Focusing on the Feds

Uncle Sam wants you. Well, it’s not so much that he wants you as that he wants to buy from you — as long as your company offers competitive prices and, perhaps even more important, provides exceptional service. A recent survey of government buyers conducted by Fairfax, VA-based business-to-business research firm Market Connections found that customer service ranked number one in what government buyers were looking for with selected vendors.

The good news is that most catalogers already provide top-notch customer service, so catering to the federal government should be a breeze in that respect. The hard part is finding federal customers and getting and staying on a General Services Administration (GSA) schedule (a master catalog of government-approved vendors and goods) to be able to accept large orders. But considering that government buyers need everything from computers to safety supplies and that they tend to need such items often and in quantity, selling to the feds is well worth it for b-to-b merchants.

Slowing, but still growing

The combined spending of federal, state, and local government offices represents 25% of the gross national product. Sales from the federal SmartPay credit card hit $17.1 billion in 2004, up from $16.2 billion in 2003. While that 5% growth rate is down from a 6% increase in 2003 over 2002 and a 10% hike in 2002 over 2001, it’s still growth nonetheless.

You may already be selling to the federal government and just not know it. Here’s an easy way to find out: If you run a sales report for purchases paid for with credit cards whose numbers begin with “4716,” “4486,” and “5568,” you will get a tip-of-the-iceberg reading of federal government potential for your catalog. These are all government-unique prefixes for Visa and MasterCard accounts issued to federal employees.

The appearance of such prefixes on sales reports proves that you don’t have to have a GSA contract to sell to the federal government. But federal buyers can’t spend more than $2,500 per transaction with a company that does not appear on a GSA schedule, and for state and local governments, the maximum per-transaction amount can be as low as $500.

To receive government orders of more than $2,500, you need to be on one of the more than 50 GSA schedules. Each schedule represents a product category of tens of thousands of items from thousands of vendors. Any federal agency can purchase from GSA suppliers. The GSA schedule procurements have averaged a more than 20% growth rate during the past four years, reaching $32 billion last year.

For vendors, getting on the schedule is in effect a hunting license to go after government business. But becoming a GSA vendor isn’t a good idea for all merchants. Some b-to-b marketers find they do very well selling on the open market. To get on a schedule, you typically have to offer the government lower prices than you generally charge, which means your margins will erode; if you don’t make up for the erosion with sufficient sales volume, appearing on a GSA schedule could end up costing you money.

If you determine that a GSA contract is necessary, you can submit your own proposal, and negotiate terms, pricing, and conditions. But it’s a good idea to get a professional negotiator to do it with you. The cost usually starts at $8,000-$10,000.

Once you’re on the GSA schedule, you have to pay the Industrial Funding fee (IFF), or 0.75% of all schedule sales, to stay on it. This is payable on a quarterly basis. Failure to pay the IFF rebate can cost your GSA contract. So can noncompliance with schedule contract terms, selling products that do not conform to federal regulations (for instance, items that are made in China are usually not acceptable for contracts), having zero dollars in GSA sales, and not having an Equal Employment Opportunity compliance program can also cause you to lose your contract.

Merrimack, NH-based PC Connection, for instance, had had the GSA contract of its GovConnection subsidiary cancelled in November 2003. According to a statement that the computer reseller issued at the time, the government found that “GovConnection’s contract management systems and procedures may have resulted in the sale of unqualified items or the underpayment of required fees.” After losing the contract, PC Connection’s second-quarter government sales tumbled 16%, to $63 million for the three months ended June 30, 2004.

The good news is that losing a GSA contract doesn’t mean you cannot get back onto a schedule at a later date. PC Connection, for instance, was granted a new GSA contract in August 2004.

Finding the feds

The ideal way to market and sell to the government is with a multifaceted approach that includes a government-friendly Website, a catalog, telesales, outside sales, and events. The most important factor for catalogers is list selection. Most b-to-b response lists (subscribers, conference attendees, buyers) have clusters of government employees. The audit statements of the audited b-to-b publications often lump federal, state, and local government employees into a single category — especially if the numbers are relatively small — but they are there.

Working with your broker, or directly with the list owner, ask how many government names are on the files you currently use. Again, these numbers are often small, but they could represent exactly who you need to reach.

There are a variety of publications that target niches within the huge government market. American City & County (a sister publication of Multichannel Merchant) caters to local government public-works employees. Federal Computer Week, Government Computer News, and Government Technology target the lucrative government information technology audience. If you need to reach managers and executives, both Governing and Government Executive are strong publications.

Attendee files available include the eGov Institute and FOSE lists, owned by Federal Computer Week (101 Communications) and Government Computer News (PostNewsweekTech) respectively. (My company, Amtower & Co., also has a list, of SmartPay cardholders, on the market.)

The cost of business-to-government lists is comparable to the costs of business-to-business files. The selects available on some b-to-b subscriber files might include “government,” for which you would pay the select charge.

The most critical part of the list selection process is working with a broker who knows your company and also knows the nuances of selling to the government. If you are performing list selection inhouse, the same applies. For instance, many generically compiled files will have title slugs instead of individual names, and these titles may not make sense to government mailroom personnel, who will trash your catalog rather than distribute it.

You may also have to contend with high turnover and government employees frequently being reassigned. Having good relationships with your customers will allow you to know when people are migrating. This will help you identify replacements and to follow employees to their next position.

The key benefit that catalogers usually have over traditional government sales organizations is superlative customer service. It is usually a pleasure to buy over the phone from a competent catalog sales representative. The transaction is relatively short and almost always polite. Government buyers, like any other customer, remember this.

In fact, while the Market Connections survey of government buyers indicated that a solid, informational Website is a must when targeting this market, most government transactions are still being done over the phone, so keep your CSRs well trained and well paid. Other attributes important to government buyers, according to the survey, are breadth of product offering and speed of delivery. If you can deliver faster than your competitors, you may not need to offer the lowest prices.

Remember that this is a market in which hundreds of billions of dollars are being spent annually. What’s more, it’s a recession-proof market with deep pockets. There’s plenty of low-hanging fruit out there that does not require a GSA contract, and plenty of big fish that will make getting on a GSA schedule well worth your while.

Mark Amtower is founder of Highland, MD-based Amtower & Co., a consultancy that helps marketers sell to the federal government. Along with Multichannel Merchant senior writer Mark Del Franco and CDW Corp.’s director of advertising Jim Garlow, he will be speaking at the session “Marketing Secrets of Mailing to the Government” at the Annual Catalog Conference.

CDW: Selling by segmentation

By Jim Garlow, director of advertising for CDW Corp., a Vernon Hills, IL-based computer reseller.

CDW has had a wholly owned subsidiary that focuses on the public-sector market since September 1998. CDW-Government’s sales exceeded $1.3 billion by the end of 2004. We started CDW-G by replicating our commercial marketing program. But we found it was more effective to segment the account managers and sales force by target markets — education, state government, and federal government — and then by subsegments (such as Department of Defense) and sub-subsegments (such as air force and naval bases).

We create customized catalogs and direct-mail programs aimed at each of these customer groups, along with a Website that drills down into subsegments and contract-specific offerings and pricing. Each public-sector segment has various nuances, and understanding them is key to successfully marketing to these subgroups.

K-12 education spending, for example, varies greatly by state. New York and California tend to have the largest budgets — sometimes tenfold what a smaller state will have. If you have a field sales force, you should structure your sales team by the appropriate regions.

In state and local government, budget deficits prevail. Local government customers often take their lead from the state government, and there is an increased use of corporate procurement cards and e-procurement systems. At the state level, there are also various types of contract requests, such as requests for proposal.

Seasonal buying trends vary dramatically by segment. Education starts off slow but has significant increases between May and September. Schools may conduct evaluations of their “planned purchases” in the winter but actually make their purchases during the slower summer months. The federal market busy season is strongest from August to October, while state spending is slow in the beginning of the year but steadily grows, with peaks at the end of June and the end of December. Forty-six states run on a July-June fiscal year. The exceptions are New York (April-March), Texas (October-September) and Michigan and Alabama (November-October).

The history of SmartPay

GSA schedule procurements
In billions
2001 $17.6
2002 $22.2
2003 $26.9
2004 $32.0
Source: Amtower & Co.

The federal government’s credit-card program began in 1989 and was known as the International Merchant Purchase Authorization Card, or IMPAC, until 1997, when it was renamed SmartPay. In 1993 then-Vice President Al Gore issued the Report of the National Performance Review, which stated that “federal managers should be able to purchase what they need quickly from” mail order discounters without having to go through the normal paperwork of government contracting. In effect, this was the green light to expand the use of the federal credit-card program.

During the next seven years, the program grew from $4.95 billion and 1.7 million transactions for fiscal 1993 to nearly $14 billion and nearly 25 million transactions for fiscal 2001.

Government buyers use SmartPay for purchases of less than $2,500, which can be bought from companies that do not have a government contract. These purchases can be made in the “open market,” as long as the purchaser believes the prices are competitive. Three of the top six categories of SmartPay purchased (defined by SIC/NAIC) reported by the four banks issuing the government credit cards are direct marketing, mail order/catalog, and direct marketing/other.