Part II

For the most of the 20th century, bundling services with product sales made sense. Profit margins were healthy, customers' needs were generally homogeneous, and the purchase-coupled-with-service business model was a fit for retailers and most of their farmer customers. No longer.

Virtually nothing about this new millennium resembles the old. Profit margins have tumbled, customers want customized levels of service — or none at all, and the “we'll-do-that-for-free” mentality is far too costly for retailers to maintain.

“All of us need to reevaluate the business model,” says Paul Kindinger, president and CEO of the Agricultural Retailers Association. “We used to sell fertilizer and chemicals. Now we need to sell information, data analysis, crop consulting services, application technology — all of the things that used to be bundled in with product sales and virtually given away.

“In addition, we are now in the age of customization. We cannot look at customers as homogeneous — each customer has different needs. So define each individual's needs, determine how you can boost that customer's productivity and profitability, then sell the value of that customized package.”

Customization.

For Johnny Schaben, president of Farm Service Center Inc. in Ellinwood, KS, customization is a key aspect of customer relations. And his approach takes many forms. Whether it's combating Internet and broker sales, designing full-service programs or expanding financing options, Schaben says it pays to know your customers.

“Every farmer is different,” he says, “so you have to figure out each individual's needs. For example, no-till production is expanding rapidly in this area, and we are seeing more and more farmers doing their own application because they have more time. Those farmers only buy product — today. But if they expand their operations enough, they'll eventually need our services to substitute for hired labor. Not only is each farmer different from another, each individual may have different needs every two years or so.”

Schaben also has a strategy for dealing with farmers interested in low-margin, direct purchases from Internet sources or brokers. For Internet sales he emphasizes the value of a return policy and complaint handling. For broker transactions he takes advantage of unique, local characteristics.

“It's tough to compete with a broker who sells a generic product like a base fertilizer,” he says. “So it makes sense to develop a custom blend that has specific applications for a local area. Again, it's tailoring a product for specific needs. Then price isn't the only consideration.”

For the long haul, Schaben is concentrating on full-service customers — they get preferential pricing and a full array of financing alternatives from a variety of sources.

“That's what business is all about today,” he says. “Know your customers and provide the options they need.”

Pricing.

John Hester, owner/manager of Nichols Agriservice in Nichols, IA, sums up the service dilemma succinctly: “If margins are sufficient, you don't have to unbundle everything. But if margins continue to fall, we have to deal with that.”

Hester already is. When prices for Roundup began falling, he changed his rates for product application. He also analyzed rates charged for other services and instigated a tiered system.

“I charge $4.75 per acre to apply liquid nitrogen and chemical, $5.25 per acre to spray a chemical with water and $6.25 per acre to apply Roundup,” Hester says. “We also may have to start charging an appropriate fee for things like cleaning minibulk systems, scouting, computer mapping and yield monitor work.”

For Hester, determining pricing structures will be critical in the future, and he is prepared for the challenge because he knows his costs.

“We maintain separate profit centers for custom application, liquid nitrogen, chemicals, liquid fertilizer, dry fertilizer, the grain business, seed — virtually every aspect of our business,” he says. “If you have to replace falling margins with service charges, you'd better know your costs.”

Of course, it's much easier to charge for new services than old, and Hester says many retailers have an excellent opportunity to do just that.

“Seed is a good place to start,” he says, “because it's new to most retailers. There are costs involved like warehousing, delivery, test plots and weigh wagons, and they need to be included in the price. It's much easier to build those costs into a new service than it is to start charging for something that historically has been free.”

At the West Central Co-op in Ralston, IA, there's nothing new about charging for services. They always have. And Larry Thomsen, vice president of agronomy, is glad they bucked the bundling trend.

“I've been here for 30 years,” Thomsen says, “and our corporate philosophy has always been that we charge for services. Believe me, there were times when our competitors made it seem like the theory from hell, but we've come full circle.”

By starting with meticulous cost accounting, the co-op developed a “laundry list” of service charges that range from toolbar rental to fertilizer delivery to soil testing. Under this system, all service charges are posted and each farmer chooses what he or she needs.

And as technology evolves, the co-op consistently adds new services. “We offer a full range of variable rate technology,” Thomsen says, “and our crop consulting department now has 20-some segments that range from soil testing to satellite imaging.

“Ultimately, we are focusing on a full identity-preserved production system where we are at the farmer's side from when the seed goes into the ground until the crop is loaded on a ship.”

*know-how

To determine how much to charge for services, costs must be accurately determined. Consider every revenue-producing operation as a separate profit center and study the costs that affect each area. Then analyze, analyze and analyze some more.

Pricing is not completely analytical, however. On the one hand, there is the true cost of an operation; on the other is the opportunity cost for the farmer — how much does hiring you to do it add to the farm's bottom line, and how much time and trouble does it save the farmer? The process begins with true cost but ends with true value.

Focus on adding new services like consulting, data analysis, marketing services, mapping technologies — whatever adds value. It's easier to charge for a new service than for one that historically has been free.

Take the time to look at each customer's needs, then tailor a program specifically for that customer. Charge only for the services clients need, not for services they don't want. And remember: Farmers aren't just different from one another, each farmer's needs change over time.

To combat Internet sales, focus on the value of return privileges and complaint handling. To compete with brokers, design custom products that apply specifically to your local market.

Want to use this article? Click here for options!
© 2007 Penton Media, Inc.