CHANNEL MANAGEMENT
22 THE MARKET 10/07
CHANNEL MANAGEMENT
CHANNEL VISION
Disappointed with the performance of your distributors or agents? Channel management experts lecturing on the International Selling Programme are advising companies to step back and look at the bigger picture. Mary Sweetman reports.
he management of channels (the routes by which goods or services get to the end user) is one of those unloved areas of business strategy, rarely getting more than a few dry, meagre pages in export and marketing books. Those tasked with managing channels are so starved of knowledge that when Jim Narius, a Professor of Business Marketing at the Babcock Graduate School of Management, North Carolina, wrote a paper on the topic for Harvard Business Review, it became and has remained one of the top-five selling reprints since 1990.
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FEET FIRST, HEAD LATER Irish companies participating in the International Selling Programme don’t need to go googling for Professor Narius’s expertise; they have the opportunity to access it first hand, through a two-day module devoted to channel management. “One of the things that strike me is that many of the companies are trying to deal with the most recent crisis,” Narius observes. “They want to hit the ground running; my job is to get them to step back and think about what they are doing and why.” “The problem is most people make channel-related decisions after they have made all the other decisions. Only then do they discover that deciding on channels is actually a strategic decision that defines the very nature of your business. It’s not an add-on to the business model, but actually part of it. You can change your price or advertising almost with a phone call, but changing your channels is very difficult, particularly if you have been up and running for a few years.” Having worked with multinationals in the electronic industry for 17 years, Brian English also believes that channel management is an area where companies “go in feet first” - even the industry giants. “Most have very poor channel management skills and don’t have any processes at all,” he says. In 2003, English decided to do something about it and set up PACT (Programme for Advanced Channel Technology) a company that provides channel management training, audits, strategic advice and outsourcing. According to English, a frequent story he encounters with Irish companies is that they bump in a ‘good guy’ at a trade show, and appoint him to represent that market. “Sometimes it works out for a limited period of time. What happens is they find someone in, say, Munich so they appoint him to
the German market. He turns out so good, they give him exclusivity (even though that’s not legally enforceable). But then someone great comes along in Switzerland, and they have an office in Austria, Germany and the Benelux, so suddenly the company has a second distributor in Germany, and the customer base is common. Now they find they are spending a lot of their management time trying to resolve conflicts.” “The consequences of channel relationships that don’t work are significant in terms of market lockout,” he continues. “If it takes a year to figure out the channel doesn’t work, it’s a year of your product lifecycle wasted in that market. The cost of disengagement may be high: you may get inventory back, you have invested management time and resources. And your brand can be sullied by a poor channel relationship that falls apart.” On top of that there is potential to land in a legal quagmire when things go pear-shaped. “There is very strong legislation in Europe to protect the interests of commercial agents, and very many companies are completely unaware of it,” English says. “They think they are taking less risk by getting into situations where they are paying people commissions instead of having direct sales employees. But when they want to terminate the relationship, they can find that things can get very messy, very quickly.” Despite this, English is a major advocate of the channel approach, arguing that when executed correctly, the cost of hiring good channel relationship managers plus the margin ‘given away’ to the distributor totals far less than the cost of operating a direct sales force. TACTICAL AND PRACTICAL While Jim Narius’s role on the International Selling Programme is to get companies thinking about the “conceptual and the strategic,” English focuses on the “practical and tactical”. “What we do with ISP is help them to work out the strategy and really clearly define what they are going to sell through which channels,” he explains. “Once they have found the right channels, the other big area of weakness is in managing them. A lot of companies abdicate responsibility.” “The key to success is to understand the mindset of your distributors and do things that enable them to increase the number of successful customer approaches, at a reasonable margin that’s not dilutive.”
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“THE CONSEQUENCES OF CHANNEL RELATIONSHIPS THAT DON’T WORK ARE SIGNIFICANT IN TERMS OF MARKET LOCKOUT.”
BRIAN ENGLISH, MD, PACT
Channel Management: A Classic Outsourcing Decision
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ne of the first things Jim Narius tells companies is that channel selection is an outsourcing decision. “Normally you think of outsourcing as going to China and having them make some component for your product. The common theme for participants on the International Selling Programme is that they all want representation internationally, and the difficultly they have is in finding a competent partner who is willing to give attention to their product. That’s a classic outsourcing decision.” This realisation leads on to the importance of branding. “One of the mistakes companies make is they treat the distributor as the final customer,” he continues. “But they are not really completing the process until the end-user buys something. You have to make an effort to build a strong brand at the customer level. Distributors will sell whatever the customer requires, so you need the customer to ask for your particular brand. If that happens, then the rest of the channel issues become far easier to deal with.” A second point is that channel management has been traditionally
viewed as a relay race, whereby the manufacturer passes the baton on to a wholesaler, who might pass it on to a dealer, who passes it on to the end-use customer. However, the manufacturer can take each one of the individual tasks and outsource them, so they basically have a network of players that come in and perform the various functions. To illustrate his point, Narius cites the example of a company trying to introduce their product to a new market. They find a distributor who could handle the fulfillment side of things – i.e. the inventory, the order processing, and the delivery - but who is less good at the market development - in other words, going out and finding customers. “They could lament the fact that there is no ideal distributor out there,” he says. “Or using the network approach, they could have the distributor perform the fulfillment functions, and then go out and get a manufacturer’s agent or broker to perform the market development functions, so they have the two sub-contactors working in tandem. There is no such thing as the perfect distributor, so this is about mixing and matching capabilities.”
UNDERSTANDING YOUR DISTRIBUTOR’S BUSINESS MODEL Jim Narius also emphasises the importance of “mindshare”. “When it comes to relationship management, many companies have a ‘Barney’ mentality as in ‘we’re all one big happy family’,” he says. The reality in a business relationship is that people are motivated by their own self-interests: and hopefully there is an overlap.” “If you, as a manufacturer, want to get the best from your partners, you need to divest yourself of the egocentric notion that the distributor is there because they really love your product and they are going to reap some huge benefit from it.” “Take the example of a supermarket. You want the customer to fill their trolley with nothing but your product; whereas the retailer doesn’t care so long as they fill the trolley. That’s the essence of the conflict: the manufacturer wants the distributor to push their product; whereas, the distributor wants to sell a solution of which your product is only a part.” The other mistake manufacturers tend to make, Narius says, is in talking about the profitability of their product. “The distributor looks at the profitability of the transaction – in other words, the profitability across all the products in the trolley, within which there may be loss leaders, but they are compensated for by other products.” “This runs totally counter to what most suppliers think,” he points out, “because they are only focusing on their own product.” “Instead of providing sales training that tells the distributor how to sell your product, going into the technical details and so on (which you have to do to some degree), it would be more useful to train the distributor how to sell your product along with the bundle. Most suppliers don’t provide this type of cross-selling training. Equally, most incentives they give are based on selling their product outright. But again the incentive should be to add that product to the bundle.” (See panel across the page.) INCENTIVISING THE DISTRIBUTOR Providing sales incentives can be another minefield, Narius believes. Once upon a time, manufacturers tried to get what they wanted by incentivising their wholesaler’s sales people. However, this is increasingly frowned upon. Understandably, distributors want to control their own workforce. “The more acceptable alternative is to incentivise your own sales people,” he explains. “The traditional incentive for the manufacturer’s sales person is either a commission or bonus, based on how much they sell to the wholesaler or distributor. This has the immediate impact of increasing the manufacturer’s sales, and it also allows you to take the inventory off your balance sheet. But distribution is a cash-flow intensive business, and by forcing more inventory on the distributor, you’re actually creating financial hardship.” “A better solution is for the manufacturer to provide an incentive to his own sales people based on distributor’s sales to the end-user. That way, you’re incentivising the sales person to help the distributor sell more. It’s a small tweak, but the consequence in behaviour is significant.” Another piece of Narius’s advice centres on seller rebates. These are common enough at the consumer level, for example, the customer buying a dishwasher. “This is an incentive on the part of the manufacturer to reduce the price to the customer without
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penalising the retailer, and it also reinforces the brand-name in the customer’s mind,” he explains. “Historically, manufacturers run promotions on a seasonal basis, such as the back-to-school specials. But an annual growth rebate is more potent. Basically, the supplier keeps track of total sales by a given distributor across the entire year and, then, at the end of the year, rebates them 3 or 4 per cent. Rather than generating peaks and troughs in sales, this maintains momentum across the entire year.” START WITH THE TOTAL CUSTOMER EXPERIENCE Total customer experience (TCE) is a popular buzz-phrase among channel gurus. This is what it sounds like: the experience the customer derives from the manufacturer’s input (typically the product itself) summed together with the experiences added by the channel partners, which may include pre- and after-sales service. “You have to begin by determining the experience your customer wants to have from your company, above and beyond the product, and then to build the channels from that,” Narius explains. “This is where market segments come in. At one end of the spectrum, you have consumers who just want the lowest price. Basically they are looking for a website where they can order whatever they want, pay by credit card and then have the thing delivered to their house or office. You could call it the high-tech, low price experience.” “Then you have groups of customers who are willing to pay more, but they want value in return. They may want advice on which product they should choose from a range of complex alternatives, or they may want someone to deliver it, install it, make sure it’s up and running, and assure them that if they have a problem in the future, there is someone available immediately, who can either give them advice on the phone or drop around and fix the thing.” “As a channels person, you’re job is to figure out which experiences your customer wants. The problem for a company starting to sell internationally is that the desired experience the Irish customer wants is not necessarily the same as the Dutch or the Bulgarian. So rather than force a business model or format that works well in Ireland, you have to step back and work out what your new customers actually want. Walmart is a classic example of a company that doesn’t always get this right. It has been an abysmal failure in Germany and Argentina, because those countries have different expectations of the retail experience than the US.” For many Irish companies, the modification required may be to move towards a consulting sale, Narius suggests. “In new countries, where they haven’t been established, they may need a longer cycle to help people understand what they are doing, the product, how it’s used and which one to buy. This expertise is part of the of desired total customer experience.” SMEs often don’t have the funding for any sort of elaborate overseas market research, so Narius advises on a ‘management by walking’ approach. “They need to go to those countries and sit down and talk to the customers, so they get a feel for what is important and how people use the products, and then come back and determine the channel. Everything comes from an understanding of the desired total customer experience.” M The closing date for applications to the next International Selling Programme is October 31, 2007. For more, see www.internationalselling.ie
“WHEN IT COMES TO RELATIONSHIP MANAGEMENT, MANY COMPANIES HAVE A ‘BARNEY’ MENTALITY AS IN WE’RE ALL ONE BIG HAPPY FAMILY.”
PROFESSOR JIM NARIUS, BABCOCK GRADUATE SCHOOL OF MANAGEMENT.
How your product fits into the bundle
Any product can have one of three roles in a sales bundle: – The ‘solution platform’ refers to the staple items – taking the grocery analogy, this is the bread and meat that you can’t do without. – Then there are the ‘peripherals.’ These are things that you add on. For example, if you buy some lamb, there are additional products that you need to prepare the lamb, and you might also add on potatoes, peas and some mint sauce. – The ‘accessories’ are the third category. These are the impulse items - the box of fancy chocolates that you toss in the trolley as you head down the aisle. Knowing which category your product falls into is important because it leads to different marketing strategies. If you’re selling a platform, the margins tend to be low but the volumes are high, and in the distributors’ world, that’s going to provide significant sales and turnover. So it’s going to generate customer traffic through their doors, giving them the opportunity to sell other things, with higher margins. The peripherals tend to have a moderate turnover and a little higher profit margin. For the distributor, this category is the primary driver of their profitability. But the distributor has to know which peripheral to add to the platform, and it’s the manufacturer’s job to provide cross-sales training. The third category - the accessories or impulse buys - tend to be the opposite of the platform, in that they have high margins but low turnover. In retail, there is a whole art around how and where these items are displayed within the store.
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