During my 26 years at Frank Lynn & Associates, Inc., I have seen and helped to create very innovative go-to-market most popular IPTV subscription for Android strategies across many industries. However, I have witnessed many manufacturers and service providers make the same errors in judgment over and over again when designing their channel strategies. It almost seems as if they have all read from the same book “How to Ensure a Failed Channel Program,” which I have never come across, but am convinced is in its “nth” printing.
Based on the firm’s 33 years of experience, here are the most common misconceptions we have seen in business-to-business markets that sell through distributors, wholesalers, dealers, etc.
Mistake #1 Expecting Distributors to Generate Demand for Your Product
Distributors service markets and rarely develop them. Demand generation is the role of the manufacturer. Some channels classified as “technical specialists,” will help to educate end users relative to new product and technologies. Therefore, they can contribute to demand generation, but ultimately demand creation is the manufacturer’s responsibility.
Sales and marketing managers that are frustrated with a distributor’s lack of demand generation activity often will refer to them as “order takers” and in a sense, they are. In fact, broad-line and logistical distributors are very, very efficient at taking orders. If you look at their activities closely, you will see they do a lot more to service their accounts–but they service demand, not create it.
Mistake #2 Expecting Great Performance by Providing Distributors with Exclusive Territories
The only good reason to grant a channel an exclusive territory or market for your products is if it is new, requires the distributor to invest and you want the distributors to feel they will have an opportunity to recoup their investment. Even with this situation, the timeframe for the exclusive should be limited. Every other exclusive arrangement restricts you, the supplier, from accessing your end customers through other means. In addition, most markets have multiple customer segments that wish to be served by different channels.
In almost every situation where I had a client with some exclusive territories and some with multiple channels, their market share is highest where channels compete.
Mistake #3 Expecting Your Partners to Sell to New Customers
Dealers and distributors focus on servicing their customer base. They evaluate new products and services to determine the best ways to grow revenues in that set of customers. While they may add new customers, typically you can expect 90% to 95% of the distributors’ revenues in 2006 to come from the same customers they sold to in 2005.
Unless your product is sold by a systems integrator or a VAR specializing in unique or custom sales that are sold once to an end customer, dealers/ distributors will rarely call on new accounts just for you. That is why most high-share manufacturers and service providers utilize multiple channels to reach a variety of market segments.
Mistake #4 Expecting Broad Business Objectives to Work Equally Well in Every Market
Let’s say you have a “selective” channel strategy, wherein you select the best distributors in each geographic market. If you are highly skilled at implementing your selective strategy, you may actually sign up the best distributors. Based on our experience, this approach may land you distributors in secondary markets (think Des Moines, Dayton, and Fargo) that control 40% to 50% of the market. However, in major urban markets (Chicago, Detroit, and Los Angeles) this selective approach may get you distributors that individually deliver 5% to 7% of the market. Even with three or four distributors in a large market, you may have distributors that deliver only 15% to 20% of the market.
Now, if you have a plan to grow your overall market share from 25% to 30%, you have a problem. Why? Because you do not have any markets where your market share is 25%! You have 15% share markets and 45% share markets and managers often articulate similar growth strategies to your distributors in both. (We find that clients often discuss strategies to impact their market share as if one number adequately describes their share position.) It is usually a lot easier to grow where your share is lowest–and your strategy in the high-share markets should perhaps be to defend your share.