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The Myth of Cost-Free Distribution

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Posted June 8, 2001 By Phil Wainewright     Feedback

Online providers and ASPs are rediscovering the unavoidable cost of customer service, writes consulting analyst Phil Wainewright.

One of many myths to arise during the crazy years of the dot-com frenzy is proving hard to unlearn -- the myth of cost-free distribution. Dot-coms thought the Internet meant they could interact directly with customers, cutting out the need for intermediaries and bricks-and-mortar sales outlets. ASPs and software vendors thought the Internet meant they could deliver finished applications direct to small and medium-size businesses without having to share revenues with integrators and resellers.

It was a myth because it was based on the belief that distribution is simply about transferring goods and services from one place to another. As so often happens when technologists are left to set up businesses without the benefit of wiser counsel, this assumption completely discounted the human element — the vital personal service ingredient that characterises an effective distribution channel.

Customer Service Meets the ASP Model
It's good to see that customer service is now coming back into fashion, but unfortunately many providers are still having a hard time working out how to deliver excellent customer service within the ASP model. As a result, they're finding it difficult to attract and retain customers.

ASPs — and all other Web-based business service providers — have to get these two elements right if they are to achieve excellent customer service:

  • Offer a business solution — Although a minority of customers are prepared to invest time in setting up new technology, the vast majority just aren't interested. Suppliers have to do the thinking and the tinkering for them. Customers want ready-made services that fulfill a need that they recognise, and which they can simply plug into their existing business processes and start using right away.
  • Build a relationship — Delivering a service is a long-term relationship, not a casual encounter. It's essential to build trust and confidence. Customers need to feel that the provider understands their business and is committed to taking care of their interests.
Back in the early days of the Internet, it was assumed that computers would automate those customer service elements. That may become possible in the future, but the challenge is too complex for present-day technology — particularly in a business-to-business environment. Look at how much Amazon had to invest in automating the simple retail process of choosing and ordering books, and then delivering them in Internet time. Selling complex, high-value business services is a task that requires accumulated specialist expertise and industry knowledge, accompanied by a great deal of communication and interaction. Automation can be effective only if it embodies all of that expertise, knowledge and relationship handling.

Paying the Price for a Relationship
The investment and overhead required to create appropriate solutions and build relationships constitutes most of the cost of distribution. Effective customer service depends on having an intimate knowledge of the customer's specific industry and business environment. Providers who aim to address multiple markets therefore face huge costs. They must acquire the skills to develop separate industry offerings and maintain separate sales teams for multiple verticals and regions. Providers who have successfully avoided falling into this trap have opted for one of two alternative paths:
  • Becoming a vertical service provider (VSP), a form of ASP that specializes in understanding and marketing to a single vertical market. By concentrating their resources on a specific target, VSPs can invest in serving a homogenous customer base and contain their distribution costs.
  • Working with a reseller or integrator channel, whose members can tailor the generic solution to their individual markets. The provider becomes a Master ASP, delegating customer service — and thus the bulk of the costs of distribution — to channel partners, in return for a share of revenues.
Think Small
The smaller the target company, the larger is the need for providers to work with sales channel partners. Small businesses prefer to buy information technology from other small businesses — local IT providers, business advisors, consultants or personal contacts who they trust. Online providers cannot supplant these intermediaries; those who tried to do so through massive spending on advertising and marketing have already crashed and burned. If they are to reach large numbers of smaller businesses, they must find a cost-effective way of persuading and empowering these trusted advisors to recommend and deliver services on their behalf.

Phil Wainewright founded ASPnews.com and now serves as a Consulting Analyst. Phil is based in London, UK and can be contacted at pw@philwainewright.com.

Reprinted from ASPnews.com

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