As a residential electrical contractor, you have a choice today: Continue to fight the battle using the same business tactics that merely allow you to keep your “head above water,” or look at other business model alternatives that increase your chances for overall organizational success. In this article, we will explore the necessary steps to implement preferred partnership agreements with various high-end product manufacturers. This approach ensures both product manufacturers and contractors enter this new economic era with a true differentiation to market and an opportunity to achieve double-digit success.
The altered supply chain
For years, traditional electrical supply houses have been challenged by “big box” stores and online product manufacturer Web portals. In some cases, your customers can now buy their own electrical products at prices below what you can get it for through your local supply house. The value chain, which was once a legitimate part of the product distribution channel, has been forever altered — a reality that places you at a distinct disadvantage.
For example, a residential consumer decided to install outdoor landscape lighting at his home. After consulting with three electrical contractors, the homeowner had both a parts list and labor breakdown for the project. In all three bids, the contractors had designated a particular brand of outdoor luminaire. Using this information, the consumer went online and was able to purchase the same products at only 70% of the bid price. When challenged about the pricing, the electrical contractor was quick to point out that he was required to buy products from a supply house. At this point, the bids became purely labor contracts with low price being the primary basis for selection.
Because the Internet has changed the product supply chain, consumers now have access to pricing on nearly every product imaginable — a feat that was only available for new car shoppers a few years ago. Although they offer a valuable service component for selecting different product configuration alternatives, supply houses appear to no longer serve as the best place for merely buying a generic part.
The next frontier
Under these circumstances, it’s now in the best interest of the electrical contractor to establish preferred partnership arrangements with “best buy” product manufacturers. This arrangement serves two primary purposes: First, it allows the manufacturer to establish non-competitive beachheads in certain well-defined geographic areas; second, the electrical contractor benefits by obtaining preferred resale pricing discounts that increase profit margins as well as a “protected area” for servicing the product.
A mid-sized electrical contractor in the Northeast established a preferred partnership agreement with a generator manufacturer. Although these same generators could be purchased at the “big box” stores for slightly less, the arrangement with the contractor made the resale value a worthwhile endeavor. Not only did the contractor obtain a double-digit margin on the resale of the product, but it also obtained a protected geographic location that ensured every installation or service call in that area was
immediately routed to them. The combined results from both the product resale arrangement and the “protected” territory allowed the contractor to achieve modest double-digit profitability results.
The key to selecting an appropriate product manufacturer is to find one that has a sterling reputation in the industry. While the electrical contractor could make more profit on a less well-known product, it’s difficult to overcome a lack of product name recognition — something that can be achieved but usually over a longer time period. Once established, make sure the pricing of the product for resale purposes is competitive yet still allows for a reasonable profit margin to you, the contractor. In addition, realize that, in most cases, increased revenues and profits will come not only from the product sale, but also from the services that can effectively be wrapped around that product.
Piggybacking the marketing dollar
Beyond the enhanced profitability that can come from teaming up with a product manufacturer comes the ability to leverage their marketing dollars. Product manufacturers spend far more than traditional electrical contractors on marketing efforts. Print and other media advertising, coupled with various sponsorship efforts, ensure the product manufacturer builds its name recognition in the marketplace. You can “piggyback” these efforts for your own benefit.
How do you leverage the manufacturer relationship? In the case of the mid-sized electrical contractor noted previously, it regularly sends high-glossy mailing inserts to potential customers, using collateral that is far beyond its meager marketing budget. In addition, as part of the arrangement with the manufacturer, this contractor has a link on the product manufacturer’s website as a “resource” in the protected geographic area. In this case, it was a strategic decision to link the electrical contractor with the manufacturer, leveraging the marketing approach of the manufacturer.
If you decide evolving to a product-centric business solution makes sense for your business, these steps should speed up the process:
- Contact several competing product manufacturers (for a single product type) to explore possible teaming agreements. Specifically, find out what these manufacturers offer and, based on your assessment, which manufacturer strategically fits best with your firm. Remember that once you choose a specific product manufacturer, you will be required to work only with it from this point forward.
- Look at a variety of different types of products. Many firms are only establishing preferred reseller agreements for a single product type. To make this approach viable, it’s important to establish a series of product type relationships for a broad range of the offerings that your firm provides to the marketplace.
- Expect to pay for some specialized training. Most product manufacturers want to make sure your technicians are fully cognizant of the nuances of their product. In most cases, the manufacturers will require that a certain number of your employees receive (and pass) the necessary training to be proficient on the installation and maintenance of their products. Some manufacturers will provide this training to you at no cost.
- Expect to warehouse some of the product at your site. To reduce the manufacturer’s costs, it makes sense for it to shift storage to you and have you maintain an inventory of the selected product at your site.
- As a reseller, you will be asked to step up to sales targets for the product. It does no good for a manufacturer to provide you with an inventory that never moves. In fact, it negates the value of the purchase discount. Instead, you should realize that its profit margins increase the more product it moves from its shop.
- Don’t be scared to change product manufacturers. Some products, over time, will degrade in value in the marketplace — it’s a reality of the product life cycle. When this occurs — and the product manufacturer is losing relevance in your marketplace — make sure you have negotiated a “get out of the deal” clause in your contract. Not having this escape clause could doom your business to the same fates as the product manufacturer.
It’s a new market for electrical contractors. The evolution from a pure services environment to a product-centric business model isn’t without risk. But in some cases, this necessary change can ensure continued double-digit profitability.
Dawson is managing director of LTV Dynamics, an international sales management and business consulting firm in the suburbs of Washington, D.C. He can be reached at BLDawson@LTVdynamics.com.