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Charging forward with fee-based services

Charging forward with fee-based services

In the last issue of V-Mail, we updated you on the progress of fictional distributor Primo Industrial Supply Co. Primo provided its customers with a free bin-stocking service for many years. Recently, Primo decided to unbundle its service offering in order to start charging customers for services they value and eliminating those they don’t need.

Some of Primo’s customers were outraged and refused to pay for the bin-stocking service. We asked for your comments on what Primo should do. For the most part, comments followed one of two paths. Distributors said Primo should have investigated whether the customers valued the service before unbundling it from the rest, and Primo should now break the service out as a line item and slowly bring customers up to speed.

William Bennett, sales coordinator for hose and accessories distributor E.H. Lynn Industries Inc., suggested that Primo needed to make sure its customers valued the service and understand the benefit it provided them before deciding to unbundle the services and charge for them.

“Having something for free, and then suddenly having to pay for it, will always cause some sort of irritability,” he said.

Darrell Tetreault, regional manager for power transmission and bearing products supplier Kinecor Inc., said the customer’s perspective should be the No. 1 concern when making changes to service offerings.

“The value Primo puts on this service could be quite different from the customer’s perception of the value,” he said. “Primo’s understanding of this value to the customer in terms of cost is critical to any change to this service, which was originally included in the price of goods.”

Other distributors offered specific advice about how to start charging for a service. Jim Hoffman, vice president of operations for electrical distributor Schaedler Yesco Distribution Inc., said Primo needs to first provide the service for free and provide the requisite documentation.

“Since Primo never charged for this service before, they should break it out now as a separate line item on their invoice at no charge,” said Hoffman. “They need to wait one year, and make their case again. They should take the position that they have been providing bin-stocking as a free service for years, but can no longer afford to do it for free, and then slowly escalate the charge.”

Torrey Jaeckle, vice president of purchasing for flooring distributor Jaeckle Wholesale Inc., took a more mathematical approach to the situation. Jaeckle said he might first implement a modest price cut and keep the new fee for the bin-stocking service. He suggested setting the price cut at a level where Primo would still come out ahead after the lower margins are balanced against the new fees.

He said Primo could let prices limp back to where they were before the line-item break out, thus successfully implementing the fee for the bin stocking service.

“It’s always good to provide good news with bad to make the bad more acceptable,” he said.

Surprisingly, no one said Primo should not try to charge for services it already provides for free. Adam J. Fein, founder and president of Pembroke Consulting, said distributors will face challenges if they try to charge for a service that used to be provided at no cost.

“Many distributors still see fees as a way to charge for something that used to be given away for free,” he wrote in his article “Succeeding with fee-based services.” Obviously, customers can be expected to resist paying for something that once was free, even if they acknowledge the economic logic behind the concept.”