Retailer Services… Lipstick on a Pig?
You’ve picked a tough business. Even among well-managed retailers, profit margins are anemic and unsustainable. Some of the largest organizations regularly report operating losses and the leaders turn in profit margins of 3-5%.
There are a several reasons for this…
Customer Consolidation
Demographics are future history. The average age of US Farmers is roughly 57. The “over 65” segment is growing MUCH faster than all other age demographics. This wouldn’t be so bad if their acreage was going to young farmers just starting out, but it isn’t. Think about your customers. Where does the acreage go when someone retires? More often than not it goes to one of the biggest operators in your community.
Consolidation among cooperatives and other agricultural retailers makes headline news, but it isn’t keeping pace with acreage consolidation. USDA figures don’t tell the whole story. Changes in ownership of farmland isn’t nearly as important as changes in control of farmland. Large operators are picking up acreage more quickly than the retailers who supply them can shed cost.
This doesn’t mean that grain farmers will dictating input prices like Smithfield Foods in hog production anytime soon, but don’t kid yourself… bargaining power will keep trending toward buyers for some time.
Technology & Equipment Utilization
Historically, the size of farming operations has been more or less capped by the fact that only so many acres could be planted and harvested during the Spring and Fall. Giant planters and combines, along with auto-steer technology have dramatically increased the acreage that an operator can cover. Making matters worse for ag retailers is the fact that technologies such as Roundy Ready® and bT Crops reduce reliance on professional agronomists, making self-application of pesticides a viable choice for many operators.
A blurry glimpse of a possible future comes from the potato business. When I worked as CFO of the Naturemark®
Potato Company, I was amazed at how few operators supplied the almost all of FritoLay’s inputs. These operations start in the Southwest and work their way north to Idaho and Wisconsin as the season progresses. As this practice, now common among specialty crops, makes its way into grain farming, service needs will change.
Will your organization be able to adapt?
Undifferentiated Offerings
How is your business different than your competitors? Be honest….
We often ask farmers to rate their knowledge in agronomy and farming practices on a scale of one to five, with “one” being much worse than average and “five” being much better than average. Usually 80-90% of farmers rate themselves as either better than average or much better than average.
The impossibility of 90% being above average reminds me of a quote by General George S. Patton, who said “If everybody is thinking alike, then somebody isn’t thinking.”
It’s like that in our business, too. When I ask retailers how they’re different than their competitors, most generically answer “service.” With due respect to Jeff Foxworthy, if your answer to that question is “service” without a definition of how your service is different, then it might be time for some new thinking.
What happens when powerful customers get to choose among suppliers offering the same products AND services?
The answer is that they buy on PRICE, with little understanding or concern of the impact on your margins.
I don’t mean to imply that customer service isn’t important. In fact, it makes all the difference in the world, but we need to think about it differently. People base buying decisions on value, which is made up of three variables:
- Product
- Service
- Price
A simple equation can illustrate how these variables interact with one another in the minds of your customers.
Value = Product + Service - Price
Obviously, people want to purchase the best possible combination of products and services at the lowest possible price. In our business, typically the products we sell are more or less commodities. Until the seed and grain businesses become truly linked, creating a need for identity preservation, this is unlikely to change.
Moreover, if our services are the same as our competitors, the only way we can show up differently is by using price as a weapon. It doesn’t have to be this way. I’m not naïve enough to say that price won’t be key to every buying decision. However, if we define service properly, we can elevate it to the point that becomes another driver of value.
We usually define retailers as being either “full-service” or “limited service.” This is a bad habit. The customer gets to define service and the truth is that it has a different meaning for everyone. So what can we do?
It’s not practical to craft truly unique offerings for an individual customer. However, no matter how many times we do the research, we keep coming up with three fundamental buyer profiles.
Relationship Buyers
The cliché for these buyers is that “people buy from people.” Which is certainly true. In ag retail, these are the customers that you can count on sticking with you as long as they feel appreciated and that they are being treated fairly.
These folks don’t want to “shop you” too hard. They want to support local businesses. They like it when you stop by their farm and they often view farming as a lifestyle.
While relationship buyers tend to be older, it’s important to resist the temptation to segment buyers by age. This is a fundamental personality trait that generally doesn’t change much as we get older. For example, my 8 year-old son who couldn’t care less how his hair looks requires large “bribes” to get him to even consider going to anyone other than “his” barber.
These folks likely represent about 30% of your customer base. But their operations are often smaller, so they likely represent 20-25% of your total service acreage. One key to keeping these customers happy is recognizing how central the notion of a farming lifestyle is to them . Many of these customers either have a day job or a spouse that works off-farm. They realize that they are far from your biggest customer, and service to them usually includes:
- Creative delivery and application solutions that help them have more time
- Feeling like you value their business as much as the larger operators
Price Buyers
It’s not hard to think of customers who fit this profile. In fact, there’s a natural tendency to lump everyone except the relationship buyers into this category. But that would be a mistake…
Through our research, we find that these folks also make up about 30% of the population. They know the price of everything & the value of nothing. It’s all price & win-win thinking is foreign to them.
The key to serving these customers profitably is limiting the offer. Some advise “firing these customers.” That’s arrogant and impractical. If you’re like me, you want all of the customers you can get. But forcing trade-offs during price negotiations is necessary. “What are you willing to give up in order to get that price?” Stress that you need to make a living, too.
Make sure he knows that you want his business, but that something has to give. Two positive outcomes almost always come from this discussion. First, it forces the customer to concede that you provide valuable services. That’s a start! Secondly, it protects your reputation with relationship buyers. The fastest way to lose a relationship buyer is to make him feel that he’s not being treated fairly.
Price buyers are tough, but progress is possible. Effingham Equity, a large and well-run coop in Southern Illinois has used “full-cost” invoices with price buyers for years. The invoice includes prices for delivery, scouting and planning services. But at the bottom of the invoice is a credit that adjusts the price to the point where it’s attractive to these customers. This accomplishes two things. It gives these customers the “good deal” they crave while reinforcing the tremendous value that your organization brings to the table.
Economic Buyers
Roughly 40% of farmers fit this profile, making them the largest of the three segments. Moreover, they tend to be the ones adding acreage the fastest. While relationship buyers tend to view farming as a lifestyle, Economic Buyers view it as a business. Their buying decisions are largely based on value.
Remember the equation…
Value = Product + Service – Price
Unlike price buyers who seek to increase value only by lowering price, economic buyers accept that value can be created by well-delivered services that benefit them.
These buyers often have their own trucks, spray rigs, etc. They may pay agronomists for planning & scouting. So finding services they’ll pay for can be challenging. But unless we can find services that they value, they’ll act just like price buyers.
We understand that it’s neither practical nor wise to tailor an absolutely unique offering. However, giving your sales team the tools to work with your customers in the most effective manner is much easier than you might think. No organization is too large or too small to understand and recognize the service needs of its customers. Your future success depends on it.
To learn more about real-world segmentation and other marketing strategies, call Steve Musser at 800,454.1096.
Steve Musser is VP of DC Musser and serves as a Senior Consultant with Adayana / ABG, a leading agricultural consulting firm based in Indianapolis, IN.