Deep Dive: Rethinking channel strategy
Are the frameworks and assumptions that have guided channel strategy for decades the right tools for the B2B revolution?
Kudos to Mike Marks for sharing Indian River Consulting Group’s work helping a leading manufacturer address a fundamental go-to-market channel problem: The channel that had helped create the manufacturer’s market was not the one to take them into the future. The case study is posted here and worth a read for every B2B channel strategist. It got me thinking. Do B2B innovators understand channel strategy? Are the frameworks and assumptions that have guided channel strategy for decades the right tools for the B2B revolution? If digital transformation is pushing manufacturer and distributor business models in new directions, should their partnership change? In this edition, I look at the fundamentals of channel strategy and imagine how they might shift. As always, your ideas, feedback, experiences, and corrections are most welcome.
A whirlwind tour of traditional channel strategy fundamentals
Manufacturers make products. Products must be sold and often require support before the sale, which can include answering questions, customizing features, integrating into a total solution, and more. After the sale, products need support that might include maintenance, troubleshooting, repair, upgrading to newer models, and more. For manufacturers, channel strategy is about deciding how many customer activities will be retained and how many will be transferred to indirect channel partners such as distributors. Retaining all customer activities is often not a viable strategy because business customers want choice and to manage their acquisition costs. Distributors meet these needs by offering a market basket of products and brands, providing customer support that transcends any manufacturer’s knowledge, and spreading their customer servicing costs across their portfolio. As a result, manufacturers with direct and indirect channels usually achieve higher market shares and lower overall go-to-market costs.
For all these reasons, manufacturers must have a channel strategy, and over many years, several fundamentals have emerged, sometimes referred to as the “Five C’s” of channel strategy:
Capabilities. Channel strategy begins by understanding the capabilities required to provide support across the entire customer journey, often organized around pre-sale, transaction, and post-sale phases. These capabilities are mandatory, but the decision to retain or transfer them is critical because they must be delivered effectively and efficiently, with a loyal commitment to supporting the brand.
Coverage. Coverage is about aligning capabilities with customers and prospects. Coverage planning begins with an honest assessment of what distributors can do better or less expensively than manufacturers. Once these facts are known, coverage planning includes several elements:
Distribution policy. The most fundamental coverage decision goes to how many distributors a manufacturer prefers to have in any given territory. Options include exclusive policies (one distributor per territory), selective (a small number of distributors), open (take on any distributor that wants to carry the manufacturer’s products), and saturation (as many distributors as possible).
Customer relationships. What do customers value in their relationship with the manufacturer and potential distributor partners? Is one relationship stronger than the other? Do the relationships support each other, are they independent, or are they in competition?
Partnering. Manufacturers that transfer many vital capabilities to distributors generally want a powerful partnering arrangement and therefore offer selective or exclusive territories. Doing so limits the competition faced by distributor partners. In return, distributors invest more in aligning with and supporting the manufacturer’s brands.
Selection and authorization. The final step is to recruit, sign-up, and authorize the appropriate number of distributors to achieve policy, relationship, and partnering objectives. Manufacturers will sometimes implement a tiered distributor structure, in which a mix of high- and low-support arrangements optimizes coverage and market share.
Compensation. Channel compensation plans set distributor purchase prices and add incentives in the form of incremental discounts and rebates. Compensation plans are designed to align with capability and coverage needs, allowing a distributor to earn an acceptable overall margin for supporting the manufacturer’s products. Incremental incentives drive the manufacturer’s objectives for sales volume, reward distributors for making investments, or encourage specific sales, marketing, or customer support activities. Bottom line, the compensation plan divides the overall available margin between the manufacturer and its distributor partners.
Controls. Controls are measures for enforcing specific distributor behavior around order quantity and frequency, returned goods, participation in marketing plans, policing competition for customer projects won through bids, encouraging lead generation or customer development, and many more. In addition, controls are about establishing shared business processes, managing costs, and delivering the right level and quality of customer support.
Communication. For a manufacturer, communication is about establishing the patterns, frequency, and depth of conversation with distributor leaders, product managers, marketers, salespeople, and more. Communication needs define a manufacturer’s channel management policies, programs, and staffing. Some manufacturers assign distributor channel management as one responsibility of many to the company’s salespeople. Others set up a dedicated channel organization with channel managers, data analysts, customized software, product and sales trainers, and more. Regardless of form, every manufacturer’s channel management resources are responsible for the tactical execution of the channel strategy.
What's changing with distributors
Our whirlwind tour of channel strategy is essential knowledge for B2B innovators because distributor business models are changing as distributors adopt digital technologies, especially e-commerce platforms, data analytics, and artificial intelligence. Social forces are also driving change as new generations of customers have different expectations for how they live their lives and do their work. Government regulations come into play through emerging policies and regulations around cybersecurity, data privacy, and the negative impacts of social media and the attention economy. There are other factors as well, but some of the significant implications for distributor business models include:
Localness. Before the internet enabled online customer servicing, distributors established branches to service local communities with people that lived there and with inventory stocked in a local warehouse. E-commerce and webstore capabilities allow distributors to serve customers and take orders anywhere, at any time. Moreover, disruptive marketplaces (for instance, Amazon) have disproved the need for local operations to serve local needs.
Front-end customer experiences. Distributors are evolving from back-end businesses to winning on their front ends. Back-end models focus on stocking a warehouse with a profitable mix of products and brands and operating as order-takers for fulfilling customer demand. Emerging front-end business models are around competing on carefully designed and differentiated customer experiences enabled by omnichannel capabilities, digital marketing, customer relationship management (CRM) software, and artificial intelligence. Front-end models are designed to create demand and emphasize the distributor’s brand, not the manufacturer’s.
Communities. Distributors are awakening to the need to establish and manage hyper-modern customer communities enabled by technology and human-centric innovations. Read my previous newsletter edition, Can communities power the B2B revolution?, to understand this trend and the required capabilities.
The democratizing impact of digital technology. Stefanija Tenekedjieva's excellent article on Medium, All you need to know about democratization in technology, covers virtually every important aspect of the democratizing impact of digital technology. For distributors, this means that the power of digital technologies is available to all distributors, of all sizes.
Research and development. Traditionally, manufacturers have R&D capabilities and distributors do not. But this is changing rapidly as distributors create innovation centers and incubators, sometimes in collaboration with colleges and universities. Examples are here, here, and here.
Funding for investments. Traditionally, distributors fund growth through cash flow, employee ownership (ESOP), or private equity. However, as distributors become proven innovators, they will attract new funding sources. For example, I have found early signs of interest from angel investors, venture capital firms, and seed capital from manufacturers, all flying beneath the radar and attracting little notice.
Ideas for innovating B2B
These changes matter. Manufacturer channel strategy fundamentals, as outlined above, are entirely dependent on creating high-impact, win/win partnerships designed to fit distributors’ business models. If distributor business models change a little, manufacturers’ channel strategies may accommodate change through minor tweaks and adjustments. If they change a lot, entirely new channel strategy fundamentals will emerge.
Innovation happens slowly, then quickly. Similarly, the evolution of channel strategy fundamentals manufacturers will change gradually over time. I offer the following scenarios as possible future states, posed as “what if” questions, and will explore them in-depth in future editions. For now, I ask my B2B innovator readers to try them on and imagine what will fit and what won’t, what your company can quickly adapt to, and what might create an existential threat.
What if distributor business models move from generating revenue through markups on products sold to revenue models based on services offered on a subscription basis?
What if distributors turn their webstores into platforms, as discussed on MDM in an article by Alex Moazed, 2 Ways to ‘Marketplace’ Your E-commerce Site?
What if distributors control customer relationships through hyper-integrated data sharing and collaborative workforces and create user experience (UX) specifications for manufacturer products, disrupting manufacturer product specifications, operating manuals, and warranties?
What if distributors jettison warehouse operations to a utility-like service that can match Amazon’s scale and technology sophistication and choose to focus entirely on world-class, customer-experience execution?
What if distributor partnerships with data aggregators become more critical than supplier partnerships built around products? For example, a data aggregator might collect data from smart, internet of things (IoT) enabled equipment and combine it with energy data (from utilities), external environment data (for instance, weather information), internal environment data (for instance, HVAC, employee information, and so on), business customer performance data and operating costs, and more.
Manufacturers have long held best-in-class capabilities around brand, marketing, and sales. They were simply better than distributors, and manufacturer excellence granted them considerable power to create control mechanisms that determine how legacy value chains operate. As a result, manufacturers lead the value chain, and distributors are consigned to roles as middlemen, adding value to their suppliers’ products. If the pursuit of front-end customer experiences—enabled by the democratizing power of digital technology—means that distributors achieve dominant, best-in-class capabilities, distributors may ultimately redefine the channel strategies available for manufacturers and, perhaps, lead the value chain.
Join the journey
I have other scenarios in mind and will explore them in future editions. In the meantime, I look forward to your feedback on the channel strategy fundamentals, evolving distributor business models, and shocking future-state scenarios. If my future states are not shocking enough, I challenge you to go further. In my newsletters to date, few readers have provided ideas through the platform comment feature. But I have had many offline conversations. Going forward, I hope to expand our comments as we come together as a community of forward-looking B2B innovators. I am available, as always, at mark.dabncer@n4bi.com.