Question

Topic: Strategy

Advice On Change From Product To Service Oriented

Posted by Anonymous on 3/11/2011 at 12:20 AM ET 250 Points
Need advice on my business idea. Currently my business deals in supplying electrical and hardware goods to just a small amount clients in the hospitality industry (middle man: Main distributor - Me - Hospitality industry). Due to competition (price cut) I would like to change from being product to service oriented. My idea is to pass the same price from main distributor to them by charging an annual service fee. They will be able to save 20%-30% on their orders depending on the type of items. In order to calculate a justified fee from mine n their point, I need to know:

1. type of items purchased (to find the main distributor)
2. number of times orders done (to calculate transport charges born by me)
3. annual purchase figures (to make sure they save 20%-30% minus my fees)

Based on my calculations, i need to make 10% of their annual purchase order. In order for them to see the savings, they need a certain minimum purchase order. As for me, i need certain minimum number of clients.

Is it a good and executable business idea? If yes, i would like to know how to pitch the idea so that they see the savings and volunteer to give me their purchasing data. Hope they see it as a no brainier and thank me for pitching the idea (getting over my head here).

Thanking all of you in advance. This is the best site I have come across with great people with great advice.
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RESPONSES

  • Posted by CarolBlaha on 3/11/2011 at 6:31 AM Accepted
    You're essentially moving to being a broker-- and combining the buying strength of several orders to get a better price point. You can do this in your current biz model -- but put the difference in your bottom line.

    It is a hard sell to ask a company to pay a fee upfront for product they have not yet purchased. They know needs change. It is also a slippery slope when you make price your differentiator.

    The way I'd sell this is to review the purchase history of your top customers. Do a comparison, what they paid and what they might have paid-- and show them the cost justification.
  • Posted by Peter (henna gaijin) on 3/11/2011 at 11:02 PM Accepted
    I wouldn't call what you are doing changing from product to service. S change to service would be to not focus on selling electrical parts, but instead focus on selling installed electrical parts (getting into the installation business). Being a broker is probably a better description.

    I agree you could do it as part of your current business model, but have a slightly different suggestion. Offer customers a XX% discount on all sales if they pay an XXX dollars annual fee. I likely wouldn't give them the full price differential (not discount all the way to what you pay), but close to it.

    But I also agree that differentiating on price is not good. You are selling to smaller customers, and providing a service to them. Other sites may provide he lower price, but can they handle these smaller customers? Ate they doing it through inline sales (so doesn't have the face to face or similar type service you provide)? Look carefully at the other options and see what they are really offering for this lower price, and try to determine of the services you offer are something that would bring back your customers at the slightly higher price you charge.
  • Posted on 3/13/2011 at 9:11 PM Author
    Thank you Carol and Peter for your response. Made me look at the idea from different point of view.
  • Posted by Frank Hurtte on 3/16/2011 at 2:46 PM Member
    Securepeo,
    I may have some insite on what you are thinking about doing... Contact me via my profile if you are still contemplating this move..
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