Counselor

Diversify or Die

Distributor businesses today need to appeal to as diverse a client base as possible. Here’s why it’s necessary and how to do it.

Sixteen years ago, Top 40 distributor CSE (asi/155807) might have been a ticking time bomb. Back then, the New Berlin, WI-based distributor had one client that represented 65% of its business, says Mark Ziskind, the company’s chief operating officer. Fortunately for CSE, it occurred to them – long before the great recession taught everyone about the importance of diversification – to expand their client base.

“Today, no one client represents more than 13% of our total sales,” Ziskind says, recalling distributors with large-scale clients like Washington Mutual, who saw their companies dry up overnight during the recession.

“It’s scary,” says Chris Vernon, president of Top 40 distributor The Vernon Company (asi/351700), based in Newton, IA, about clients that take up too much of a company’s resources. And though none of the company’s 30,000 clients represent more than 3% of sales, the company still has customers whose large orders take them out of their comfort zone.

The company was hit hard recently by a financial services firm that went from a million-dollar client to one ordering just $70,000 in promotional products within a year. “We didn’t lose the client,” Vernon says, “but they’ve never regained the purchasing they did before the recession.”

How to avoid similar client pitfalls? The key is diversification, says Vernon and others. In fact, the economic downturn of 2009 showed companies nothing if not the need to diversify, say industry insiders, who caution that, even in the best economy, a top client should never represent more than half of a company’s yearly earnings.

“You want to diversify your customer base as much as you can to avoid that one customer who’s going to go away,” says Robert Holland, chairman and CEO of Vistage Michigan, an executive coaching firm based in Ann Arbor, Michigan.

Recipe for Stability

After all, even those clients that seem the most stable can falter. In one case, a church The Vernon Company had worked with repeatedly suddenly shuttered, blindsiding the distributor with a $40,000 loss. “An actual church went belly up,” Vernon says, incredulous. “We had worked with them for a long time. We didn’t see it,” he says, recalling how the organization had ordered a multitude of items and paid part of the bill only to walk away from the deal midway through completion.

And that’s one of the most important factors to keep in mind, say experts – that any organization can become insolvent almost overnight, no matter how seemingly stable. So it’s important to constantly reevaluate their strength as well as yours in the marketplace. Not diversified enough in clients, services or markets? Then you’re operating dangerously, says Nancy Simmons, president and CEO of Aero Industries in Orlando, a diversity expert who advises companies on how to expand their business after her own firm backed away from a defense department contract that represented 85% of its annual revenue.

“I really think 60% in one industry, let alone one client” is a dangerous way to operate, says Simmons, referring to the depth to which one firm should represent a distributor’s sales.

That can be a tricky proposition, since too much diversification can leave distributors “with no client relationships at all” and an equally unsteady business model, says Vernon. In fact, how to diversify in a largely commoditized marketplace can be a distributor’s biggest challenge, says Marc Simon, CEO of HALO Branded Solutions (asi/356000), a Top 40 distributor based in Sterling, IL.

“It is not necessarily realistic to ever ‘ensure’ that your company is diversified at all times,” Simon says. More to the point, in an increasingly competitive marketplace “it is not realistic to turn down profitable business from a valued client,” he adds. “So that client may grow to represent a very large portion of your business.”

The key, says Simon, is to maintain additional client growth in relation to customers who are becoming a greater and greater piece of company sales. For HALO that means “no client is close to representing more than 5% of our business,” Simon says, and “no sales office represents more than 10% of our revenue.”

The same holds true for end-user industries, where the company ensures that no single industry provides more than 10% of the company’s overall income for the year.

Diversity Analysis

The key to being able to diversify is to clearly analyze exactly where your company’s revenues are coming from on both a client level and an industry level. It’s incumbent upon distributors today to know exactly what percent of their business is represented by each client and by each market that they sell to. Experts say that those numbers should be reevaluated on at least a quarterly basis to ensure that no market is representing too much of a company’s sales.

Also, part of a distributor’s ongoing analysis of their need to diversify is to determine how big a loss one client would be. How to do that? To start, distributors should “remove the large client’s revenue from the profit and loss statement and then identify the incremental profit that would be lost,” as well as the steps needed to regain that loss, Simon says.

When diversifying, many distributors advise expanding service offerings as much as, if not more so, than product lines. That’s a smart tactic, says Dave Lakhani president of Bold Approach, a sales and business consultancy in Meridian, ID. “The problem with offering a wider product line is that everyone has the same product line,” in this industry, Lakhani says.

Instead, he suggests that distributors mine their current clients for more contacts, diversifying their client base as opposed to their product line. Too much business with one customer? Be honest with your client, Lakhani advises, letting them know that they’re accounting for too much of your company’s annual sales. Ask that client for referrals internally or within their industry, he says, adding that diversification within an industry where a distributor already has expertise is always a smart first step. Cold calling, particularly when it comes to expanding a company’s client base, “almost universally doesn’t work anymore.”

In fact, connections are the key to diversification, says Simmons. That can come from referrals from current clients, but it can also come from competitors. “The more people you can reach out to, the better,” Simmons says, adding that indirect competitors (like ad agencies, screen printers, and marketing agencies) are often the best resources for ideas on finding new clients or adding new services.

Along those lines, it’s important to determine if your best-selling product or service fits into a tangential marketplace – one that perhaps your current clients compete with or support, says Holland. Asking for referrals to customers of your current clients, for example, is an easy way to connect with another industry in a way that makes sense for the services you offer.

Market Mix

For distributors branching out to newer markets – a key strategy to remaining aggressive and ensuring client diversity – it’s important to be strategic, Lakhani says. Rather than targeting big players randomly, Lakhani suggests distributors identify their “fab 50” – the top 50 influencers in the industries they already sell to. These aren’t necessarily sales prospects. Rather the “fab 50” are potential sales leads as well as market leaders who can open doors to additional clients. That could include current clients in your marketplace, their competitors or even suppliers or other distributors within the market. Then, create a “drip campaign,” Lakhani says, with the idea that your campaign will motivate them to refer new clients to you and ultimately get business in return. They should be companies that “even if you did business with or received referrals from only 20% of them in the coming year, they would meet all of your commission goals,” Lakhani says.

To create a drip campaign, he suggests that distributors “drip” information and marketing materials on them at least once a month accompanied by twice-monthly phone calls. “Once a month they should get lumpy mail” with a product sample geared toward their industry or specific company, he says. “At the end of 12 months if they haven’t purchased from you, you’re still creating a flood of awareness and giving them branding and marketing tactics they can use,” says Lakhani.

And that keeps a distributorship top of mind among industry influencers – always a smart, long-term growth strategy.

Short of expanding the number of clients a distributor has, experts also suggest they expand their client services in order to diversify. That might include showing current clients how to increase their newsletter subscription or capture rates, including writing the necessary materials for customers, Lakhani says, as well as offering suggestions on the best way to follow up with their clients’ prospects. While distributors can’t be everything to everyone, it’s important that they diversify their services in a way that relates to their current offerings in order to remain competitive, he adds.

“You owe it to your clients and employees to diversify your client base.”

Mark Ziskind, CSE

Expansion Funding

Perhaps one of the biggest challenges to diversification and growth is the need to fund that development. For distributors who need to purchase additional equipment, pay for marketing campaigns or hire staff for additional services, that can feel like a risky venture without guaranteed income coming in the door. Quick capital through merchant cash advance providers is one way to receive rapid funding, where funding firms offer cash in advance for a percentage of future sales.

The trick to funding wisely as a distributor diversifies, however, lies in expanding into known territory – either product, service or market lines that are familiar to the company, says Jeff Beckwith, CFO of New York-based funding firm Merchant Cash and Capital.

“Let’s say a restaurant wants to open a Laundromat next door,” Beckwith says. Expansion into unknown markets, even if it’s within the same geographic territory, “we’ve found those to be not good investments on our part.” At a 2.5% payback on money funded, merchant cash advances can be a smart move in a tight market, and Beckwith says many of the companies they work with go through two rounds of advancements before they find they’re stable enough to fund their growth from within. But those who expand carelessly are stuck with the advancement obligation.

So it’s smart to invest wisely. Finding the best place to diversify into can often be identified through current clients, Aero Industries’ Simmons says. Asking clients what your greatest strengths are may surprise you. In Simmons’ case, it helped her identify her power as a sourcing firm, helping to expand her company exponentially and develop a slew of new customers.

Holland agrees, and adds that existing clients are also a great audience to test new products and services – a safe, loyal focus group ready-made for feedback. Doing so “lowers the risk of diversification and will perhaps save the reputation of your company as it moves to diversify,” Holland says. Loyal customers are unlikely to drop a distributor if he runs a product or service by them that’s unsuitable for the industry. That way it’s nixed before it hits the marketplace.

In the end, diversification is one of the key factors of distributor success in today’s marketplace, say industry insiders. “Look at the number of bankruptcies in our industry,” says Ziskind, alluding to the fact that some are scared of doing business with suppliers and distributors who have too much invested in one client or industry. “You owe it to your clients and employees to diversify your client base.”