Suppliers offers a wide range of products and services. Their customers operate in various markets, market segments and in a vast geographical space. To reach these customers with their portfolio Suppliers need a ‘go-to-market model’ (G2M) that serves them best. Not always is a direct set-up of the field organization the optimal choice.
Here are some basic considerations that explain why working with partners might be beneficial for Suppliers. This short document lists the benefits and the items that need special attention when working with Indirect Channel Partners.
Benefits of Indirect Channels
Complementary Products and Services
To build a good relation between seller and customer frequent interactions are key. Despite the wide range of products and service the Supplier offers, for many customer segments there might not be enough reasons for a sales organization to build a very close relation to customers for Supplier’s products only. Indirect channel partners that offer complementary products and services have more reasons to see the customer, build a stronger relation and be therefore the better choice to buy from when the next decision to purchase a Supplier’s product comes up again.
Sometimes a Service that is provided by the Indirect Channel Partner (e.g. consultancy on workflow, efficiency improvement projects, IT consultancy, etc.) is the starting point for building the relation to a customer. The procurement of equipment follows afterwards. Therefore a Supplier may want to work with companies that offer such services.
Geographical Proximity to Customers
Indirect channel partners might be better established to serve the customer simply by being geographically much closer than the next Supplier’s office. This might especially be an important factor for service providers of technical services and less densely populated areas.
Channel partners who are close to the customer represent business partners who understand the cultural environment of the customer very well. In some cultures long lasting relations play a very prominent role in purchasing decisions. Trust is built over many years and it is difficult to ‘hire’ such relations into a Supplier’s organization. Working with existing trusted partners might be the better choice.
Channel partners who offer complementary products and service and are close to the customer, better understand the customer behavior. Because they know their customer needs very well and are embedded in the local networking they often can offer more flexible terms and conditions and fulfill customer needs better than a direct Supplier’s organization. As an example these partners might offer extended payment terms to customers that would not qualify within the Supplier’s guidelines. Or they might extend return guarantees at terms very favorable to the customer.
Fixed versus Variable Cost for Supplier’s
One of the most important aspects of going indirect for Suppliers is the fact that when employing an indirect channel most of the ‘costs’ of that channel (typically discount) are applicable only when there is a sale. Of course Suppliers still has to invest into building and supporting this channel (provide the right infrastructure of channel managers, a back office, training, etc.) but these costs are spread across a large number of partners. The sales force and organization that these partners maintain is reimbursed through the margin that the partner can make on transactions.
This fixed vs variable cost considerationis very important in smaller markets and in markets with very volatile turn-over. Here the complimentary product portfolio (more reasons to see a customer, more transactions to cover for the total cost of organization) is a helpful feature of the channel partner.
Items that need to be managed carefully when working with Indirect Channels
After having discussed several advantageous points a channel partner can bring to both the customers and Suppliers we need to point out some disadvantages that need to be considered and managed.
Filtered Market Information
Because the Supplier out-source selling and servicing to the channel partner, the Supplier does not get first hand information from the customer. What he gets is ‘filtered’ information, information that is ‘adjusted’ to contain as well the needs of the distributor or dealer.
This can be overcome partially by mutual customer visits, following the outcome of public tenders, studying independent market data, etc. but always remains a factor. The bigger and important the market is for a Supplier, the more direct resources he will need to employ to keep a good understanding of the customer needs.
A second consideration when working with partners is possible conflicting strategies. While the Supplier’s targets are clearly to be profitable andto maximize the reach (penetration) in available segments, a distributor might want to maximize its profit only. He might make more profit with complementary products or services and therefore not promote the Supplier’s range optimally. Or he might only go for the most profitable segment of the market.
When a Supplier wants to deploy a new product for new market segments, a new way of offering its products and services (e.g. care-cycle approach) or simply launch a marketing campaign it may do so ‘by command’ in all areas where it operates directly. It is more difficult to convince channel partners to make additional investment into e.g. marketing activities or even adding additional resources to serve new market segments in new ways. Channel partners need to be convinced that a new way of working is beneficial for them and that the return of investment will be fast enough. At the same time (see flexibility) sometimes the Supplier can start cooperative activities faster with channel partners because – once convinced – they have less administrative hurdles to overcome. Examples for such activities would be to offer promotional discount to distributors to pay for additional marketing activities.
After having looked to the major benefits of having indirect channel partners and the items that need to be considered when working with such channel partners we conclude that the choice of the G2M model always has to been seen in direct relation to the market conditions and customer needs. There is no ‘one size fits all’ strategy. The smaller and more volatile a market is the more the explained benefits of indirect channels come into play.
Without going into details, the diagram below explains certain preferences, depending on two parameters only: market size and market stability/maturity. Of course, in reality many more aspects need to be considered, among them e.g. historical development and existing channels, costs of switching channels, cost of setting up a new channel, synergies across business lines, account management etc.
It is to be noted that each business line of a Supplier should look at its offering and the market conditions independently first to identify the optimal G2M model. Only after such independent considerations the total Supplier’s set-up in a given market needs to be taken into considerations to evaluate the synergies that can be found across the various Supplier’s business lines.
This document has been written to ‘set the scene’ for channel discussions amongst people with a back ground mainly in direct organizations. We have developed a 2 ½ days training program called “The Distributor Manager’s Academy” that covers many more aspects of channel management. This training and consultancy on G2M choices is available on demand.