Issue 348 - Between a Rock and a Hard Place

Welcome to a New Year of Newsletters. In speaking to a Customer whose primary line of business is supplying pizza shops, delis, etc. a type of distributor that we generally consider a specialty provider, I asked her how was business in 2011. Well her answer was very interesting to say the least. She said revenue was a little off but her real problem was collection and cash flow. Please read on........

She went on to explain that before the Great Recession there was 2 or maybe 3 vendors in a shop. But due to the softer business climate and increased competition there was 4 to 6 vendors playing for the same business.

That's not the end of the story, she went on to explain that if she was giving 2 week terms her customers would lower her order size and string her out amongst the other vendors. By doing this little trick customers could get terms of 30 to 50 days between vendors by just giving each guy a little less and stretching the terms out. Of course you could say good bye to the client and your Receivables. End result less revenue and reduced cash flow. Poison to any business.

Well we would like to attack this real problem with real solutions.

What to do when your customers are playing you against your competitors.

Analyze and determine the true cause and severity of the problem: Let's look three potential reasons your customers might be using more vendors than before and techniques you can utilize to work through this business challenge.

Cash Flow Problems: Shopping around because they have to. This is the worst possible reason. If a customer has maxed their credit with their existing vendors and is shopping multiples because they must then they already started down the slippery slope that can lead to a business abruptly closing with outstanding debt. Generally a customer won't admit this reason to you directly you'll have to identify it indirectly through your Accounts Receivables/Collections people.
- Enforce your credit terms and if the terms are not met downgrade the customer to payment in advance. This might cost you a sale today but it protects you against having to try and collect through a bankruptcy tomorrow.
- Be careful not to mistake a growing business for a failing one and vice versa. As a business grows they might need a larger credit line for their orders but be more comfortable maintaining multiple smaller credit lines. Remember a healthy growing business should need a larger not longer. Talk to your customers, determine which they are and react appropriately.
Curiosity Shopping: Shopping around because they want to. This is the middle ground. As new potential vendors open your customers will get hit with introductory specials, loss leaders, new product offerings, and promises of better service. Even if a customer is 100 percent satisfied with you, they may 'try out' the other vendors (the grass always looks greener on the other side). Your sales team will normally be able to identify this by inquiring after where a customer is now sourcing an item they used to get from you.
- DON'T MAKE MISTAKES! Continue servicing your customers and show there's no reason to make a permanent change. Quality control, consistent service, and value will see you through, but you must have systems and safeguards in place to ensure you slip up at these critical times.
- Be on guard for up-and-coming competitors. Keep an eye on customers you identify as "Curiosity Shopping" if it continues for more than two or three order cycles then they may be "Value Shopping."
Value Shopping: Shopping around because they should. This is the best possible root cause to identify, because honestly it is the only one you can exert control over. Value shopping customers are doing what they feel is right for their business--buying in as cost effective a manner as they can. You might hear feedback from your sales team like "They're getting a better price from X." or "They're buying it to meet minimums from Y." As your customers continue to refine their cost management the convenience of ordering from one vendor looks less appealing than the cost savings of ordering the best price from a variety of vendors.
- Positively push the apparent value of being their primary vendor back in your favor. We'll call this the 'traditional sales problem.' The new wrinkle of course is that you need to show even more value for every penny of premium you expect to charge. This is your fight to win, apply your sales expertise and earn your customer's business all over again.
- Protect your margins and profitability against those who value shop. Be sure that your policies (minimum orders, price levels, service commitments and salesperson commission structure) are applied to your customer's new behavior, and that those policies are designed to protect your margins and profitability. If you don't already have policies in place to protect your profit or if you've been lax in enforcing them you have an uphill battle ahead of you, but the longer you wait before digging in your heels the further down the hill you're going to be.
In closing identify what the customer is really doing, put your helmet on and COMPETE !!!!! Have a great 2012 !!!!