Loves Me, Loves Me Not
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.