United States: The Seven Most Common Channel Strategy Mistakes

Last Updated: January 10 2008
Article by John Henderson

During my 26 years at Frank Lynn & Associates, Inc., I have seen and helped to create very innovative go-to-market channel strategies across many industries. However, I have witnessed many manufacturers and service providers make the same errors in judgment over and over again when designing their channel strategies. It almost seems as if they have all read from the same book "How to Ensure a Failed Channel Program," which I have never come across, but am convinced is in its "nth" printing.

Based on the firm's 33 years of experience, here are the most common misconceptions we have seen in business-to-business markets that sell through distributors, wholesalers, dealers, etc.

Mistake #1 Expecting Distributors to Generate Demand for Your Product

Distributors service markets and rarely develop them. Demand generation is the role of the manufacturer. Some channels classified as "technical specialists," will help to educate end users relative to new product and technologies. Therefore, they can contribute to demand generation, but ultimately demand creation is the manufacturer's responsibility.

Sales and marketing managers that are frustrated with a distributor's lack of demand generation activity often will refer to them as "order takers" and in a sense, they are. In fact, broad-line and logistical distributors are very, very efficient at taking orders. If you look at their activities closely, you will see they do a lot more to service their accounts--but they service demand, not create it.

Mistake #2 Expecting Great Performance by Providing Distributors with Exclusive Territories

The only good reason to grant a channel an exclusive territory or market for your products is if it is new, requires the distributor to invest and you want the distributors to feel they will have an opportunity to recoup their investment. Even with this situation, the timeframe for the exclusive should be limited. Every other exclusive arrangement restricts you, the supplier, from accessing your end customers through other means. In addition, most markets have multiple customer segments that wish to be served by different channels.

In almost every situation where I had a client with some exclusive territories and some with multiple channels, their market share is highest where channels compete.

Mistake #3 Expecting Your Partners to Sell to New Customers

Dealers and distributors focus on servicing their customer base. They evaluate new products and services to determine the best ways to grow revenues in that set of customers. While they may add new customers, typically you can expect 90% to 95% of the distributors' revenues in 2006 to come from the same customers they sold to in 2005.

Unless your product is sold by a systems integrator or a VAR specializing in unique or custom sales that are sold once to an end customer, dealers/ distributors will rarely call on new accounts just for you. That is why most high-share manufacturers and service providers utilize multiple channels to reach a variety of market segments.

Mistake #4 Expecting Broad Business Objectives to Work Equally Well in Every Market

Let's say you have a "selective" channel strategy, wherein you select the best distributors in each geographic market. If you are highly skilled at implementing your selective strategy, you may actually sign up the best distributors. Based on our experience, this approach may land you distributors in secondary markets (think Des Moines, Dayton, and Fargo) that control 40% to 50% of the market. However, in major urban markets (Chicago, Detroit, and Los Angeles) this selective approach may get you distributors that individually deliver 5% to 7% of the market. Even with three or four distributors in a large market, you may have distributors that deliver only 15% to 20% of the market.

Now, if you have a plan to grow your overall market share from 25% to 30%, you have a problem. Why? Because you do not have any markets where your market share is 25%! You have 15% share markets and 45% share markets and managers often articulate similar growth strategies to your distributors in both. (We find that clients often discuss strategies to impact their market share as if one number adequately describes their share position.) It is usually a lot easier to grow where your share is lowest--and your strategy in the high-share markets should perhaps be to defend your share.

Mistake #5 Expecting Your Investment in Various Strategies/Tactics will Motivate Distributors to Promote Your Tertiary Product

If your products are tertiary to the channel, that is, the category represents less than or equal to 1% of channel sales, then you have to adjust your expectations of the channel and avoid spending money on things that the channel will not utilize. We describe tertiary products as those that are "bought not sold." Therefore, do not invest in training programs for the distributor's sales force, or worse, certification programs. Management is not going to allow its sales force to go to three days of training for a product that the distributor carries as a convenience to its customer base. Do not develop sales presentations for the distributor's sales force; do not run contests and promotions.

Let the distributor's sales force know that your product is available and "in their bag" and make yourself easy to do business with. The distributor's management does not want to deal with availability issues, ordering or shipping problems with a vendor in a category that represents less than 1% of overall revenue.

Mistake #6 Treating All Partners as if They Perform the Same Functions and Have the Same Costs

A very common mistake made by many manufacturers is to offer a discount structure that "treats everyone the same." Clearly, not all channel partners are the same. Those that perform more activities on your behalf will tend to have a higher cost structure and therefore require more margin. Those that perform fewer activities can afford to lower the price of your products to their customers, if you are "overpaying" them.

Most discount structures are designed to provide the channel with X% off list (e.g., 40% off list is common). We find this practice tends to grant more margin than is needed to your low-cost partners. Their pricing behavior creates channel conflict with the high-cost partner. The high-cost partner will eventually determine that they cannot make enough margin to support your product line. He/she is not likely to tell you that they have stopped supporting your product, but you will discover it over time as the distributor moves its support to your competitor's products.

For the best example, think in terms of getting your product specified. The channel that gets your product specified has incurred greater costs than the channel that does not perform this activity. In some industries and markets, the distributor can spend dozens of man-hours getting your product specified. Whose product will the salesperson specify next time if you allow the non-specifier to compete for the sale with a lower cost structure?

Our philosophy, as succinctly summarized by one of our clients, "Do what it takes to serve the customer, and pay the channel that does the work."

Mistake #7 Failure to Enforce Your Own Policies

We understand that manufacturers are in the business of selling, not in the distributor termination business. But, many manufacturers have clearly defined expectations of their channels that they fail to enforce. There are many other penalties that can be levied prior to termination, but manufacturers must have an effective and functional penalty process.

Channel partners are very observant. If they see that XYZ distributor did not invest in the showroom that you require and nothing happened to them, then it will be assumed that your requirements are requests.

We see this all the time with requirements like:

  • Annual business or marketing plans
  • Sales out reporting (point-of-sale)
  • Minimum inventory requirements
  • Drop-ship requirements
  • Training requirements
  • Sales quotas within a defined territory

These are commonly required elements of the manufacturer-distributor relationship, but often they are not enforced across all channel partners. If your requirements are really "required," then enforce them. If you do not, your channel partners will decide which policies they will support for you.

Summary

Take a look at your channel strategy and see if you find any of these seven common mistakes that may be undermining your effectiveness with channel partners and jeopardizing the results you expect to achieve.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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