Value-Added Distribution Can Work

September 14, 2007

Splash of Color’s success proves the point
By Steve Aranoff and Robert FitzPatrick

In the May column we discussed how value-added distribution can work despite the fact that customers are fickle, do not give any lasting value to favors, and try to buy "cheap."

We referred to one particular success story in this arena: Splash of Color, a digital imaging distributor and value-added reseller in Dallas, Texas. We had first run into Splash of Color’s COO John Nelson in the early to mid-’90s when he was pioneering this message while trying to build a distribution sales business. At the time, Nelson always went out of his way to demonstrate technology-based products to the customers of his dealers, but he was also trying to distribute lower margin products at the same time.

About five years ago, Nelson indicated that he was getting fed up with a manufacturer who tied Splash’s upcoming year’s quota to increasing their sales of high-volume, very low-profit commodity products. He decided to do something about it and moved forward by changing the company’s business model.

Charting a new course
Nelson steered Splash onto a new course, distributing products that really needed a value-added sales process. They found that 70 percent of their efforts were being directed toward products that added 30 percent of their profitability. He figured that they should just stop selling those products and instead concentrate on the other 30 percent that accounted for 70 percent of their profitability. At the same time, they would try to sell more of these profitable products and add more "correct" products to the product line.

They would advocate a small number of manufacturers’ products that did well for them and continue to grow profitability, if not sales volume. The immediate change was a significant reduction in sales volume, but their profits more than doubled at this lower volume.

Out went the mass-market products and finicky buyers; in came the more specialized products and buyers for:
• wide-format printers,
• laminating systems,
• wide-format scanners, and
• digital photo printers

These products could be demonstrated and "sold" to newer customers, including screen printers, commercial photographers and sign makers.

Within a year, Splash’s volume was back up and profitability continued at higher levels. Rather than taking on more products for growth, the company has instead found itself responding to customers’ input by developing/ modifying custom versions of the products it already sells.

Why is this important? Because Splash can justify the small volume of modified products based upon its smaller size, whereas an OEM couldn’t afford to modify such a small number to satisfy the individual needs of a few customers. This ingenuity further adds to Splash’s profit and sales growth.

Sales assistance
The distributor actively works with dealers to help close the sale. Splash provides a fully stocked demonstration center to which the dealer can bring customers and do a demo themselves, or have Splash do it for them. They provide inventory levels sufficient to make deliveries quickly (and have a sophisticated electronic inventory database and accurate shipment tracking for products coming in from OEMs). They manage their inventory flow so that it is an asset to selling and profitability.
Splash, on request, will install equipment, train the customer and provide on-site service. They do charge the dealer for these services but the added value reinforces the dealer’s value to their customer, the end user.
And all technical, business and buying/pricing/stock level information is readily available to each dealer through Splash’s dealer website.
Unlike most electronics distributors we see, who are really order takers for the manufacturer of commodity products, Splash tells the dealers and their customers that they don’t even have to know the product they want to buy or the repair part number they need. Anybody who answers the phone will be able to walk them through the problem, make suggestions and offer a recommended solution.

Through these actions, the company has developed a positive relationship with dealers who like being properly supported throughout the sales process and like even more receiving higher margins for their actions. The customers like it because they can get accurate information about products they might like to buy.

Better business
Bucking the trend toward poor relations between manufacturers and distributors and dealers, Splash seems to have good relations with their OEMs and customers. So much so, dealers allow the company to drop ship without worrying about having a customer stolen from them. The good relations with the manufacturer come from setting mutually agreeable goals and accomplishing them together.

Relationships like this mean that the three sides trust each other and work together seamlessly. Splash’s biggest problem is that there are some cities in its geographic region in which it just can’t find good dealers, ones willing to carry their own part of the bargain to sell through. In these cases, while tempted to sell direct and make more margin, the company bends over backwards to find a more distant dealer to handle the account. To them, this is preferable to starting a rumor among their dealers that they’re beginning to go direct.

In the larger part of the printing market, the traditional graphic arts distributorships that we normally discuss are really large "dealers." As we move from commodity supermarket mentality to advocacy, it will be interesting to see if these larger manufacturers and dealers/distributors have as much success as other smaller players have been able to achieve.

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