Eliminate the Middle Man and Save

Out on a lonely street of the seldom used two-lane highway between Dubuque, Iowa and Madison, Wisconsin, there once stood a ragged and paint-worn billboard with these words emblazoned in three foot letters: “Eliminate the Middle Man and Save!”

While the sign has likely fallen and the once flourishing cheese factory is gone, the legend lives on in the hearts of untrained purchasing professionals everywhere. It’s one of their dozens of negotiation tools and they’re not afraid to use it on the unsuspecting manufacturer’s sales executive.

Allow me to set the stage for the typical play of this tool…
The purchasing guy’s company uses your product and has for a considerable amount of time. One day, you get a call from the purchasing department. The buyer asks for a meeting but specifically requests you come without your distributor. During the meeting, this procurement guy describes how his company likes your product and wants to strengthen and expand their business relationship with you. (The bait…?)

All sounds good so far, but then comes the well-rehearsed message: the distributor shouldn’t be part of the equation.

There are a predictable list of reasons:
• The distributor is good but doesn’t really add value to this piece of the business
• The customer wants to build a closer relationship with your company for technical reasons and the distributor only gets in their way.
• The customer is evaluating their supply chain and their “consultant” told them distributors are an unnecessary step.
• The customer has identified new business for which you are qualified but doesn’t see how it could possibly work through a distributor.

A defining moment in channel policy.
Very few manufacturing organizations with distributor channels proactively explore the proper response to such a scenario. Like most things associated with the negotiating process, salespeople come to the table unprepared and unaware a negotiation is in progress. On the other hand, purchasing teams actively train in the art of the negotiation. Most are rewarded by their ability to knock down prices without impacting quality. Stripping out the distributor margin while insisting the manufacturer continue to provide all of the services formerly handled by channel partners is a frequently used ploy.

The salesperson is unprepared.
We have already noted few manufacturer sales people realize they are being “played."  This is an issue. Exacerbating the issue, many manufacturers fail to insure their sales teams understand the cost of the transactions handled by the distribution team. For example, when the distributor is removed, orders must be placed, shipping and billing questions handled, expedites responded too and warranty issues explored by staff back at the manufacturer; typically these are more expensive than the distributor alternative. Further, issues like distance, lack of ongoing relationships and inability to quickly drop by the customer to “handle the issue” impact cost and service levels.

Most manufacturers have failed to build a decision matrix for precisely what makes for good direct business and what qualities this business should possess. Instead, untrained salespeople are forced to make subjective decisions with big bottom line impacts.

How to handle this negotiation tactic.
First, allow me to provide some fair balance to this message. I believe some business might need to be done manufacturer direct. Examples include: private label opportunities, business where the manufacturer develops a special product to the customer’s specification and business falling outside of the channels normal market segment (electrical tape sold to hockey teams for wrapping sticks might be an example). And sometimes, opportunities become so large and so price driven that distributors are not part of the equation.

The rest of the time distributors are an important part of the business model. You wouldn’t remove the distributor from the sale any more than you would say, “this is business where we don’t pay the sales team.” The channel is part of the sales team.

So how do we respond to the negotiation push for direct business? Here are a few steps that make sense from my standpoint:

1. Visit with the customer to hear the whole story. Don’t limit your conversation to (only) the purchasing department. Instead insist on talking to the engineering and production teams. Ask pointed questions about their ongoing needs.

2. Push back against price. If the customer starts off with

assumptions that your distributor is making 20, 30 or 40 percent gross margin, and the purchasing guy talks asks for that margin as a price reduction, ask where they got the numbers. Most customers over estimate the distributor margin.

3. Indicate there will not be a major price reduction driven by the direct business. Point to the services provided by the distributor which may be more expensive coming from the manufacturer directly. Point blank ask the buyer if they would want to go direct if the price remained the same.

4. If pricing becomes a bigger point, ask if the customer is willing to make some kinds of concessions in return for the price reduction. More business, blanket orders, elimination of services and/or reduction of warranties all could be tied to reduced price.

5. Offer to bring the distributor into the negotiation. Perhaps the distributor can provide added services or streamline the services they provide to help match the price cost needs.

6. Keep the distributor involved in the process from the very start.

Channel Distrust and Disruption.
Hitting on point number six from above, it is critical to keep the distributor involved in the process from the beginning. Experience dictates, the distributor probably has a better handle on the local relationship than the manufacturer’s sales team. The distributor may know people within the customer who can provided details on the reason for the negotiation; things like pressure from corporate, a loss of a major customer, a new procurement executive making a name for themselves or some mistake the distributor made in the recent past.

If the situation does call for a price increase, look to the distributor before giving away gross margin. Over three decades of work with distributors indicates most are willing to drop their gross margin percentage if presented with facts. And, most are emotional about doing so without some say in the process.

Finally, if the situation does call for a move to direct business, the distributor needs to be compensated for the following:

• Finding and nurturing the business if they originally brought it the manufacturer and developed a strategy for getting the business off the ground.

• Any work they are required to perform should your system break down. Stocking, handling warranty issues, working through customer technical questions all cost money. If you take the business direct, expect to pay for the service requests passed to the distributor.

Eliminating the Middle-man is not a savings.
Distribution is a business model. It does not exist because it’s as American as Mom’s apple pie and the freckle-faced girl next door. It exists because distributors can handle customer relationships more efficiently and effectively than a manufacturer can do directly; at least in most cases.

Manufacturers need to invest in training their sales teams on the distributor model. If your team does not understand the financial drivers of distribution, buy a Profit Report from one of the distributor associations and spend some time understanding it.

The New Salesman: Square Peg, Round Hole

My assistant came back to the office today with a distinct look of disgust.  Apparently she did some last minute dress shopping over lunch.  She went on to explain how infuriating it is when a salesperson tries to cram a “hideous mess of a dress” on to anyone willing to buy.  She further explained how she had met this salesperson before and was given a song and dance about how great an outfit looked, when clearly it was just meant for a mannequin.  This trip, she tried to avoid this salesperson and with good reason.  While I laughed at her fitting room trials, I couldn’t help but think about how it’s not just mall employees who push their way in for a buck.

Tips for the New Guy – Don’t sell a square peg for a round hole

Want to ruin your career?  Just establish a reputation as a guy who “force fits” the wrong product into customer applications. Customers will never forget or forgive you for it. 

I call the practice selling square pegs for round holes. Allow me to share a war story.  Join me as we hop into Mr. Peabody’s WayBack Time Machine.  We’ll set the dials to the 1980s. 

One of my friends was working for an automation company.  The company had just launched a brand-new product – but it was a dog.  The technology was too little and too late for the market.  Nearly everyone-- customers, competition and salespeople, recognized the issues.  But the upper management of the company insisted the product could be sold.  When it didn’t sell, they instituted a large ($1,000 back when this was a lot of money) bonus for anyone making a sale.

My friend leveraged all the trust one of his customers put in him to force the product into their operation.  He collected the bonus check, and prepared to live happily ever after.   But problems soon showed their ugly face.    

The product didn’t work in the application.  The customer (and my friend) worked weeks trying to get some level of suitable operation.  But again, it was the wrong product.  And, even though networking wasn’t the same back then as it is today (no internet, no users groups, no on-line forums), the customer soon came to realize others knew about the problem well before their purchase.

They felt burned, ripped off and abused.  And, my friend was caught in a terrible position.  He had sacrificed the customer’s trust for a hand full of bucks.  He sold a square peg for a round hole.  Branded: My friend was permanently branded as a guy not to be trusted. 

Here are three rules to follow in avoiding the label

Rule One - If your company doesn’t provide the right solution to the customer’s problem, don’t try to force fit a product into the wrong application.

If your product doesn’t work well in a hot environment, explain to the customer why you think this time you need to NOT make the sale.  Doing this demonstrates your integrity and adds to your reputation as a trusted adviser. 

If you know a competitor has the right product, offer to assist the customer in selecting the correct solution.  If multiple competitors offer an appropriate solution, I recommend directing the customer to the competitor with the lowest overall competitive threat.  Online sellers fit this bill, because they rarely push for other business.  Mostly, they simply process the order.  Some sellers have even offered to purchase the product

and pass it along to their customer at cost.  Either way, you send a strong message to your customer – you are a guy who can be trusted.

Many of you have fiscal year end approaching!

Rule Two – If no real solution exists, explain the risks of using your product.

Sometimes, no real solution exists.  Every now and then we run across an application where no real solution exists.  This is a rare occurrence but it does happen. 

Your solution may work, but may not last very long.  The product in your catalog may need to be modified to work.  There are probably risks.  Make certain the customer understand what might happen and that you are only making the suggestion because you can think of no other solutions.  The customer wins and you might still make a sale.

Rule Three – Your solution doesn’t have to be the best on the planet, if it works for the customer.

This whole “square peg -- round hole” issue confuses many new sellers.  They wonder if their products and solutions must be the absolute best on the planet.  The answer is no.  If your product works for the customer and solves their problem, it works. 

There may be other products that run faster, cost a little less, and have a sexier connection, but solving problems is your stock in trade.  The competitor’s product may run for a million operations, but if the application calls for 10,000 cycles and yours will work.  You have done the job.

A final word…

There are a few sales managers out there who are looking for salespeople to “force fit” their company’s offering everywhere.  Most times, it comes as a lapse in judgment.  On rare occasions, it’s a deeply seated case of machismo taken to extreme.

My friend’s management team tried to slam products.  They offered outrageous rewards.  My friend bought into the program.  He got his bonus but lost a more valuable thing – customer trust.

When your manager insists you sell the wrong product, get clarification.  Are you missing something?  Is your manager missing something?  If it’s the macho “I can sell anything to anybody” issue, we need to talk.  Give us a call.

Are you a believer in the advantages of having Distributor Specialists?  See why your bottom line should be a big believer at Amazon.com.

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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Channel Killing Blunders: The E-Store

Distributor Policies – Worst Practice Mistakes Revisited

In the past couple of weeks I have been bombarded with horror stories of distributor policies gone wrong.  I have to wonder how and why so many manufacturers fall into the same traps.  Perhaps they don’t have a vehicle for benchmarking distributor practices. 

Manufacturers with strong distribution channels typically participate in Distributor Associations and one can surmise networking takes place to some extent or another.  If not directly with other manufacturers, then information may be exchanged by way of distributors sharing best practices.  The others, well some days it’s tough to imagine where they get their input. 

Management teams from Europe and Asia often don’t truly understand how the channel works in North America.  The whole concept of distribution sounds as goofy as buying hot dogs at a barber shop to their native sensibilities.  I mean, if you don’t really understand value proposition of a distribution channel, the set up really does seem like a massive margin giveaway.  This isn’t an excuse, but it is a definite possibility.  Wholesale distribution in North America is generally more professionally developed, provides greater value to their supply partners and customers than channels elsewhere who merely handle paperwork. 

Newly minted MBA’s often only understand wholesale distribution in an abstract way.  After reviewing some of the case studies developed around wholesale distribution for MBA programs, our kind of industrially focused and knowledge-based distribution lacks representation.  Instead, one is likely to see stories of food, beverage and pharmaceutical distributors.  In other words, unless they seek to understand what we do, they can only imagine our model looks just like the local Dr. Pepper Distributor.  

Regardless of the reason, their mistakes cost them plenty… money, marketshare, growth, brand recognition and the good will of the world’s largest industrial selling resource.

I plan to publish a series of channel killing blunders but to get you started here is a good example of a bad strategy:

Case 1: Poorly thought out E-Store Strategies

Everybody needs an e-Store

Manufacturers are playing with the concept of e-stores.  They get bombarded with articles and sales calls expounding the benefits of an e-store presence.  In theory, the ideas make sense.  Provide customers who lack a local distributor relationship an easy outlet for your products.  While in most cases, a list of distributors by zip code would work just as well at a fraction cost.  Based on the view of e-stores only serving customers without a distributor partner, the e-store concept still seems benign.

Issue arises.  Nobody actually uses the e-store.  Careers are on the line.  Somebody has to do something.  After all, the manufacturer laid out big bucks to have it programmed, produced and populated.  Why not call on marketing to attract business?

Distributors discouraged

Advertising your e-store irritates your channel.  Distributors hate direct business because it has a long checkered history of abuse.  Distributors value sales leads.  Most do a pretty good job of following up on the leads.  Progressive distributors see leads as door openers for not only one product but for their whole line card.  Some turn into immediate sales opportunities, others bloom over time (after weeks, months, and years of nurturing calls).  But when an e-store is in place, it becomes the recipient of any new leads.  If the advertising works, the e-store gets traffic.  But since most customers want someone to provide intelligent assistance along the way, e-store purchases don’t happen.

Still no customers down at the e-store
The e-store manager contemplates business levels (or lack thereof), they assume published list prices are the culprit.  Cutting prices on the e-store should attract customers who are “on the fence” or comparing brands.  Unfortunately, discounting published prices impacts distributor margins.  When the distributor’s customer says, “I can buy the product cheaper on the internet.”  The distributor salesperson usually gets the sale, but at a lower than normal margin.  If they hear the “cheaper on the internet” story more than a couple of times, most distributors will switch their strategy.  Distributors who once actively sold the manufacturers product by finding new applications and converting competitive business invest their time in more profitable products (in selling time is money).

If the online price gets low enough and the distributor feels they no longer make sufficient gross margin to turn a profit, the distributor will begin to actively target the e-store owners product for conversion to another line.

A word of warning to the guy with an e-store
If you are congratulating yourself on not yet seeing distributors switch your products at the customer, you’re not out of danger.  Product conversions take time.  By the time you notice the effort, it will be too late.

Shipping is part of the price

If the customer gets better shipping terms than the manufacturer’s authorized distributor, it will affect your distributor channel too.  Why provide free freight to online customers, but charge distributors a freight fee?  A combination of low prices and free freight will “whip up” your channel’s blood pressure just as quickly as dirty deeds done dirt cheap pricing.  

Sometimes, the e-store doesn’t even belong to you
Every manufacturer should have a published distributor policy for advertised prices.  Without even committing a single of the e-store sins described above, a handful of distributors adopted strategies for using the internet (and very low pricing) as a tool for expanding their business. 

These wholesalers have taken on a new business model for business.   They see themselves inserting technology in place of a sales force.  Working the internet model to expand their business to the world is their credo.  I appreciate their entrepreneurial bent.   However, I also see the poaching effect of their very low prices on the distributors who actively sell.  They provide deep discounts and do absolutely nothing to promote their manufacturers’ brand, discover new applications or grow the marketshare.

I am not an attorney

I’m not passing myself off as an attorney, but here is my understanding. 

It is illegal to dictate price levels.  If the on-line guy wants to give the product away, that’s their right.  However, you can dictate lowest advertised price.  The customer can still call and negotiate, but that’s another step and it’s the banner add with a super low price that hurts your distributor efforts.

Finally…

We’ve all benefited from best practices.  Perhaps some can benefit from a list of worst practices.  If you see a manufacturer who is going down this path, shoot them a link to this post. 

Better yet, if you have a favorite worst practice to share, send to me.  We’ll add it to our list (without naming names or companies).

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