A screen play, as any football fan knows, uses distraction and a wall of blockers to keep the defensive team at bay.

After the recent Super Bowl and victory of my hometown New York Giants, I keep seeing everything in terms of football metaphors. Last week one of my clients was intensely reviewing their go-to-market strategy. However, they were focused on the channel, while overlooking the end-customer. My client, I observed, was about to fall for a screen play.

In a previous blog post “Who is the Customer?” I noted that many companies start thinking that their customer is the channel, not the end-user. This happens because manufacturers are in much more frequent contact with channel partners. And, that’s a key factor in the channel screen play.

The channel, whether intentionally or unintentionally, screens manufacturers from actual customers. To break through the screen and stay engaged with end-customers, manufacturers can pick from a wide range of tactics:

• Joint sales calls on end-users with the channel partner
• Informational calls on the end-user without the channel partner
• End-customer training events and webinars
• Formation of an end-user advisory council
• Customer research and “voice of the customer” surveys
• Engage with customers via the Web, customer portals and social media
• Participation in national and regional trade shows
• Assigned executive programs - where key managers meet occasionally with executives at selected end-customers
• Analysis of channel point-of-sale data

Share the findings with your channel partners. Use the data to drive your channel strategy. Just make sure to do whatever it takes to stay abreast of customer usage, sourcing and economic trends -- and break down the screen.

Is there a word or phrase that really bugs you? Something that whenever you hear it instantly makes your blood pressure go up? For me, it’s when I hear someone refer to their channel as their “customer.”

“Wrong,” I want to yell out . . . and sometimes do, depending on the setting. It is easy to understand why a manufacturer would call a channel a customer. After all, the channel buys the product from the manufacturer and then sends payment.

However, the thinking that underlies this phrasing creates many problems for manufacturers.

First, calling channels customers leads to a mindset established by Marshall Field, the famed 19th century department store magnate who once quipped that, “the customer is always right.”[1] Possibly so, however, we all know that the channel is not always right. Sometimes they have very valid input and complaints, but sometimes they demand irrational discounts, rebates, programs, support, etc. By thinking of the channel as the customer, the manufacturer puts itself at a negotiating disadvantage. This is why many channels insist upon being called “the customer!”

Second, thinking of channels as customers obscures the real customer - the end-user. Manufacturers need to be hyper-aware of end-users - segments, needs, trends, perceptions, etc. If a manufacturer considers the channel as the customer, it is a sign that the manufacturer has lost touch with the real decision-makers.

Third, manufacturers that call their channels “customers,” overlook the real role of the channel - as a partner. The channel may emphasize its “payment” to the manufacturer, but in actuality the manufacturer is paying the channel a discount and/or rebate (which leads to a gross margin) to perform specific activities. These activities include some mix of selling, marketing, inventory management, installation, integration, credit, collections, etc. Manufacturers and channel partners need to share a common understanding of each other’s role, and make joint plans based on this understanding. A manufacturer who considers their channel as a customer will lose sight of the channel’s role as a partner, with disastrous economic, market share or customer satisfaction consequences.

After taking such a hard line I will admit that in some cases, most notably when the end-user abdicates the brand decision to the channel, the “channel as customer” thinking has some, and I emphasize “some” validity. For example, when a homeowner buys a house they rarely, if ever, demand a specific brand of, say, insulation in the wall. The contractor, in this case, becomes a mix of channel and customer. However, even in these instances the manufacturer still needs to consider the contractor as a channel, lest they fall into the problems I noted in my second and third points above.

The two key points I’d like to stress are that manufacturers need to constantly be aware of their actual customers’ changing needs, and that manufacturers need to clearly define and insist on the activities performed by the channel.
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[1] Although the phrase, “the customer is always right” is frequently credited to Field, it is also ascribed to Harry Gordon Selfridge the founder of London's Selfridges store and César Ritz of the famed hotel chain.

“Make no little plans,” advised Chicago architect and urban planner Daniel Burnham. “They have no magic to stir men's blood.”

I’m a big fan of requiring distributors and other channel partners to write a business plan. Maybe not every partner, but, assuming you’re an important supplier, then at least for your large partners or your top tier, e.g. “Platinum” partners. Recently, I completed some work for a client recommending that their distributors’ compensation hinge, on part, on the distributors creating and receiving approval for their business plans. However, I continually get “push back” from distributors, channel managers, executives and others. They complain that business plans are just a paperwork exercise. That there is no way to effectively and objectively assess the quality of a plan. That plans don’t matter, only results do. That plans never “survive first contact with the enemy.” Each of these objections have that pithy, street-smart smidgen of truth. “Been there, done that,” they seem to be saying.

However, how do I square these protests with the positive results I see from most of my business-planning clients? First, the process of partner planning, like a fine wine, takes time to mature. Sure, the results in the first year can be mediocre. For go-go sales guys this is enough to torpedo any further efforts. This leads to the second conclusion . . . senior sales management needs to buy into the concept, pushing it forward through its awkward, freshman year and soothing the many voices of protest. By the second year, both partners and channel managers are beginning to see results. More partner salespeople attend training, boosting sales. Key account plans turn into some big wins. Previously fallow marketing efforts begin to take root, building customer awareness and conversion. Sure, only results matter. But absent a plan, why would anyone have faith that positive results will happen? Just remember that “hope is not a strategy,” (attributable to economist Benjamin Ola Akande, ex-New York mayor Rudy Giuliani, and several others).

So, what do you think? Are channel business plans a valuable sales tool or a waste of time?

How would you describe your relationship with your channel? Are they important customers whose needs you must meet? Are they small businesses that mostly do what you ask? Do you give them your product and expect them to do the rest? Or, do you provide them with a wide array of marketing, sales, logistics, and financial support?

Actually, none of these describes the ideal relationship between a manufacturer and a channel. The ideal relationship is a partnership. In a partnership, the two parties agree upon a split of responsibilities and profits. Furthermore, regardless, of the relative size and power of each company, long-term success in manufacturer-channel relationships comes from adhering to the following six elements of partnership:

1.Complementary skills - You want to find resellers that do something you need, but can’t (afford to) do well - sell to small companies, integrate products from multiple vendors, consult in market niches, deliver a multi-vendor order same-day or overnight, etc.

2.Shared vision and commitment - When recruiting partners, and at the beginning of each year, you and each partner should develop a mutual plan and establish “rules of engagement” - who sells to whom, who performs what roles, who makes how much investment where, etc. This will reduce channel conflicts, build trust, and eliminate misunderstandings. Strong partnerships are also built on extensive information sharing - new product plans, POS information, business plans, market analyses, financial results, etc.

3.Ethics and integrity - Resellers that sell a lot, but don’t stick to the letter and spirit of agreements will hurt your bottom line (and your relationship with every other reseller) . . . and the same applies to you

4.Takes responsibility and doesn’t need to be overly managed - Sure, you’ll need to meet frequently, make some joint sales calls, do training. But, a reseller that consistently shirks agreed-upon responsibility (inventory levels, qualified sales people, marketing campaigns, etc.) is a huge profit drain

5.Has compatible work styles - Business hours, use of technology, detail-orientation, risk preference, dress style, corporate cultures (individualistic, team-oriented, plan-driven, etc.) should match, or, at least, mesh

6.Track record - For potential partners, look for an owner’s track-record of success with other manufacturers or in previous business experiences

If you sold $10M, would you rather have a single $10M reseller or ten $1M resellers? No, it’s not a trick question. Rather, it’s an exercise to explore many of the key issues of channel strategy.

Consider the pros and cons of a concentrated versus a fragmented channel strategy. In the concentrated strategy, the 20:80 rule applies; 20% of your partners deliver 80% of your revenue. Probably 5% of your partners deliver as much as 50% to 60% of sales. The pros of these concentrated structures are:

>	Ease of communication-you don’t need to “herd cats.” Getting your message to, and agreement from, a small number of big partners is easier than communicating with hundreds or thousands of small partners
>	Efficiency-the cost per dollar to manage a small set of big partners, arguably, is less than in a fragmented partner environment
>	Sophistication-larger partners are typically better prepared to engage with you on complex technology/IT, sales and marketing initiatives

On the proverbial other hand, having so much of your revenue in the hands of a small number of big partners raises several negative possibilities:

>	Power-big partners have significant clout, and frequently can make (unreasonable) demands of suppliers regarding compensation, support, functions performed, etc.
>	Risk-if relationships with just one or two key partners fall apart (they add a private label line, they start pushing competing brands, etc.) you can lose a significant chunk of revenue in a short period of time
>	Brand Premium-larger partners often actively sacrifice price to gain volume. Your street price (and premium brand position) can suffer as the elephants dance
>	Value-Add-large partners rarely provide the industry, application or geographic specialization often needed in the early to mid phase of a market life cycle

We could explore the pros and cons of a fragmented strategy, but really these are just the reverse of those discussed above.

Optimizing a channel strategy requires a channel-savvy management team and organization. Typically the company needs to pivot from a fragmented strategy early in a market life cycle to a more concentrated strategy later in the cycle. Many early market leaders are either unaware of this requirement or cannot manage the internal and external change/conflicts. In mature markets, where larger partners tend to dominate, manufacturers need to ramp up their “pull” market activities to build up countervailing power and directly maintain their premium brand messages.

The emergence of tablet computers, most recently highlighted by Apple’s iPad, has significant implications for channel marketing and sales operations, well beyond the computer industry. The form, price, portability, connectivity, and convenience of tablet computers place them in a market “sweet spot;” between laptops and cell phones (which, of course, will still have their own substantial uses).

On Monday, the New York Times ran an article highlighting commercial iPad deployment by General Electric, Wells Fargo, and Medtronic among other corporate users. On a call with financial analysts, Apple’s CFO claimed that 80 percent of the Fortune 100 is now deploying or piloting iPads.

There really isn’t that much you can do on a tablet relative to a laptop; its just that tablets are easier to carry, share, and use with multimedia. They can also tap into the vast ecosystem of app developers. I think tablets are likely to impact manufacturers’ channel operations in several areas:

Partner Portals- to reach tablet-enabled channel salespeople, manufacturers will need to adapt their portals. More video. Apps that link to the portal - imagine a deal registration app, or a special-promotion app, for example

Product Demos- channel reps will want vendors to contribute tablet-ready demo content. This means more multi-media and Internet links as part of the demo. Reps might also want to initiate a simultaneous chat session with vendor support people during the demo

Channel Training and Support- same thing as above

Trade Shows- tablets will allow salespeople to venture beyond the booth to offer demos, collect contact information, etc. Using the GPS features might even allow for a variety of new selling opportunities

Apps- end-customers and channel partners will look to vendors for any number of potential apps for the tablet (and vice versa, manufacturers will push partners and end-customers to use vendor-written apps). Third-parties may also develop apps, either to fill gaps left by vendors or to handle functions that cut across multiple vendors

However, distributors are notorious laggards in the adoption of technology. Therefore, I suspect that the early inroads will happen in more tech-savvy channels and at the end-user level. Traditional resellers will be pulled into the tablet market by others.

Even among tech-savvy channels and end-customers, tablet adoption is not a slam-dunk. Manufacturer IT budgets are already strained. Furthermore, how do you secure and audit all the potential information flowing through such portable (and potentially losable devices)?

Like most new technologies, people are probably overstating the speed of adoption, but underestimating the eventual impact.

It’s early January, and you are staring at twelve months of open road. No bad first quarter to overcome. No end of year deals to close. No dwindling marketing budget to stretch. Just twelve months of pure optimism.

Of course, you have a growth target. 5%? 10%? 15%? More?

How will you get there? The more you stare at the growth target, the more overwhelming it becomes.

There is an old riddle that asks, “How do you eat an elephant?” Of course, the answer is, “one bite at a time.” The lesson is that achieving daunting goals can only be accomplished by breaking them into smaller, logical parts. To achieve a revenue goal, some people simply break the yearly goal into monthly or quarterly goals. While the smaller number might make your heart beat slower, it does nothing to develop a definitive course of action.

As an alternative, we’ve developed an approach we call Components of Growth. Mathematically, we disaggregate growth where you’re target revenue equals =

Base Business + Net Churn + Net Economic Growth + Net Price Change + Gap Closures + Growth Initiatives

Channel sales and marketing managers need to develop different strategies for each of these components of growth.

Base Business - although the percentage and rate may vary, every company has repeat buyers. Do you know the size of this segment? Do you know which customers (and partners) fit here? If yes, you need to keep this segment content, however, you may be able to reduce the amount of time you spend here.

Net Churn - some of your base business will erode every year (luckily, the same is true for your competitors). You and your channel partners need a separate plan to identify and retain wavering customers. Similarly, you need a rapid response plan to capitalize on miscues by competitors.

Net Economic Growth - the economy will rise and fall apart from any steps you or your company takes. However, you can target the economic winners, de-emphasize the economic losers and implement tactics in response to the economic ebb and flow. For example, focusing on lower price products, cost-reduction messages, and channel financial “health” in the face of an economic downturn.

Net Price Change - price increases can alleviate some growth pressure . . . as long as the quantity of sales doesn’t fall faster than prices go up. The reverse is true for price decreases. Price increases require working with partners to sell the continued value of your products. Price decreases often mean pushing into new channels and customer segments in search of additional volume.

Gap Closures - many companies, possibly yours, have distribution gaps - in certain geographies or industries. To maximize growth, your sales team needs to assess the number and mix of channels region by region, industry by industry, customer segment by customer segment.

Growth Initiatives - individual growth initiatives provide the greatest upside potential, but also the greatest risk. These initiatives can include new product launches, adding new types of channels, entering new customer segments or application areas, selling solutions or services in addition to tangible products, etc. Each of these initiatives requires a separate channel plan.

You’ve got twelve months. But, do you have a plan for each component of growth?

Satisfaction. Or, so said Mick Jagger and Keith Richards on their classic rock song of the same name. However, customer satisfaction is something that most manufacturers desperately want to attain. A big element in satisfying customers is the performance of the sales channel. Did the channel anticipate the customer’s needs? Did they know the customer’s industry or application? Was the product in stock? Was it delivered as promised? Installed properly? Were the distributor’s personnel professional and courteous?

Customer satisfaction is so important that some vendors, such as Cisco Systems, make it a key part of their channel scoring and compensation system. I think this is a good idea. Too many vendors focus on their own needs from the channel, such as sales volume, loyalty, mindshare, etc. These are all worthwhile objectives. However, ultimately, it is the customer who decides whether the channel is doing a good job.

Lately, it seems that the big thing on everyone’s mind is mindshare. On my current client engagements and during my last few workshops, the single most recurring question was - “how do we get our distributors to spend more time thinking about and selling our products?”

Channel partners sell products from tens, hundreds or even thousands of suppliers. Sometimes this equates to hundreds of thousands of individual products. A partner’s salesperson simply doesn’t have enough time to adequately sell each vendor’s line. So, what’s a vendor to do?

First, you need to understand where your product fits in the partner’s portfolio. We often talk about primary, secondary or tertiary product lines. For example, at a pump distributor, pumps are primary. Hose, filters and seals are secondary. Small replacement parts are tertiary. Distributors lead with their primary products . . . these products almost automatically get mindshare. Tertiary products, however, are typically “bought, not sold” and vendors struggle to gain mindshare.

To boost mindshare, you need to focus on the distributor personnel with the most potential interest. This can range from the partner’s owner, to outside sales reps, inside reps and even the technical support staff. For each person, craft a message drawing from the following menu: top-line revenue, margin (gross or net), risk reduction and relationship. For example, since sales reps are often paid on gross margin, you might overly emphasize this (assuming your margin is higher than competitors). For inside sales reps, contests or SPIFs are often highly valued.

A product and person-specific strategy is the best way to build mindshare with partners.

In a new ad, Meg Selfe, IBM's Vice President, VP, Embedded & Complex Systems states that "66% of new products have some kind of intelligence built in." I don't know where IBM found that statistic, but microprocessors seem to be everywhere, not just in computers and cell phones. I'm thinking of cars, appliances, industrial machinery, building systems, and so on. And, where there is a microprocessor, there is software, data and potentially networks and data analysis. So, here's the question -- how will traditional sales channels develop the skills to sell, install and support all of these new "smart" products? Let me know what you think.

Recently, a client approached me for advice about launching their new product. The product was an automated version of an older, manual product. The new technology provided greater control, significant cost and time savings, and a log of useful information; but, otherwise, the physical end-result for the customer was similar with both products.

No one within the company had really thought about the channel implications of the new product. Most of the sales and marketing people simply assumed the existing channel would volunteer to carry the new product.

I agreed with my client that existing channel partners would indeed raise theirs hands to sell the new product. First, channel partners don’t want to seem ungrateful or pessimistic. Second, channel partners don’t want to create an opening for new, competing resellers.

However, the new product was much more complex than the prior version. It required more technical selling skills, some knowledge of software, and the ability to integrate the product into the customer’s existing infrastructure. Most of the existing channels lacked these skills. I suggested that the client might want to consider a more technically-capable channel. “But, our channel already sells to the target customer,” my client responded. “True,” I agreed, “but, not entirely.” Because of the new product’s higher price and significant speed/cost benefits, the purchase decision would likely get booted up to the Vice President level or even the executive suite. I suggested that the channel would need some consultative selling skills.

My client still worried that the existing channel would react negatively if they were excluded from the sales of the new product. Furthermore, he worried about the time, expense and risk of establishing a new channel. I reminded him of the time, expense and risk of failing through the existing, unprepared channel.

To resolve this dilemma, I suggested the following (a path that we have seen other clients follow with positive results): create a set of partner criteria and an associated application form. Any partner (existing or new) that wants to carry the new product would need to develop a business plan, agree to train their technical and sales people, employ a software programmer and demonstrate past consultative selling capabilities. A few of the existing partners could already meet these hurdles, and therefore jump-start the selling effort while my client undertook the longer process of recruiting additional, qualified partners. Existing partners that failed to meet the criteria could not protest that they were excluded; rather they could re-apply if and when they improved their capabilities.

Channel Problem Solved.

Over the last several years, manufacturers have increasingly created tiered channel programs. I refer to the tiered strategy as a “precious metals” approach to channel design, because so many companies label their tiers as Platinum, Gold, Silver, etc.

Generally, I applaud this trend. Treating partners differently reflects their inherent variability. However, creating a successful tiered strategy takes some work.

First, volume should not be the only requirement to reach a tier. A volume-based program can lead to a spiky rather than smooth order flow, channel conflict, and gray-marketing. Instead, manufacturers should consider other partner attributes, like market share/loyalty, number of trained technical and/or sales people, submission of a business plan, etc.

Second, before creating a tiered program, manufacturers may want to separate their channels by business model. For example, wholesalers, system integrators, and retailers perform vastly different functions for vastly different end-customers. A single-tiered system might not reflect nor properly motivate such different partners.

Third, tiers must be reachable. If the requirements for “Platinum” level are beyond the reach of most “Gold” partners, for example, the program will not change behavior. Furthermore, manufacturers need to provide tools for partners to reach higher levels. These tools could include accessible training programs, support from account managers, marketing funds and materials, etc.

Poorly designed tiered programs will fail, mostly by channel neglect. The most common causes are poor program launch and communication efforts, overly complex rules and requirements, and insufficient or inappropriate benefits for reaching a tier. If you have any other thoughts about tiered channel programs, please feel free to call or comment.

In many large companies, my clients complain that changing their channel strategy would take an act of God. I was reminded of this recently as I read an op-ed article by New York Times columnist David Brooks, averring that, “the old generation has to die off before a new set of convictions can rise and replace entrenched ways of thinking.” Brooks was writing about the U.S. Army; but rather than using it as an example of calcification, he cited the Army as an example of rapid transformation.

Brooks elaborated on the Army’s adaptability, beginning with the dark days of 2004-5 in Iraq. What most struck me about Brooks’ article was not the Army’s rapid ability to change its strategy, but the people behind the change.

“The process was led by these dual-consciousness people - those who could be practitioners one month and then academic observers of themselves the next. They were neither blinkered by Army mind-set, like some of the back-slapping old guard, nor so removed from it that their ideas were never tested by reality, like pure academic theoreticians.”

This reminds me of the on-going battle in some business organizations, between the sales teams and the (channel) marketing people. Salespeople, like front-line soldiers, are under extreme pressure. In the case of the salespeople -- to hit their quotas, to help partners close deals. Most salespeople enjoy this pressure, the thrill of the deal. However, in their rush to close deals, salespeople may take short cuts with the channel program. Marketers, however, complain that violating the integrity of the channel plan is shortsighted. These practices substitute short-term gain for lower mindshare and worsened channel conflict in the mid-to-longer term. Finding a way out of this cultural dilemma can take years, if ever.

One solution is to find some “dual conscious” salespeople and put them into marketing for a while - or place a “dual conscious” marketing manager into sales. I’ve worked on countless channel strategy projects for clients, and the best experiences I’ve had are with “dual conscious” marketing and sales people. Please put them on the project team the next time I work on a channel strategy engagement for you.

Mergers, acquisitions and other combinations are commonplace in the channels world. Owners retire, businesses fail, technology shifts, opportunities arise. However, in the grips of the recent recession, distribution deals slowed dramatically. Now, with signs of life in the U.S., Asia and other economies, stronger channel companies have begun to pick through the bargain barrel looking for good acquisition candidates. Just recently, Kaman Industrial Technologies, bought Minarik, a national controls and automation distributor. Industrial Distribution Group is buying Alamo Iron Works, an industrial supplies distributor out of bankruptcy. Computer distribution giant, Avnet, Inc. recently announced its largest deal ever, buying Bell Microcomputers for $594M (equity plus debt assumption).

These acquisitions pose both risks and opportunities for suppliers’ channel strategies. On the plus side, suppliers can derive sales and logistics efficiencies by working with a smaller set of partners. Larger partners can commit more serious capital and marketing resources to supplier programs. Merged partners sometimes creates a more sophisticated selling or technical capability, broadening the channels reach into new solutions and customers.

Unfortunately, the downside of distribution deals is probably more impactful. Acquisitions give distributors more volume and customers, and, therefore more negotiating power with suppliers. Acquisitions distract channel management and employees - potentially interrupting marketing programs and other activities. Acquisitions can upset finely-honed territory assignments raising the risk of channel conflict. Sometimes, a competing manufacturer might buy a key distributor, thereby marginalizing or eliminating that partner as a channel for other suppliers.

Individual distribution deals are notoriously difficult to predict. However, manufacturers can anticipate types of deals, and their implications. For one of our clients, we are working on a “what if” acquisition playbook. This type of planning can reduce the reaction time and negative impact when channel deals suddenly pop up.

I expect to see channel deals heat up even more in the next few months. So, as my old Boy Scout troop master used to preach, “Be Prepared”.

Last week I taught our workshop, Professional Sales Channel Management. The course teaches channel account managers (CAMs) how to select, motivate and manage their channel partners. During the workshop, I advised CAMs to use a combination of carrots and sticks to maintain a healthy partnership. The next day, taking my exhortations to heart, one of the participants told me he was going to buy a carrot-flavored stick to use with his channel partners.

Partners face a continual barrage from suppliers to sell, sell, sell (or buy, buy, buy). Consequently, many partners adopt a defensive mode whenever a supplier’s CAM approaches. This type of relationship, however, is antithetical to the concept of “partnership”.

CAMs need to win the hearts and minds of partners through trust, sharing of information, joint planning, training, etc. Revenue is the end, not the means. CAM’s have many “carrots” to use - financial (discounts, rebates, MDF, etc.) and non-financial (lead-sharing, information sharing, education, joint-selling, key account planning, conflict management, etc.). Too often, CAMs don’t use all the carrots at their disposal, and don’t remind their partners of the actual, cumulative benefits of these carrots. Studies show that relying on positive incentives builds strong partnerships. Of course, partners must hold up their end of the bargain - sending their employees to training, developing partner plans, implementing marketing initiatives, etc. When they don’t, CAMs need to pull out the stick. Using negative reinforcement, however, is a tricky proposition. The best way to use the hammer is by beginning with a review of the partnerships’ overall goals, and the mutual account plan - if you have one. Use a stick (fewer leads, lower program status, less discount, etc.), but tie it to a specific plan of action. The plan should incorporate your knowledge of the partner’s specific strengths, personnel, finances and goals.

Last Friday, General Motors announced it was offering over 600 terminated car dealers an opportunity to apply for reinstatement. Initially GM terminated almost a third of its 6,000 dealerships in a move to streamline its distribution network. Many of the terminated dealers sold only a handful of vehicles each week. This turnabout is emblematic of a core, channel strategy question facing suppliers in all industries, “How many resellers are enough?”

Undoubtedly, the biggest factor in determining the appropriate number of resellers is market coverage.

In new markets suppliers need channel “push”. With a mass market several years away, manufacturers need only a few resellers to identify and educate a targeted group of early-adopter customers. These customers are willing to forego price and convenience in return for finding a competent reseller. For making an investment to go after a risky, early market, suppliers may give the few, chosen resellers assurances of limited, or even, exclusive distribution rights. Savvy suppliers will limit the timeframe of any exclusivity promises, however, because as a market grows, the need for more resellers will arise. Eventually, as markets reach maturity, customers’ values flip. With many years of purchasing and usage under their belts, customers now emphasize convenience and price over reseller product/technical competence. This means suppliers need to have the product available wherever (and whenever) customers want. In very mature markets (glue, soda, blank CD’s, etc.) this may mean “open” distribution - selling the product through any or every reseller.

Other than in the “open” model, manufacturers must deal with the optimization curve. The curve, an upside-down U shape, posits that as vendors add resellers, total revenue will grow - as market coverage increases. However, at some point, coverage becomes optimal and revenue peaks (for that point in time). Beyond this mysterious point, adding more resellers simply creates intra-channel competition. Discouraged resellers lower their prices to compete, and pressure the supplier for larger discounts - causing overall sales to decline. Finding the optimal point is a complex undertaking, and requires an analysis of the underlying market growth rate; the shopping patterns of customers; and unique, local market conditions. Overall, we use a rule of thumb that says the optimal number of resellers occurs when the average end-customer calls (or is called upon by) 2.0 - 2.5 resellers regarding the supplier’s product. A rate below 2.0 implies that some customers never see the product. A rate above 2.5 means that too many resellers are competing for each customer.

While market coverage is the primary factor to consider, the GM example demonstrates that other considerations exist. GM undoubtedly wanted to cut its U.S. dealer ranks to about 4,000. Beyond coverage/conflict, the cost of maintaining hundreds of small dealerships was a profit drain on the company. However, GM has publically stated that the cost of negotiating and litigating 1,100 dealer challenges would offset the efficiencies of a smaller network. Lastly, GM had to contend with bad PR and government pressure at the national and local levels.

Overall, the best practice is to constantly monitor feedback from customer and resellers alike, listening for the telltale signs of over-distribution (price pressure) or under-distribution (product is hard to find). One other thing, don’t let the sales team sign up resellers willy-nilly. Make sure they have a target number and type of reseller in mind; and that the final decision rests at headquarters - not in the field.

Last week my dishwashing machine died.

I called my plumber to see if he would install a new one, but he declined. “The electronics in those things are just too complicated,” he explained. He would hook up the water, but wouldn’t guarantee the machine would work. So what should I do? Get the plumber and a computer technician to meet at my house? Luckily, most appliance retailers have re-trained their installers, but the intrusion of electronics into lots of other “analog” products is creating a need for new hybrid channels. Other examples of merging technologies include:

>	Stand-alone copiers that now get linked into computer networks
>	Cars with automation that dealers can barely understand
>	Building systems - lighting, boilers, chillers, elevators, etc. - that are now computer-controlled
>	Industrial products - pumps, valves, boilers, conveyors, etc. - that must work as a system

And, its not just the digital revolution we have to blame. Non-computer technology is also creating the need for these channel mash-ups. Buying some solar panels? Besides the dealer, you might want to call a roofer and an electrician.

How are the channels responding? Most are acting like my plumber, a deer caught in the headlights. Simply providing computer training for existing employees may work in the case of an appliance retailer, but re-training is often an inadequate step in the face of complex technologies. A few channels are hiring new, more computer-savvy employees. Many copier dealers have successfully converted their businesses, by either hiring new tech-oriented employees or actually buying or merging with computer networking firms. A handful of HVAC contractors have similarly refashioned themselves into energy management integrators via the hiring/acquiring route. A few companies now act as a new type of general contractor - pulling in the respective trades, but adding an additional layer of technology integration.

Manufacturers that see opportunities among these merging technologies will need to consider whether and how they can adapt their legacy channels. The results will likely be worth the effort. After all, a Reese’s Peanut Butter Cup sure tastes good.

When two big guys enter the ring, you know there will be lots of grunting and groaning, ending in an inevitable thud. Today, the thud came from Amazon.com.

If you haven’t been following the dust-up between Amazon and the book publishing industry, it’s a classic story of greed, conflict and power. Here’s an abridged version:

Amazon launches its e-book reader, the Kindle. It becomes an instant success. Amazon’s deal with publishers is the same for e-books as for printed books -a 50% discount off list. However, Amazon shocks the publishers by pricing bestsellers at only $9.99 -- a loss to Amazon, but a big incentive for consumers to buy a Kindle. The low price has brick-and-mortar booksellers complaining to the publishers. The publishers are concerned about the channel conflict, but, what they really fear is that Amazon, and the other booksellers, will eventually start demanding bigger discounts.

Fast-forward to the present. Apple launches the iPad (is that the best name they could find???) . . . and agrees to act not as a reseller, but as an agent. Agents don’t set price, so the publishers win back price control and aim for e-book prices around $14. In return, Apple asks for a 30% commission on each e-book sale (which ironically results in LESS profit for the publishers than the Amazon deal, at least in the short-term).

With Apple in its hip pocket, Macmillan, one of the largest book publishers, tells Amazon it will delay e-book availability until several months after the hardcover release unless it agrees to the new pricing plan. Have fun with that $9.99 price now. Hah!

Fearing it can’t compete with Apple unless it has access to the same content (books), Amazon reluctantly agrees to Macmillan’s (and presumably the other publishers’) terms. THUD.

What are the lessons here? First, if your channel isn’t cooperating, then the competitor (Apple) of your channel (Amazon) is your friend. Second, your new friend (Apple) might extract a hefty price (a 30% commission) to join the fray. Lastly, pricing power is, well, priceless.

The issue of direct-selling is contentious for any company that also works with independent, or “indirect” channels. It stirs up questions about channel economics and efficiency, channel conflict and customer satisfaction. Today, the New York Times reported that Seagate, the world’s largest manufacturer of computer disk drives, is experiencing its highest ever volume of direct sales.

Partly, this is a result of factors unique to the technology industry. However, it also points to issues bubbling up everywhere.

High quality imports, the recession, and Internet-driven transparency have created an extreme level of price sensitivity. Across many industries, our research work shows these factors have pushed price from third or fourth on the list of brand decision factors to first. Price conscious buyers, especially larger customers, believe that direct purchasing results in lower prices.

In the past, I would counter with the old adage, “you can replace the middleman, but you can’t replace the middleman’s costs”. However, I’m no longer convinced of the absolute validity of this point-of-view. Many manufacturers can build/ship just-in-time - eliminating the need for a middleman and their inventory costs. Innovative manufacturers can support customers (especially larger customers) better and at lower cost than through resellers - where technical support has declined in many cases.

While past fears of “disintermediation” have proven ill-founded, more direct-selling may be on the horizon. Resellers caught in the middle, between low-cost, high volume distributors and niched, value-added channels, will likely suffer the most.

In one of my LinkedIn forums that focuses on channel management, someone asked how to motivate their resellers. One respondent suggested that hiring good channel account managers (CAMs) was a critical part of the answer. Fair enough. The respondent went on to suggest that two types of CAMs exist.

The first was a “professional appearing sales person,” focusing on processes, reporting, ROI, etc. The second type was someone who knew 50 resellers by their first names, and those of their spouses and and kids, the type of car they drove, their favorite sport team, etc. However, this person didn’t appear business savvy, rarely provided forecasts, etc. The respondent concluded that he’d hire the second type every time.

I’ve seen both types of CAMs. However, I’m not a big fan of black and white categorization. The world is full of complexity and nuance. I think these descriptions are mostly caricatures or extremes. In between, you can find people who might lean one way or the other, but have decent business skills, and can still forge good personal relationships.

Most partners, I suspect, would prefer both attributes in their CAM. However, partners vary too. Some will respond better to a CAM with stronger business skills. Others would rather deal with their good buddy who drops off Cubs tickets. Vive la différence (and the complexity).

Price is always one of the top three or four issues for buyers. However, in this Great Recession, price has frequently become THE issue.

Yesterday a client called asking how to handle an impending price war. Curiously, this wasn’t a war between competing manufacturers. Rather the client was a bystander in a war between its channel partners.

One extremely large and powerful reseller wants to pursue an Everyday, Low-Price (EDLP) strategy. It believes that in today’s environment, price rules. Competing resellers would rather emphasize product features, performance, etc., but have stated that they won’t be undersold. The EDLP reseller is initiating the price war by soliciting bids at ridiculously low prices from multiple suppliers. If our client gives in, it will find itself in a downwardly spiraling price war. Furthermore, it will cause channel conflict unless it gives this low price to all its resellers.

In these channel pricing situations, we generally see three answers. First, refuse. Our client has a strong brand, and might be able to convince customers to shop for its brand elsewhere even at somewhat higher prices. In different circumstances, Nike used this strategy with great success against Foot Locker several years ago. Last, give in. By publicly stating that it won’t be undersold, our client may signal its competitors that they will never win. Consequently, the EDLP reseller may not get any viable, low-price bids. In between both these strategies, manufacturers can pursue a hybrid approach. For example, they might offer the EDLP reseller a low-price on one or two exclusive SKU’s, with a strategy to up-sell some of the customers attracted by the advertised low-price. Alternatively, they might offer a low-price product, but only when bundled with another product, such as a service contract.

Price rules today, but that’s no reason to get sucked into a price war.

A few days ago Google announced its new smartphone, the Nexus One, which operates on Google’s Android phone operating software. The phone is available on Google’s new web store. Beyond some cool, new features (such as transcribed voicemail), the Nexus One is notable in that it represents competition, or channel conflict, for Motorola, Korea’s HTC and other manufacturers of Android-based phones. The Nexus One also competes with carriers, such as Verizon, that distribute these Android-based phones.

How can Google get away with competing, or conflicting, with its own distribution channels?

One answer is that Google has such clout, due to its dominance in the search advertising market, that Motorola, HTC, Verizon, etc. dare not challenge it. In addition, by introducing its own phone, Google increases awareness of the Android software; a benefit to all its partners. However, I think the real answer is that Google smartly pointed out to its channel partners, that Apple with its market-leading iPhone (and to a lesser degree, RIM with its Blackberry), is the real competitor. This is a shrewd, if not original, conflict management strategy - re-direct partners away from the conflict, and focus them instead on a perceived bigger threat.

A few days ago I overheard some salespeople trying to justify extending payment terms beyond 30 days for their dealers. It reminded me of a psychological condition I first heard about in one of my freshman college classes. In 1973, several people were held hostage in a thwarted bank heist in Stockholm, Sweden. After a few days, the hostages began to identify with their captors. Later, this paradoxical behavior was named the Stockholm Syndrome.

Like the bank hostages, channel account managers (CAMs) often fall victim to this condition. Rather than identifying with their employer (the manufacturer), I've frequently seen CAMs cross the line; advocating positions that aid the channel to the disadvantage of the manufacturer. From a narrow perspective, one might argue that CAMs simply want to maximize their own commissions, and avoid fights with their resellers. However, this behavior has broader causes, stemming from feelings among CAMs of corporate isolation, and the lack of a strong sales support structure. To avoid the Stockholm Syndrome, I recommend that manufacturers consider three steps. First, senior management should articulate and reinforce goals that channel partners (and CAMs) perceive as mutual, such as increasing efficiency, raising customer satisfaction levels, etc. Second, the channel sales organization should adopt a formal account planning process. Partners should work with their CAMs to develop an annual, account-specific plan that includes general strategies and specific, scheduled tactics (such as employee training, new-product launch activities, promotional campaigns, etc.). Third, sales managers need to make sure that CAMs don't feel isolated within the company, alone in their territory with no one to consult except their reseller partners. This means that CAMs need to meet every so often with senior management, direct salespeople, product managers, channel marketing managers, and other fellow employees.

It can be lonely out in the field. CAMs just need some corporate "love".

While working with a recent client, I was reminded that many marketers, when seeking a channel for their new product launch, simply "round up the usual suspects", e.g. their current dealers. Selling a new product through your existing set of partners is a good strategy . . . assuming nothing has changed -- same product type, same dealer skills, same customer segment, same decision-makers. Hey, it could happen. Actually, if you are launching version 17 of a long-standing product, your current dealers probably are the right channel.

Over the years, however, I've seen many cases where circumstances are different. Hewlett-Packard launching one of its first software products. A manufacturer introducing a paint dispensing system, rather than just pails of the paint itself. An industrial supplier trying to reach small job shops, rather than its traditional base of large factories. In each case, the company initially launched its new offer through its existing channel, with less-than-stellar results.

Why are existing dealers not always the best choice? Channels have a "window". The channel window is a combination of the channel's selling method and its target customer. In HP's case, its existing hardware-oriented dealers sold on a price and product features basis to IT managers that specified PC, servers, printers, etc. Selling complex software was outside their window. The hardware dealer would need to retrain its sales force; call on a different buyer, often including non-IT executives; and re-orient their entire business model around fee-based services, rather than marked-up hardware.

The economics simply don't allow channels to change their window, except in extreme circumstances.

Why do so many marketers round up the usual suspects, rather than investigating potential new partners? Several factors explain this behavior:

>	The product launch process doesn't engage channel experts early enough (if at all) in the planning stages
>	Finding, recruiting and ramping-up new partners takes time (see the bullet above) and costs money
>	New partners haven't built up any vendor loyalty yet
>	Relying on existing dealers is an expedient, if inappropriate, option
>	Existing dealers would complain if not offered an opportunity to carry the new product
>	Existing dealers would complain that vendors are inviting over-distribution

Existing partners may have a valid fear of channel conflict. However, many will volunteer to carry the new product, not because they think they can sell it, but because they worry the vendor will punish them if they don't try! The best approach for new product launches is two-fold. First, start channel planning early to provide room to bring new partners on-board, if necessary. Second, publish a list of channel requirements to carry the new product. This will help you screen potential new partners, and explain to existing partners why they should focus on their current business or window, instead.

Many manufacturers dream, request or require that their reseller partners share point-of-sale (POS) information. Ideally, POS data describes all the facts associated with each sale of the manufacturers’ goods or services by its partners, including:

>	Product(s) sold, by SKU number
>	Price
>	Customer name
>	Customer address (billing and shipping)
>	Customer industry and revenue/employee size (for B2B, or other demographics for B2C)

Most manufacturers want the POS data for the narrow purpose of calculating salesperson commissions. Sophisticated manufacturers also want the data to spot trends and fine-tune marketing strategies.

In some industries, the sharing of POS data is standard operating procedure. However, most resellers tell manufacturers to “pound sand”. Resellers might be reluctant to share POS data due to cost or technical issues, but mostly they fear manufacturers will use the data to sell directly to the reseller’s customers. (Yeah, like that ever happens!). Manufacturers worry that even if they get their hands on the data, it will arrive in divergent, fragmented and unmanageable data streams.

To handle the reluctance problem, manufacturers can resort to several tactics. First, they can reassure resellers that no direct selling will result from the sharing of POS data. Of course, for manufacturers with a questionable direct-selling track record, that will be a tough argument to win. In such cases, the manufacturer can hire a third party to scrub the data, including hiding the actual names of the end-customers from the manufacturer. A third-party firm we recommend is Interlynx Systems.

If manufacturers use the POS data to pay “dual-comp” commissions, they can justifiably demonstrate to resellers that the POS data helps to reduce channel conflict.

Manufacturers can also use various carrots and sticks. For example, they can pay resellers an additional rebate for providing POS information, or for performing a bundle of activities that include sharing POS data. Manufacturers can also make POS data a requirement for any reseller wishing to attain “elite” status in the vendor’s channel program.

Probably the biggest inducement to partners comes from the few, enlightened manufacturers that not only analyze the POS data, but also share their analysis with the partners. Most resellers are small companies with no marketing analysts on staff, and limited access to good data. Manufacturers can share data that compares the partner’s sales (by product, by customer type, etc.) with all other partners, or partners of a similar type.

What a radical thought - manufacturers and resellers acting like partners, sharing information, making more money for both parties.

So, that’s the point of point-of-sale.

Recently a client asked us to look at their independent rep network. Manufacturers sometimes use independent reps or agents rather than a direct sales force -- to address niche market segments, cover sparsely-populated regions, or avoid the fixed cost of a direct sales channel. A good source for information about reps is the Manufacturers' Agents National Association.

One issue of interest to our client was rep compensation. I tapped the collective Frank Lynn & Associates knowledge base and we agreed that a successful rep compensation structure should target four areas:

>	Compensation level - Based on product complexity, length of sales cycle and likely hit rate or risk, companies should pay as low as 3% for undifferentiated products and up to 12-15%+ for complex, high-end equipment.
>	Compensation basis - Most companies will pay on net invoice amount, e.g. after discounts. However, manufacturers should also exclude revenues from accounts sold directly; and cash discounts, back-end rebates, marketing funds, and other non-invoice deductions.
>	Payment timing - Most companies hold commission checks until after receiving payment, thereby keeping the rep focused on collections, not just sales. However, some companies pay at time of invoice, using other resources for collections and helping the rep’s cash flow. If back-end payments such as rebates muddy the net sales amount, companies can estimate sales and “true-up” with reps at the end of each quarter.
>	Commission splits - In some instances, two or even three rep firms may “touch” a sale. One rep might call on an influencer (architect, consultant, etc.). A second rep might book the order in its territory. Yet a third rep might help with post-sales support in the destination territory. A fixed split (e.g. 40:40:20) helps avoid complaints. A pre-established escalation process is a common way to handle unique situations.

In the real estate market, most agents are seller’s agents. That is, the agent has a fiduciary responsibility to maximize the gains of the home seller. A buyer may like the agent, listen to the agent, even trust the agent. However, at the end of the day, the agent is (supposedly) working for the seller, not the buyer.

So, in your industry, who are your channels working for - you or your customers?

Optimists will answer, “its not a zero-sum game. The channel can represent the interests of both the buyer and the seller.” A knowledgeable reseller will identify a customer problem and suggest a product/solution of which the customer was previously unaware. Win for the buyer. Win for the seller. (Win for the reseller, too).

Skeptics will counter that optimists are living in a dream world. Sure, resellers occasionally deliver win/win solutions, but the vast majority of transactions involve more commodity-like products, with sellers mainly trying to extract premium prices from buyers.

Skeptics don’t believe the channel supports either the seller or the buyer. Rather, the channel, they contend, is trying to maximize its own gains. Resellers attempt to placate buyers and sellers while keeping a keen eye on their own margin-making opportunities.

The skeptics have some ammunition on their side. Steven D. Levitt and Stephen J. Dubner, in their popular book, Freakonomics, examine data regarding the behavior of real estate agents. In theory, the goal of the home seller and agent are aligned - a higher final sale price provides more money to both. However, the time and effort necessary to hold out for the highest price often doesn’t justify the tiny commission increase for the agent. Levitt’s data shows that agents encourage sellers to accept the first reasonable offer, allowing the agent to move onto selling other homes. Interestingly, when agents sell their own homes, they DO wait for the highest offer - waiting 10 days longer and netting a 3% higher price for their own homes versus what they get for their clients!

So, who are your channels working for?

Yesterday, one of my client’s referred to their channel partners as “coin operated”. My client meant that despite attempts to build loyalty, partners will sell whichever brand generates the most margin.

But, is this true?

We’ve interviewed tens of thousands of partners, so I actually know the answer to this question. The answer is a definitive, “it depends”.

Products, brands and entire companies vary from highly differentiated, to not differentiated at all. Apple Computer? Very differentiated. Milk producers? Not very differentiated. The greater the differentiation, the less important margin becomes in motivating channel partners.

Building strong differentiation with partners requires a bit of corporate soul-searching. Some areas to consider include product design, end-customer services (repair, consulting, optimization, etc.), partner services (logistics, training, lead generation, etc.), ease-of-doing business, partner “intimacy”, etc.

If you want loyal partners, a big margin certainly doesn’t hurt. However, it’s not the only thing.