The Bundling Effect of Distribution
I’ve covered the value of bundling and unbundling as a business principal in the past on this blog but I like to share certain examples that arise in my daily life that remind me of the principal. As I covered in this blog post about the channel business and our growth of reseller partnerships, the commoditization of hardware and any physical product has led to the proliferation of the distribution business model.
I have some incredibly successful distribution leaders that follow this blog and I’m sure they’ll have some tweaks to my understanding here but I’m going to do my best to simplify the fundamentals of distribution and what make them so successful.
Let’s look at the basic makeup of a distributor:
Large fixed costs like warehouse space
Operating costs like specialized staff and expertise
Large balance sheets that play “bank” to its customer base as it carries large accounts receivables for short and medium duration
Maintain relationships to a large set of customers
Handle end customer billing and fulfillment
Let’s look at the supplier’s relationship to the distributor:
Off-take partner that smoothes out purchasing and reduces inventory to billing cycle
A multiplier effect for customer acquisition and marketing function to end customers
An outsourced fulfillment function for the supplier to the end customer
All of these benefits above are paid for by ways of giving “margin.”
As a consumer, you probably interact with retail distributors all the time. Lowe’s plays a similar role to me as a homeowner. I don’t call Weber for my grill, Lutron for my lights and 3M for my air filters - I go to Lowes, speak to their specialists and then purchase through them. I get the value of bundling my purchases at retail price and in turn they bundle their own purchasing power to their suppliers. They buy product in bundles at X and sell to me unbundled for 50% above X while delivering value to me through expertise, convenience and service - a fair economic trade.
In our work at Xeal, we’re quite familiar with distributors who play in the electrical industry. An electrical distributor carries pipes, conduit, wiring, transformers, switchgear and more (including EV charging equipment now). They play supplier and bank to electrical contractors who are working on job sites, rolling trucks and frankly need one place to call on for all their needs. When Michael’s Electric rolls up to its distributor ready to ‘buy out a job’ that requires pipes, wiring and more, they may very well say “hey, the architectural plans call for 50 level 2 electric vehicle chargers, what do you have?” It’s at that point that the distribution salesman earns their keep as they prepare to educate the buyer (the electrician) of a newer category and influence the buying decision.
‘Parts and smarts’ has created a new wrinkle and an opportunity for distributors. While distribution has always sold parts, the onset of software built into hardware devices (accompanying software contracts) is becoming an important function of the distribution business. As IoT continues to touch everything from your microwave to your new ‘smart’ lawnmower to EV charging solutions, the distribution partners now need to take into account customer education and process besides buying parts in bundles and selling them unbundled - they need to be able to communicate the value of software differentiation to accompany the parts.
The best distributors will recognize the opportunity of smart devices and build an expertise around this if they haven’t already. While an electrical distributor used to be the home for ALL electrical supplies, it’s probable that you’ll see the unbundling of electrical distributors into specialized distribution functions for smart lighting, smart grid technologies and smart home solutions OR they’ll stand up divisions that exclusively focus on these categories to ensure they too don’t become unbundled.