Four-step total cost of ownership process
Value-adding distributors can demonstrate how they impact a customer's total cost of ownership by following this easy to understand four-step process.

1) Identify value-added services
2) Determine the total cost of ownership
3) Determine the impact on the customer's bottom line
4) Report the results

Step 1: Identify value-added services
The place to begin is to first identify the product features or services you provide that can help reduce a customer's total cost of ownership.

Here is a partial list of common ways that distributors add value:

For a more complete list, refer to the Win-Win-Win Value-Added Workbook. Click here for a downloadable version (Adobe .pdf format). back to top

Step 2: Determine total cost of ownership
The next step is to determine the total cost of ownership categories that your value-added activities impact.

Revenues: Explain how your efforts impacted your customer's revenue stream. For example: Substituting one cutting tool for another improved plant productivity.

Assets: Explain how you enabled your customer to reduce possession costs. For example: by moving to a consigned inventory program, your customer saved 15 percent to 35 percent of the asset value in carrying costs.

Process: Explain how your new process reduced your customer's process costs. For example, by instituting electronic data interchange (EDI), you reduced the customer's cost of processing invoices.

Expenditures: Explain how you reduced your customer's expected annual purchase cost requirements. For example: substituting one product for a like-performing product resulted in a unit price savings.

Services: Explain the value of the technical expertise or service you provide. For example: applications training you provided at no cost.

Other: Explain other ways that your company impacts total cost of ownership that don't fit neatly into the above categories. For example: your ability to reduce legal liability.

Some activities may impact more than one category. Click here for a downloadable .pdf diagram that demonstrates how certain activities impact various categories.
back to top

Step 3: Determine impact on the customer's bottom line
The third step in the process is to gather the data you need to show -- in dollars and cents -- how you impact the customer's bottom line. Sources for information include:

• In-house. You likely have more useful information about your customer than you realize. For example, based on the number of invoices you receive each month, you can estimate the total number of transactions that customer performs.
• Industry standards. Rule-of-thumb data often exists that can help estimate a customer's costs. For example, the possession cost for inventory is often valued at between 15 percent and 35 percent of the amount of inventory in stock.
• Credible estimates. When no other hard data exists, you may need to estimate based on information from other companies. For example, many companies estimate the cost to process an invoice at between $35 and $75.
• Customer numbers. The best data to use comes straight from the customer. Be aware, however, that these estimates may be conservative. For example, customers often under- or overestimate the amount of inventory on hand.

Click here for a downloadable .pdf file with examples of forms that value-adding distributors use to show how their activities impact customers. back to top

Step 4: Report the results
The final step in the four-step process is perhaps the most important. It is where you put down in black and white the concrete evidence of your value to a customer. Putting the results on paper (or in an electronic format) benefits you in several ways. First, it creates a paper trail that the customer can keep on file. Should your key contact at a company be replaced, the company will have a permanent record of your activities on file. Another reason it's important to report the results is because your key contact will likely pass the information on to other personnel within that company. Doing so opens doors for additional value-adding opportunities for you.

Click here for examples of how distributors report results to customers (in downloadable .pdf format). back to top