The 7 Deadly Sins of Manufacturer Channel Management
Manufacturers have many valid reasons to change channels in an updated go-to-market strategy. We know, as it is a core part of our consulting practice. But it may be unnecessary to make expensive and disruptive changes to a channel design when the easy answer may be to simply stop committing one of the deadly sins I outline below.
As you read through these seven deadly sins of channel management, assess your own performance.
Ask the key stakeholders to privately rank the sins based on the company’s level of guilt.
Then meet and discuss any differences in views.
No. 1: Failing to have enough channel conflict
The first principle in channel design is that the manufacturer must sell to customers the way that they want to buy. If they want to buy through distribution, through the Internet or any other place, a manufacturer must incorporate those channels into an aligned go-to-market strategy. When you don’t have channel conflict, it’s a strong indicator of poor market coverage. Coverage definition: Do all the potential customers of your product see you in the way you wish to be seen?
The redneck definition of a channel: The manufacturer makes the hotdog while the channel provides the bun and the condiments – but remember the customer just wants lunch.
The channel is part of the customer experience of that brand. In other words, the brand goes beyond just the product itself. Sometimes a customer doesn’t need full service. Sometimes they just want something cheap because they don’t need service, so you can unbundle it and give the customer choices. It is a rare case today when an analytically developed channel design recommends a single channel to market.
The goal of channel management is to manage the conflict, and not avoid it. That may mean selling through Amazon in addition to distribution – but at slightly higher price – so that the customer who can’t get a part on a Sunday, can still order it on Amazon and get it in one day – maintaining that customer’s brand loyalty. That benefits the entire channel.
The best test for this is an evaluation from the senior sales executive with respect to two aspects of channel conflict:
- Do we have enough channel conflict, which indicates effective market coverage?
- Are we managing the channel conflict or is the conflict managing us as we react?
No. 2: Failing to have clear published rules of engagement to manage channel conflict
To manage channel conflict successfully, manufacturers must share guidelines that remove uncertainty with channel partners. Reducing uncertainty increases distributors’ willingness to invest in growing your line.
Clear rules of engagement avoid situations where a distributor might feel betrayed by a manufacturer suddenly going direct. Instead, a manufacturer should outline specific conditions under which they would take business direct; everybody should know in advance what those conditions are and what would trigger a change. Typical practices state five to eight factors for taking business direct, and any three in play make the decision.
The goal: giving distributors enough confidence to invest in growing a manufacturer’s line because they know they won’t have the rug yanked out from underneath them. When they have enough certainty around how a manufacturer will behave, trust is established and maintained. And please, never change those conditions retroactively.
This is easy to self-test because perceived or real betrayals are eternal in everyone’s minds. Because they are so memorable, take time to list the significant events you have inflicted on your distributors over the past three years. If there are no events that are remembered, then your guidelines are clear.
No. 3: Failing to let the field manage channel conflict
While headquarters needs to manage national relationships, they won’t be as effective at the local level. If fact, a worst practice is to change priorities or direction to the field, telling them to invest more effort with a location of a national distributor. Channel conflict must be managed in the field and all the channel partners need to see that their local contact makes powerful decisions. This enhances their market power. The reason is simple: The local rep is responsible for aligning and working with the best channel partners to maximize growth and share in their assigned geography or market.
If local reps have been ignoring locations of national distributors it is almost always because they are weak, whining and not in the local rep’s group of most desirable partners. Unless the product is a pure commodity, the rep can’t have every distributor location representing the product. National distributors bring significant value to the industry in the form of innovation. The national distributor often knows the location is underperforming as well and often asks suppliers to help improve performance. This is best ignored when the real issue is weak local management, and the distributor executive doesn’t welcome this feedback.
The right response for many of these situations is the VP thanks the distributor for the feedback and states that they will take corrective action (assuming a candid conversation was inappropriate); the VP calls the rep, shares the story, and clearly leaves any change in priorities up to the local rep.
To self-test this sin, ask the field sales team to rate the frequency of time their priorities are changed by corporate around local branches of national distributors on a high to low scale. Ask the same to the sales executives and compare the scores. There is often a large difference and the reasons should be discussed.
No. 4: Failing to have adequate personal relationship transparency that creates trust and lowers relationship friction
The ability to share information without the coloring of negotiation helps ensure effective alignment around real growth opportunities on both sides. Loyalty goes both ways, and the resultant trust has significant economic value to both. It dramatically lowers resource misalignments and reduces surprises and even conflicts while supporting mutual investments in growth.
The fact is that there is not enough trust – and far too many games. As a result, a distributor or manufacturer often does things that don’t make sense because they’re trying to comply with rules that don’t make sense.
If there’s trust, a distributor can outright say: “You’re not competitive on that product, so I don’t want to put a lot of effort into it.” And a manufacturer can say: “We’re working on it, but where can we grow? Let’s both find something specific to invest in that helps both of us.”
It is critical that the manufacturer behave based on their position in the distributor’s overall resale volume. Any manufacturer that isn’t in the distributor’s top 20 suppliers in descending order should very rarely require annual planning from them. Their appropriate role is to be easy to do business with.
On the other hand, national distributors are investing millions of dollars in their innovation efforts and are much further ahead of most of their suppliers. A level of trust would open some potentially powerful doors to collaborate.
To test your trust level, consider the differences in tone and transparency between two discussions about the distributor, where the only difference is whether the distributor is present or not for the conversation. There is high trust if there is no difference.
No. 5: Failing to make small channel changes to keep up with market changes and instead letting them accumulate, resulting in misalignment
The cost to fix a major channel realignment is a lot larger than the costs of tackling the little hiccups as they go. We often act as a marriage counselor to get a manufacturer and their distributors to talk transparently with each other. It’s better than letting the issues build. If I have relationship issues with my wife, and ignore them, we both start to hate each other. The divorce is ugly; it would have been easier to speak truth to each other along the way. The same is true with channel partners.
So why isn’t there more trust? The reasons are simple. Start with the manufacturer’s sales force. They have one mission: Make the number. This runs deep in their DNA. Now some market change occurs that requires a small policy or practice change. Every one of these changes threatens one or more existing channel partners who could potentially retaliate. If retaliation can be avoided the probability of making the number is higher. Kicking the can down the road is fine at the time, but when these accumulate the manufacturer loses market power with the channel and end-user customers.
One of the early signs that this is a deadly-sin issue is the sales force increasing the frequency of their complaints about channel partners doing bad things.
No. 6: Failing to shift some channel compensation from scale and takeaway power to the actual value a distributor provides
Think of the margin that a distributor earns as compensation paid by the manufacturer to provide services to the manufacturer's customer. Most distributors have customer repurchase rates well over 80%. Since customers are buying the same products again, they do not require active selling. On this repurchase rate volume distributors are simply providing a transaction management service to an existing customer base – or market-serving, rather than market-making.
Manufacturers need to hang onto as much channel power as they can, because if they don't and let power migrate through the distributors, the distributors are able to extract more and more price concessions. Unfortunately, many manufacturers make the mistake of discounting based on distributor takeaway power, which gives up all control of the brand to the channel partner – meaning, the bigger the distributor, the more suck-up behavior.
The result: You end up compensating distributors that are trying to commoditize your brands because a lot of business is channel-led versus brand-led. Brand-led means the customer is looking for the brand first and will find the best place to buy it. Channel-led means a customer is choosing the distributor or other channel first and will buy whatever brand that channel offers. That's why private label works really well in channel-led business.
Much of the MROP market is channel-led, which means brands get commoditized. In many cases, the big distributors end up switching the customer out to their private label. This can often double or triple the margin earned by the distributor.
The most common cure for this deadly sin is the introduction of functional discounting.
No. 7: Failing to compensate market-making activity differently than market-serving activity
Manufacturers almost always undercompensate channel partners for market-making and overcompensate them for market-serving. If you measure overall growth of distributors, and don’t look into the drivers of that growth, this may be occurring.
For example, the growth provided by the large distributors is often driven by acquisitions, which is accurate from an accounting perspective, but often very wrong. In many cases the national acquired an existing distributor so the manufacturer lost that business, and their revenue was simply reported under the acquiror. It is often instructive to go back five years and restate growth rates when these losses are factored in.
Gross margin dollars are the means that manufacturers compensate distributors for provided services. Serving the established repeat customer base (market-serving) should be optimized to minimize the cost to serve, and maximize customer retention. As compensation is removed from this provided routine service, the money can be invested in some combination of expanding the customer base, expanding the share of wallet, displacing a competitor, capturing a new market segment or any other strategic objective.
Changing the flow of distributor compensation requires metrics and processes that must be designed and put in place before any implementation.
Remember that poor channel design or channel management is often the root cause of low revenue growth. At times it can place your sales team into a gun fight with a knife.