4/29/2011
Does Size Matter? 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
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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
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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.
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