I am a middle man. I run a business that sells HVAC products and equipment to contractors. We do not do any retail.
In my world, it is common for the manufacturer of the equipment that I am selling to set up factory direct stores that welcome contractor business. It makes it interesting, to say the least. Imagine you are doing your best you can to sell a company’s products, then they set up a store down the street a few blocks and sell directly to your customers. It may sound weird to some, but it happens all the time in my industry.
We sell service, delivery, no damage, taking care of problems, and basically do everything that the factory direct stores can’t, or won’t. The relationship is more complex than this, but for this post that is all I need to explain about it, as that is the nuts and bolts of it.
The huge problem with this situation is that as a reseller, you are obviously at a price disadvantage to the factory direct store. There is only so far you will go with this line. That is fine with me, you either take it or leave it. But something interesting happened a few weeks ago. I received a call that this particular manufacturer was shutting down its operations in my state. That is awesome news for me.
For whatever reason, a disgruntled employee from the factory store came over and gave me a handful of price sheets and told me which customers were on what sheets. This is great news as well. I thought.
As I began calling these customers, most of which I already had relationships with from selling them other things, I quickly realized that this wouldn’t be as easy as I had hoped. Is anything easy anymore?
This factory store had a blizzard of different price sheets on the street, and the information that I received from the disgruntled employee was about half right. Many of the contractors had not received current pricing. Imagine my surprise when I was told by some contractors that they had not had a price increase in several YEARS. Have you seen what raw materials have been doing? The trend is UP, to say the least. What is an air conditioner or furnace? A bunch of copper, steel, and other raw materials bent, soldered and welded into a usable form.
On top of all of this, most of the contractors were not getting invoiced correctly from the factory store according to their (not current) price sheets. Many times it was lower, or higher, depending on the employee that worked there that day, apparently. I heard rumors of the factory store dealing units out the back door for cash, opening side companies, sub distributors, and kickback schemes. It is incredible. I have filled almost a complete legal pad full of stories that I have been told.
As an added bonus, many contractors were being sold products AT COST. No kidding.
I have many more things to add to this list of nonsense, but you get the drift. It is no surprise that the manufacturer pulled the plug on this operation, because they weren’t making ANY MONEY.
It is at times like this that I think of Freakonomics by Steven Levitt. Much of that book is and has been argued, but one thing that really sticks out in my head is the concept of incentives. Of course Levitt didn’t invent the concept, but he explained it very well in his book. It is clear that the employees of this operation had zero incentive to make money. I wish I had the information, but I would guess that the manufacturer paid the employees by the number of boxes that passed through the place rather than the amount of profit that they made, which is a huge mistake imho. This would partly explain the low margins on many accounts (some zero) and the general lack of any perceivable plan on their part to present themselves as professional business persons. This whole episode really kicks in at the end of the month when the factory store officially closes, and it will be insane at my place, in a good way.
It has been quite an eye opener.