Posted on Wednesday, March 14th, 2012 by Jonathan Ebenstein
Industrial companies use various means to sell and move product from their manufacturing facilities to the end customer. This connection from manufacturer to customer is known as the channel. Historically this movement of product was through partners who would add value via their local relationships while also providing quick access to products via physical inventory. As manufacturing systems have evolved, through Just-in-Time (JIT), Lean Manufacturing, Six Sigma, etc., the need for physical inventory within the channel has been minimized. What this has meant is lower prices for the end customer or higher margins for the manufacture, or both. What this has meant for the sales channel is that they have had to re-invent themselves.
This blog series explores:
- Defining the sales channel and how it has evolved
- Working with and evaluating channel partners
- Implementing your channel strategy
What is meant by sales channels?
The sales channel is the leveraging of partners to generate revenues for the company and to optimize the transactional processes for getting products from manufacturers to end users. From a marketing perspective this strategy will include: promotion programs, product placement and pricing strategies.
In the industrial world there are many types of channel partners. Some more common types include: Distributors, Manufacturer Reps, Resellers, Catalog Houses and System Integrators.
At times the relationships with these channel partners can get confusing and complex. An example of this is outlined in the Handbook of Channel Marketing by Edwin Lee, 1996.
You should consider your channel partners and map relationships. This mapping may uncover conflicts or opportunities within the channel. While developing this map be sure to consider all levels in distributors including: large national distributors, local or regional distributors, independent distributors with a few local locations or single location, catalog houses, online distributors, and systems integrators. They all provide various levels of value-add. You need to determine what is required for your business and your customers.
Selling Direct vs. the Channel
When working with distributors the issue of selling direct by the manufacture usually comes up. In the end you should evaluate your business and your relationships to build trust and create the best long-term value for all. When conflict arises, you need to have an open and honest discussion with channel partners. They need to understand that the end user must be served with your product at a fair price, and you need to understand that the distributor may have the relationship with the end users.
There are some disadvantages for manufacturers when considering the use of distributors. Having a channel partner involved may:
- Increase your costs of sales
- Decrease your control of the product
- Increase your frustration if you choose the wrong partners
There are some advantages for manufacturers to use distributors. If they did not have channel partners then they would:
- Need to increased people & facilities
- Lose local market knowledge
- Lose customer contact
- Lose flexibility & fast response
Again, it comes down to the relationship. Who has the relationship with the end user, and would it cost you more to develop that relationship than working with a channel partner?
Exclusive Model vs. Open Model
When establishing your distributor partners there are various relationship models to consider. You can either have exclusive distributors who have predetermined sales territories and can only sell in these areas, or you can implement a model that is open. With this model you may sell via multiple distributors with little regard to territory or markets. Some manufacturers have implemented a hybrid system of open and exclusive. This may depend on the geographic region, the industry or the end user.
There are advantages and disadvantages to both the exclusive model and the open model.
The primary advantage of exclusive distributors is that you have a tighter relationship with your channel partners. You are able to have more control over the relationship and provide more guidance from top down.
With the open model you are able to sell via the distributor with who you may already have a relationship with your end user. Under the open model you lose some control and need to be careful of conflicts with other distributors and your direct sales team. Ways to manage conflicts include defining relationships and providing fair and open policies.
Changes to the Channel
There have been many changes in sales channels over the years. What has not changed is that the channels are still in place. Some channels have been minimized or have had to be redefined, but selling is about the relationship more than anything. All things being equal, it is the relationship that wins.
The Internet has also brought change to the channels and channel strategy. At one time it was thought that the Internet would kill the channel. If anything, I think the Internet has opened up options for the customer. It has also blurred the lines a little between manufacturers and channel partners. There are manufacturers who are selling direct on the Internet and distributors or resellers selling like manufacturers. When it comes to the Internet, it is the organization that gets the best exposure through SEO and online advertising, and has the easiest customer interface system that gets the order. But, to keep the order, it is still the relationship, the service and the product quality that will keep the customer coming back.
Another change with the channel comes from not needing local inventory due to the improvements in manufacturing techniques; business processes such as JIT, Lean manufacturing, better and less expensive delivery systems; and quicker communication systems. On the other hand, some channels partners continue to add value to key customers who need local inventory. Others carry inventory as a differentiator or because the items are higher volume and thus quicker inventory turns.
Check back next week for part 2 of 3 of our channel marketing solutions series. To learn more about channel marketing services, contact Jonathan Ebenstein of Skoda Minotti Strategic Marketing at 440-449-6800.