If you aren’t in the industrial space, you may not have heard of Fastenal. It’s an industrial supplier valued at more than $50 billion.

Today, it positions itself as an industrial supplier, but it mainly deals with fasteners (hence the name). If you don’t know, a fastener is an item that fastens or binds two objects together. Yes, things like screws, bolts, anchors, washers, etc.

They sell these fasteners to industrial units like factories, workshops, contractors, etc.

Founded in 1967 with $30,000, Fastenal today employs more than 20,000 people.

Sounds like a normal success story of a B2B boring business, right?

Not really.

Here’s where things get interesting: they sell these fasteners through industrial vending machines. That’s been their business model since day one. So, they stock up different sizes of fasteners in vending machines and install them at their customer locations. As and when the customer needs a fastener, they can enter the PIN and get the fastener.

The most interesting part from the customer’s point of view is their payment process. They pay only for the fastener that gets dispensed. Also, the customer doesn’t need to manually reorder the fasteners that run out of stock. Fastenal monitors the stock of these vending machines remotely and restocks fasteners as soon as they reach the reorder level.

Cool, right?

So, for Fastenal, these vending machines act as a way to ensure that the client doesn’t switch to a competitor. How? They offer a frictionless purchase. There is no reordering required. They provide ease of use. Their cost is less for customers. They get billed only for the items that are dispensed by the vending machines.

This way of dealing is quite different from how traditional fastener distributors work. Traditional distributors take orders and deliver the stock to industrial units. Fastenal, on the other hand, flips the script and installs a kind of mini-shop at the client’s place itself.

They’ve another advantage.

Customers pay a fixed monthly maintenance fee for these vending machines. Yes, recurring revenue irrespective of the amount and frequency of fastener billing.

I noticed a fascinating number: Fastenal’s gross margin is around 45%. That’s high. Reason? Because fasteners come in thousands of sizes. The popular sizes yield normal margins. But, the hard-to-find sizes yield a very high margin.

This is a fastener industry’s open secret.

So, overall, fastener distributors enjoy a good gross margin. Also, operation-wise, fasteners are tiny in size, easy to ship, and don’t expire. There are thousands of independent industrial distributors in the U.S. alone. The advantage Fastenal has is the scale. Also, the vending tech. If you look at their website, they are also pitching themselves as a complete supply chain solution provider.

Why?

Because services are where you differentiate and earn a high margin.

A smart business, indeed.