More Channel Killing Blunders: Direct Sales Policies

Poorly Planned
Direct Sales Policies

First let me start off with a statement:  I’m not a negative guy.  Just the opposite, I typically walk around with a smile on my face and fill the silent void with sonic sweetness – whistling my own renditions of rock classics.  I am a distributor guy with a special spot in my heart for manufacturers who recognize the power of a well-developed channel.  You can call me Mr. Nice.

The problem is my cerebral serenity is torn, stapled and otherwise mutilated by irate calls from distributors looking to load their emotional baggage on to the consultant guy from Iowa.  Here’s the scoop.  In the Saturday afternoon matinee Westerns of my misspent youth, the hero took a shot of whisky, put a bullet between their teeth and growled “yank it on out”.    In this case the flaming arrow is lodged in the muscular torso of our hero Trust and his faithful companion Cooperation.  

The Poorly Planned Direct Sales Model

In this case, the manufacturer felt they were losing opportunities in the mid-sized OEM market.  To stimulate activities within their own sales team, they offered a major bonus ($10,000) to reps who signed up OEMs who did over $50,000 a year in business.  The plan sounds good on paper.

Unfortunately, the manufacture didn’t clearly define the rules around OEM selection.  OEMs doing business through the distributor channel weren’t clearly identified.  In this case, the manufacturer didn’t have solid Point of Sale data.  (And in retrospect will probably never get POS data anytime soon based on their newly created reputation as a company willing to steal business from their channel partners.) 

Common sense would dictate that salespeople would be instructed to stay away from distributor accounts.  Without challenging the honesty, professionalism or birthright of the reps in play, the manufacturer’s salespeople couldn’t resist the temptation of fast bucks and big bonuses.  There was a mad rush to convert distributor OEMs to direct OEMs, pass go and collect $10,000. 

Any communication with this once valued supplier was shut down immediately.  Any new opportunity was quickly passed to a safer supplier.  Distributor inventories were depleted.  Service levels to customers diminished.  In one instance, the local rep responsible for converting the business was barred from the distributor’s building.

The rest of the story goes like this.  The OEM accounts which had netted the $10,000 bonus were targeted for conversion by the distributor.  In a couple of instances, angry distributor managers paid double commissions to convert the customer to a new brand.  Competitive manufacturers, smelling blood in the water, offered up special pricing and other incentives to assist in the conversions.

In less than two years the manufacturer found themselves staring down a 35% decrease in business.  What’s worse, their distributor channel was in shambles.  Any hope for assistance in fixing the business by way of distributor launches lie in shambles. 

How could this unfortunate situation have been avoided?

First, let’s set the record straight:  regardless of distributor grumbling, there is a place for manufacturer direct business.  However, the rules of engagement must be defined ahead of time.  Any changes to the game plan must be discussed and agreed to well ahead of the plan. 

Best practices in direct business are as follows:

·         There must be some real reason for going direct.  These may be industry dynamics, type of relationship or product mix.

·         If some bit of preexisting business falls outside of the “reason for going direct” there should be a plan for moving the business over to the distributor.

·         If the opportunity grows and/or pricing levels shrink the available margin for compensating the channel, the distributor should be given the opportunity to handle the order at a lower margin level or through a finder’s fee type of commission.

·         The manufacturer’s sales team must be compensated for distributor sales in a way that does not encourage direct business.  This is critically important as best laid plans are often ruined by rogue salespeople working to maximize their commission checks.

A few random thoughts about direct business:

·       Customers have been conditioned to expect lower prices from manufacturers.  Purchasing departments will toss out all kinds of smoke signals about lack of distributor performance, the need for a direct relationship and other bantering about direct relationships.  Once they learn the price is actually more for going direct, these points will disappear.  If you have a performance issue with your distributor deal with it directly, but not by discounting to potential customers.

·        If the vast majority of your business is through distribution, share this information with your channel.  Distributors are impressed if you say, “90% of our business is through authorized distributors.”

·       If you have rogue sales types who has a habit of taking business direct, deal with them quickly.  These people impact the reputation of your company. 

Distribution is a business model not a way of life:

I’m not from the "distribution is a way of life" school of thought.  In spite of tales of mom’s apple pie, the girl next door and all things pure, I don’t believe distributors should be supported for the good of mankind.  Distributors aren’t shady middlemen, hands outstretched, extorting a ransom for doing business in their territory.  Distributors provide a valuable service for their manufacturing partners. 

Wholesale distributors extend credit, build relationships, service existing business and find new applications for their suppliers’ products.  It is cheaper and more effective for manufacturer’s to do business through distributors than to service hundreds of customers. 

Manufacturers cannot assume their sales teams understand these principles.  They need to invest a bit of time and training to assisting their channel facing sales teams in the nuances of the wholesale industry.  It is good for everyone.

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