1

What Will Drive Distributors Through

2020

June 12, 2014

Marketing Channel Alignment

Amazon Supply

VALUE

Why Value Matters

•  “Frugalnomics” and the economic buyer

•  Multi-channel competition •  Global competitors •  Less emphasis on relationships

Value and Price Positions •  We offer much more value than our competitors for a higher price

than our competitors •  We offer more value than our competitors for roughly the same price

as our competitors •  We offer more value than our competitors for a lower price •  We offer comparable value to our competitors for roughly the same

price •  We offer comparable value to our competitors for a lower price than

our competitors •  We offer less value than our competitors for a much lower price than

our competitors

The Lake Wobegon Effect A natural human tendency to overestimate one's capabilities, is named after the town. The characterization of the fictional location, where "all the women are strong, all the men are good looking, and all the children are above average," has been used to describe a real and pervasive human tendency to overestimate one’s achievements and capabilities in relation to others. The Lake Wobegon effect, where all or nearly all of a group claim to be above average, has been observed among drivers, CEOs, hedge fund managers, presidents, coaches, radio show hosts, late night comedians, stock market analysts, college students, parents, and state education officials, among others.

What Distributors Say About Value

51%

30%

10%7%

2%0%

10%

20%

30%

40%

50%

60%

More  value  than  our  competitors  for  roughly  the  

same  price  as  our  competitors

Much  more  value  than  our  

competitors  for  a  higher  price  than  our  competitors

Comparable  value  to  our  competitors  for  roughly  the  same  price

More  value  than  our  competitors  for  a  lower  price

Comparable  value  to  our  competitors  for  a  lower  price  

than  our  competitors

Value  and  Price  Relative  to  Competition 90% of respondents believe that they deliver more value than their competitors. This response is nearly identical to the response from two years ago. Two issues: •  Price pressure •  Unclear understanding of value

What Tech Companies Say About Value

0%

10%

20%

30%

40%

50%

Much more value than our competitors

for a higher price than our competitors

More value than our competitors for

roughly the same price as our competitors

Comparable value to our competitors for a lower price than our

competitors

Less value than our competitors for a

much lower price than our competitors

Value and Price Relative to Competition 86% of respondents believe that they deliver more value than their competitors. This response is nearly identical to the distributor response.

Operating Discipline

Three Operating Disciplines

•  Product Leadership •  Operational Excellence •  Customer Intimacy

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Description of Value Discipline Alternatives

'Value Discipline' Basic Philosophy Examples

1) Operational Excellence

q  Operations are standardized, simplified, tightly controlled, centrally planned

q  Management systems focused on integrated, reliable transactions

q  A culture that hates waste

-Dell -Costco -Wal-Mart -Southwest Airlines

2) Product [and Service] Leadership

q  Focus on invention q  Fast-adapting business

structure q  Management systems reward

new product / service success

-Apple -Intel -Nike -3M -Sony -Google

3) Customer Intimacy

q  Decentralized decision-making q  Flexible mgt systems that

create customized solutions q  Culture embraces

empowerment

-Starbucks -Lexus -Nordstrom -CDW

Gorillas, Chimps, and Monkeys

At least $500M revenue Operational excellence National or global market

$50M to $500M revenue Usually customer intimate Regional or national market

Less than $50M revenue Customer intimate Regional or local market

New Rules for Market Leaders •  Provide the best offering in the marketplace by excelling in a specific dimension of

value –  A value proposition that is compelling and unmatched

•  Maintain threshold standards on other dimensions of value –  You can’t allow performance in other dimensions to slip so much that it impairs the attractiveness of your

unmatched value

•  Dominate your market by improving value year after year –  No company can be best at everything, so focus on one dimension and you will be better than others who

don’t that focus

•  Build a well-tuned operating model dedicated to delivering unmatched value –  �Improving customer value is the market leader’s imperative. –  Improving your operating model can make competitor's offerings look less appealing, or even shatter their

position by rendering their value proposition obsolete

Distributor Value Proposition Features

0%10%20%30%40%50%60%70%80%

Prod

uct  availability

Prod

uct  selectio

nPre-­‐sales  techn

ical  …

Spee

d  of  delivery

Professio

nal  outsid

e  …

Post-­‐sales  te

chnical  …

Training

Source  non

-­‐stock  …

Easy  web

 ordering

Free

/inexpe

nsive  …

Onsite

 sales  and  …

Low  pric

eKitting  and

 assem

bly

Accoun

t  priv

ileges

Returns  p

olicy

Fast  and

 …Re

ntal  and

 repair

Warranty

Value  Proposition  Features

Fifth

Fourth

Third

Second

Most  important

•  Product availability •  Product selection •  Pre-sales technical support or expertise •  Professional outside sales reps •  Speed of delivery •  Post-sales technical support or expertise

Distributor Value Proposition Benefits

0%10%20%30%40%50%60%70%80%90%

Value  Proposition  Benefits  

Fifth

Fourth

Third

Second

Most  important

Primary benefits •  Reduces inventory holdings •  Improves customer’s expertise through training

Secondary benefits •  Lowers labor costs •  Reduces waste •  Lowers receiving and warehousing costs •  Streamlines paperwork

Tech Value Proposition Benefits

0%

10%

20%

30%

40%

50%

60%

70%

Increases our

customers' revenue

Increases our

customers' IT productivity

Increases our

customers' customer

satisfaction

Decreases our

customers' COGS

Decreases our

customers' technology

capital expenditure

Decreases our

customers' customer

support costs

Value Proposition Benefits Primary benefits •  Increases revenue •  Increases IT productivity •  Increases customer satisfaction

Value Chain

Tech

Company

Distributor

End Customer

Key question: How do your tech company’s products increase the efficiency or effectiveness of the primary operating discipline of your distributor customers?

Economic Value Models

Value Map

Challenger

Incumbent

$-

$2

$4

$6

$8

$10

$12

$14

$- $2 $4 $6 $8 $10 $12 $14

Ann

ual B

enef

it

Thou

sand

s

Annual TCO Thousands

Value Map

Note: size of bubble represents NPV of solution

Annual Benefits Exceed Annual C t

Annual Costs Exceed Annual Benefits

Companies to the left of the diagonal line can have a value discussion Companies to the right of the diagonal line are limited to discussing cost

Why use Economic Value Models? •  Pricing

–  List price setting – Discount price management

•  Sales enablement –  Increase close rate – Compress sales cycle –  Increase average selling price

•  Marketing – positioning and messaging •  Product management – product feature

prioritization

ROI/TCO Calculators

75% believe that calculators are effective for increasing win rate 55% believe that calculators are effective at compressing the sales cycle or maintaining margin

When to Use Economic Value Models •  Something big

–  Large customer –  Large company –  Large competitors –  Large deal size –  Large % of total customer budget

•  Something new and different –  New innovative product, existing product category –  High uniqueness of product –  New product category –  Less mature market

•  Many choices that are difficult to compare or differentiate •  Competitors use them •  Customers create a financial business case •  Multiple decision makers •  Risk of making a change

–  High cost of switching

Economic Value Components •  Total Cost of Ownership

–  Technology –  Consulting –  Personnel –  Training –  Infrastructure

•  Summary –  Return on investment (ROI) –  Payback period (years) –  Net present value (NPV) –  Average yearly cost of ownership –  Other C-suite level metrics (IRR,

EPS, etc.)

•  Direct benefits –  Increased up-selling revenues –  Increased profits –  Increased cross-selling revenues

–  Reduced returns handling costs –  Increase profit from sales

efficiencies •  Indirect benefits

–  Improvement technology management

–  Optimized process management –  Increased staff productivity

Branding Ladder

Building a Differentiated Value Proposition: The Branding Ladder

•  The “hook” is how you emotionally engage individuals – values, beliefs, fears etc.

•  The “benefit” is the rational value that I get from buying from you

•  The “reason to believe” is a specific thing you do better than the competition Feature: Reason to believe

Benefit: Why I should care

Hook: How I am emotionally engaged

The Branding Ladder

Attribute: Reason to believe

Benefit: Why I should care

Hook: How I am emotionally engaged

CDW knows that end-users don’t understand IT and make unreasonable demands on IT

managers

CDW offers flexible and powerful solutions to make my job easier

CDW understand me better than other suppliers so I prefer them

•  Perfect laddering construction. IT professionals loved this message and CDW has grown at a rapid rate

•  CDW is the kind of company that is built to help me meet the unreasonable needs of end-users

•  This says, “CDW is on your side. We GET it.”

MULTICHANNEL

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Communicating with Customers

30

0%20%40%60%80%

100%120%

Sample  Customer  Communication  Preferences

Never

Once  per  year

Once  per  quarter

Once  per  month

Once  per  week

Customers want to hear from you more than you know and in more ways than you suspect

Marketing Channels and Vehicles

•  Primary –  Field sales –  Inside sales –  Direct response – print and digital –  E-commerce

•  Secondary –  In store –  Mass media –  Social media

Marketing Channel and Vehicles

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Market leaders place much greater emphasis on •  In store •  Outbound only telephone •  E-commerce •  Search marketing •  Catalogs

0%5%

10%15%20%25%30%35%40%45%

Marketing  Vehicle  Importance

Market  Leaders

Other

0%10%20%30%40%50%60%70%80%90%100%

Channel  Importance

Market  Leaders

Other

Customer Communication Preferences

0

50

100

150

200

250

300

350

Never

Once  per  year

Once  per  quarter

Once  per  month

Once  per  week

Preference for email and phone call is increasing Preference for sales rep visit is decreasing

Inside Sales in Distribution •  Typically, distribution sales channels include field sales

and reactive inside sales and/or customer service •  There is usually not a proactive outbound program in

place •  Cross-selling programs are not in place and cross-selling

happens only sporadically •  Small to medium sized customers not assigned to field

sales do not have a focused selling program •  Goals and metrics are not always in place, or may not be

incenting growth behaviors

Outbound Selling Cost Advantages

35

•  The advantages of outbound selling are: –  Lower cost of service compared to field sales:

–  Respect customers’ time – 3 minute call vs. 1 hour sales call –  Ability to reach many more customers – 5 times the number reached

than through field sales –  Can reach customers that wouldn’t normally be contacted due to high

cost of field sales call

Channel

Contacts/day

Contacts/year *

Average Annual Salary

Average Cost/contact

Field Sales 3-4 750-1,000 $100K $100-$133

Outbound calling

20-25 5,000-6,250 $45K $7 - $9

Direct Response •  Catalogs •  Print flyers •  Email and marketing automation •  Search marketing A combination of direct response vehicles is best, however, the mixture needs to be tested and measured.

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E-COMMERCE

37

E-commerce •  E-commerce revenue as a percent of overall revenue is rising as

indicated in 2014 survey –  Percentage of companies with 5% to 10% e-commerce revenue is expected to

grow 30% –  Percentage of companies with 10% to 20% e-commerce revenue is expected to

grow more than 100%

•  Key objectives –  Increase new customers and orders acquired through website traffic and search-

engine marketing –  Ease of use and increased customer satisfaction by end users –  More frequent use of website and e-commerce transactions by regular customers

•  Respondents express mixed satisfaction with much of the functionality on their own e-commerce sites

•  Nearly half of companies have a mobile device optimized e-commerce solution. An additional 30% are implementing such a solution in the next 12 months.

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E-Commerce Revenue – 2012-2014

39

•  2013 - Increase of nascent and growth stage companies •  2014 (projected)

•  More than 20% increase in growth stage companies •  More than double number of mature companies

Definition •  Nascent – less than 5% e-commerce revenue •  Growth – 5% to 10% e-commerce revenue •  Mature – 10% or more e-commerce revenue

E-Commerce Revenue – 2013-2014

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•  A significant number expect to increase their e-commerce revenue •  Only a small percentage expects their e-commerce revenue to decline in 2014.

Top Priority

41

Top priorities are •  New customers •  Existing customers •  Ease of use

Priorities reflect the nascent and growth stage e-commerce in where the first priority is to get revenue flowing with a usable web site.

E-commerce Leadership

42

Among respondents with nascent stage e-commerce programs, only half have dedicated leadership vs. 70% who in growth or mature stage.

E-Commerce Capabilities

43

Respondents are only satisfied with the table-stakes functionality (contact information and basic search.) For only slightly more complex functionality (stock levels, technical information, social media), there is mixed satisfaction. For advanced capabilities (quote, live chat, and purchase suggestions), satisfaction is low.

E-Commerce Capabilities

44

Respondents have high satisfaction with login and order placement. They have mixed satisfaction will all of the other capabilities.

Integration Capabilities

45

Smaller distributors are less likely to rely on EDI or punch-out as part of their e-commerce solution. The emphasis on EDI and punch-out has diminished from last year.

Mobile Capabilities

46

Support for mobile technology has grown nearly 25% from last year including: •  Smart phones •  Mobi implementations •  Mobile apps Still, more than 30% intend to implement support for mobile technologies in the next year and beyond.

Ordering Methods

May 11, 2014 47

Most frequent methods •  Over the phone with supplier rep •  In the supplier branch or store •  By website with computer •  By email The 46 to 65 age group is somewhat more likely than the 26 to 45 age group to prefer purchasing in the supplier branch or store The 26 to 45 age group is significantly more likely than the 46 to 65 age group to purchase via email

Future Ordering Methods

May 11, 2014 48

Largest expected increase is: •  By tablet/smart phone •  By website with computer •  Email Largest expected decrease is: •  Face to face methods (branch and jobsite) •  Fax

More than 70% of the 36 to 45 age group expects tablet/smart phone ordering to increase somewhat more frequently or much more frequently.

Future Online Transactions

May 11, 2014 49

In 2 years •  Nearly half believe that 25% or more of transactions will be online •  One fifth believe that 11% to 25% of transactions will be online

Driving E-Commerce Demand

50

•  Email marketing, catalog, and SEO are most effective and highest spend •  Paid search has low effectiveness •  Marketing automation is underutilized in distribution relative to other industries

E-commerce and Catalog Synergy •  85 percent of companies with a successful catalog believe that e-

commerce and catalog are synergistic or that their catalog helps drive e-commerce sales.

•  73 percent of companies who have a mature e-commerce channel believe that e-commerce and catalog are synergistic or that their catalog helps drive e-commerce sales.

•  The three distributors (Grainger, MSC Industrial Supply and McMaster-Carr) who were considered by their peers in a previous survey survey to have the best websites were also considered by their peers to have the best catalogs.

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Product Data

Product data accuracy and completeness are good for most distributors. Photographs, substitutes, and information about related products is weak Vast majority of data comes directly from the manufacturer. However, there is an increasing role of pure third party solutions or blended third party solutions.

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Almost  entirely  from  

manufacturers

Mostly  from  the  manufacturers  with  some  from  

third  party  sources

Even  blend  from  manufacturers  and  from  third  party  sources

Mostly  from  third  party  sources  with  some  from  

manufacturers

Almost  entirely  from  third  party  

sources

Not  applicable Other  (please  specify)

Select  the  choice  that  best  describes  how  your  company  gets  product  data.

Product Data Best Practices •  Analyze quality, time, and cost of in-house and third

party solutions. •  Normalize data from manufacturers including

manufacturer, part number, product category •  Enrich data by mapping the items to industry standard

templates and populating •  Cleanse and normalize long and short descriptions •  Get product images •  De-duplicate based on part numbers and attribute

descriptions

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Thank you!

Jonathan Bein, Ph.D. Managing Partner

Real Results Marketing www.realresultsmarketing.com

303-898-8636