini.

Fishman says he foresees LEED services being an area where customers would be more than willing to pay.

“If I walk into an account that’s thinking of LEED certification and every step of the way, they’re writing a check, if I come in with a service that can be seen as an expert service and I’m willing to charge something for it, I think end users are willing to pay for that because at every step of the way they are paying for it,” says Fishman.

Although there are potential areas that distributors can charge for select services, distributors say if there isn’t an all-in approach, it won’t work.

“What will happen at some point in time is someone will start to offer a service as free as a way to get in the door and then we are going to dumb it down and we are all going to race to zero on one more valued-added service,” says Fishman. “Because that’s what happens. As soon as we find a service we can charge for, the first time it’s given away, that’s the new price.”

Change The Conversation

Charging for services is still a grey area for most distributors. While it’s very commendable for distributors to continue to strive to meet all of their customers’ every need, there does have to be some limit.

“The starting point around services has to be more financially driven than it has in the past,” says Blissett. “The distributors that seem to be having some success with services are those that have a very solid idea as to the services that they deliver, the services that they want to deliver and the financial dimensions of those services.”

It’s OK for distributors to still offer some services as value-adds, but start changing how customers view these free services. Get them to realize how financially valuable they truly are.

Blissett recalls a distributor from the contruction industry having success in changing this dynamic. What the distributor started to do was put a line item on the invoice with the quantification of the value of the services that they were delivering. So at least their customer could see what that number was. They also had a second line right underneath that which was a full credit to the value of those services.

“It started to create some transparencies into, we deliver these services to you, we make the value of them to be this,” says Blissett. “We don’t expect you to pay for them because you never have, but at least lets get this out in the open that we are doing these things for you and they are creating some value.”

Blissett says what this allows distributors to do is when the next time the phone rings, and the same customer is looking for another service, the distributor can then have more of a fact-based, financially-driven conversation than what typically happens today.

“It’s not just, ‘Wow, I deliver all of these services to you and you don’t appreciate them, but lets talk dollars and cents,’” says Blissett. “How much am I helping your business by doing all of these things for you?”

Continuing down the path of giving away services for free spells doom for distributors, especially since services are major profitability drainers. There are customers who are willing to pay for services, but in order to cash in, distributors must offer services that go beyond the call of those that have been traditionally offered for free. In the end, it’s up to an individual distributor to make an educated decision on whether charging for services is in their future. Staying out of the red may soon depend on it.