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).

Distributor Planning Made Easy. Check out our Distributors Annual Planning Workbook:

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The New Salesman: Junk in the Trunk

Being Prepared-  The Salesperson’s Trunk, a Modern Version of an Old Vaudeville Act

Adolph Proper (stage name A. Robins) aka "The Banana Man" worked the Vaudeville circuit for over 40 years.  His clown act, unfortunately, lives on.  But instead of showing at ram shackled playhouses at the edge of downtown, it has moved to the front line of distributor sales.

Adolph’s act went something like this: dressed in a loosely fitting clown outfit, the Banana Man would walk on stage and ask the audience to call out random items.  He would sing a little song and dance around a bit while ceremoniously reaching in to his coat pocket.  Eureka!  Out came the item mentioned.  He produced guitars, violins, giant magnets, eggs, can openers, shovels—you name it.  The crowning touch typically came when the audience asked for a banana.  Instead of producing a single yellow fruit, Mr. Proper produced giant bunch after bunch, enough to fill an entire shopping cart.

How does this amazing anecdote apply to salespeople?

Today many salespeople confuse a well-stocked trunk with being proactive.  They carry reams of product literature, samples, demos and tons of support materials as ballast in the back of their company car.  Being prepared is a good thing, but I suspect it is a practice ripe for abuse.

Many salespeople substitute this trunk full of stuff for call planning.  Over the course of my career, I have been on dozens of calls where the sales guy opened his truck and said, “now, what should I bring on this call?”  Really…  Standing and staring down a semi-organized stack of stuff was their version of planning the sales call.  Within minutes, they would be standing face to face with the customer and the extent of their plan entailed pulling two or three samples and handful of literature from a shopworn liquor box nestled in their trunk.  What’s worse; they did nothing to customize the literature for the call or ensure that the sample was in good working order.

This is a bad habit.  And, we must steer new sellers away from the practice.  Let’s face the fact a good many veterans see this trunk full of junk as a point of pride.  They may even “sell” the idea to our new sales guys as a fool proof plan for working a territory.  In reality, many use it as a crutch for not taking the time to engineer a call plan.  Proactive planning is a fragile thing.

Aside from substituting immediate for planning, other issues abound.  The literature and samples become outdated.  The literature bares the mark of riding (for months or years) in the trunk of the car.  As golf clubs and camping gear from the previous weekend are tossed on top, sales materials get beat up.  Sometimes, samples are damaged by heat, moisture and dust.  Some may brush aside these seemingly minor points.  But bear in mind that today’s typical sales call comes with a $400 price tag.  When tossing around this type of money, why not maximize chances of success.

Nothing beats a call plan.  Sales managers need to ask their new salespeople (if not the entire team) to provide them with a list of sales calls planned for the coming week.  This encourages thought on topics begging to be discussed and provides the salesperson a few days to subconsciously tune their approach at the call.  On top of all that, the practice encourages appointment making skills, territory and calendar management, as well as greater efficiency.

In our industry, sales calls are not stand alone events.  Instead, the sales process is a series of activities intended to move the customer forward with the solutions we provide.  Call planning, when properly done, allows the salespersons to see previous events as integral to the needs off the current sales call and as a potential piece of future interactions.  Thinking this way improves other processes – like targeting.

I believe in targeting and hope you do too.  Targeting matches customer needs to (product-based) solutions we provide.  Simply stated, we look for ways to help our customer by introducing them to technologies delivering a payback.  This isn’t done while standing over an open trunk lid contemplating available literature on a snowy day in Iowa or a burning hot day in Arizona. 

As a salesperson lays out their call plan for a coming week, they think of products with the best payback for their customer.   Investing a short blast of brain bounce improves not only the quality of their choices for products shown to a customer, but also improves the customer’s response.  They can tell you were thinking about them.  It is nearly impossible to say “I selected this product form the thousands available in my catalog,” especially for you, without at least developing a couple of good reasons for making that statement.

Let’s return for a moment to The Banana Man.  There is a place for a well-organized traveling stash of literature.  Many times sales calls provide instant and unexpected opportunities and success does in fact, favor the prepared mind.  With this in mind, here are a few pointers for that roving round house for selling stuff:

1.      Be sure the literature is fresh and well protected.  We have found that hard plastic cases which protect against dirt, dust, and moisture work most effectively.

2.      Make plans for regularly reviewing what you carry.  New literature must be inventoried and replenished as used.  Without a plan for handling that specific task, it’s easy for you to miss opportunities.

3.      In the world of electronics, storing information on your hard drive or tablet can be handy and most likely allow for easier sharing of data.  However, this data must also be occasionally reviewed and refreshed.

4.      Think about a plan- if the selling opportunity is not urgent- to turn it into a two-step process.  Volunteering to return soon with a better prepared answer to the customer needs often brings more results than an immediate and impromptu handoff of literature.

For you sales managers, I encourage you to ask your sales team to provide you with a proposed call plan.  Routinely ask them to show you their trunk.  What are they carrying besides the remnants of their last camping trip?  Are they prepared?  And finally, never confuse a full trunk with a well-planned sales call.

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The New Salesman: The Joint Call

The Joint Call – A powerful tool for the Sales Repertoire



Don't underestimate the power of a Joint Call

There are few things in the world of distributor sales that pack the explosively powerful impact of a joint call.  These come in several flavors: calls with Specialists, Sales Managers, fellow salespeople, and with a person from a key manufacturer.  We’ll address joint calls with the distributor’s internal folks later.  But for now, let hit on calls with a manufacturer.

Strangely, this powerful tool has been undocumented, improperly benchmarked and ignored by many sales managers.  Whether they take it for granted or simply assume everyone knows how to drive the process forward, there is precious little outlining the best way to make one of these things happen.  While the old saying reads, “S… happens”, we don’t believe good stuff happens by miraculous accident.

It’s gigantic mistake to leave joint calls to happenstance because the joint call fills two very important needs in the distributor-manufacturer selling relationship. 

First, a well done joint call serves as a training platform for advanced solution selling (and everybody wants to be a solution provider these days).  Instead of devising a nebulous conference room discussion, the joint call allows the manufacturer’s expert salesperson to demonstrate how problems are discovered and solutions are proposed - firsthand.  When several joint calls are conducted on the same day, it provides the manufacturer sales rep to literally “hand off” portions of the presentation as the day progresses.  This practice builds confidence and creates numerous coaching opportunities. 

Secondly, and also of great importance, joint calls cement the relationship between the distributor and supplier.  Instead of working in adversarial (“cross purpose”) relationship, the two salespeople work together to address central customer issues.  A message is sent to the customer enhancing the value of the distributor and reinforcing the distributor’s role in assisting the customer in applying the manufacturer’s product.  Simply stated-it’s a win-win for everyone.

When joint calls are improperly handled, they create a chasm between the distributor and supply partners.  What’s worse poorly planned and terribly executed joint calls send a terrible message to the customer.  Let’s explore a few of the trouble spots.

Distributor salespeople create issues with their supply partners doing a poor job of scheduling joint calls.  When the costly sales resources of two companies come together, a well-defined set of appointments is a must.  Failure to use appointments wastes time, costs money and reflects poorly on the distributor organization.  Unfortunately, many times joint calls turn in to “ride-a-rounds” where the only connection is the use of a common car.  In the old days, the salespeople got to know one another.  These days, one guy drives while the other does email on their I-pad.   Joint calls should be/must be based on solid appointments and defined plans.

On the topic of planning, a plan should exist for the sample/demos used, the proper product literature carried, and other collateral required.  Furthermore, the call plan call should have an objective, which includes customer needs, the contact approached and the customer reaction.  It makes no sense to lay down a plan without a joint understanding of the customer’s environment and operating conditions.

Laying out a clear objective of the call is a must.  For example, if the objective is to move the distributor’s position forward a small notch, it should be spelled out.  If the objective is to convince the customer to add you and your product to their specification list, that should be defined, too. 

Sometimes, the objective might be to simply show the customer you are the authorized distributor for a specific product.  If this is the case, careful communications with the supply partner’s salesperson must be made ahead of time.  This is sometimes identified as a problem spot because manufacturers often have multiple distributors.  It does them no good to make a call with you if they already enjoy the business through your competitor.   

This this way: If the call has no real benefit for the manufacturer’s guy, the story won’t have a happy ending.  Whether you are a nice guy or not, both sales teams are charged with growing their business and making money – it has to be win-win.  Or everyone loses. 

But, wait there’s more.  My favorite line from late, great, TV pitchman Billy May. If you take a vendor salesperson on a joint call, you have just reduced the chances of them visiting the account with that competitive sales guy down the street.  When properly framed, you now own exclusive rights to the account (at least for a while).

Sorry for the interruption, now back to the message already in progress….  

Rules of engagement are important.  Ask who does the talking, how are introductions made and what logistical details may be important?  If a quotation is to be made customer based on the sales call, a timeframe should be set.  Commitments to the customer must be well documented and understood by both sellers.  For example, if the manufacturer’s salesperson makes a commitment for returning some technical information to the customer in the next week, that timeframe reflects on distributor and manufacturer alike.  Discuss these points before and after the sales call.

Trust is one of the unspoken issues with manufacturer’s sales agency reps.  I am not reflecting on any one company, just summing up the anecdotal stories from the past three decades. 

Sometimes the rep agency has product lines outside the offerings of the distributor.  When this situation exists, create a “gentleman’s agreement” well ahead of the sales call.

For manufacturer’s reps, returning to the customer a few days after the sales call with an offering competitive to the distributor is a good way of blackballing yourself from future distributor customer activities.  (Mr. Rep Salesman, if you have been accidental offender, apologize soon. If you are a habitual offender, be glad dueling is outlawed in all 50 states.  Otherwise some distributor would have already thrown down the gantlet of honor.)  Manufactures be sensitive to this issue and deliver a solid message to your rep as to the consequences of breaking this type of trust spill over to you as well.

So how do we fix these areas of concern?  I believe forward communication does much for establishing solid and high quality joint calls.  I recommend distributors establish a joint call policy for their supply partners.  Conversely, distributors must hold their sales teams accountable for making a measurable quantity of joint calls with prescribed supply partners each month.  In addition, the quality of those calls should be measured and tested – with both the distributor and manufacturer’s seller.   

A final word for sales managers

Returning to our very first though, joint calls are dynamite; applied properly they move mountains.  But, if mishandled, they can blow up in your face.  Sales people aren’t born, they are created.  They must be taught to make the right kind of joint calls.

Distributor Planning Made Easy. Check out our Distributors Annual Planning Workbook:
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The New Salesman: Thinking Like Your Customer

Trade publications aren't just for decorating the lobby!

Trade Publications


One thing that differentiates great salespeople from the new guys and the “also-rans” is their ability to think like a customer.  I am told that the only real way to gain this type of insight comes via years of customer experience.  I’m not buying it.  We can accelerate the process.  After years of direct customer visits, I cannot think of a single lobby that didn’t have at least one (often a pile) magazine catering to the customer’s industry. 

These trade publications are a wealth of information surrounding the customer’s day to day problems.  Editorial pieces often prominently make the case for solutions to common critical issues - literally begging to be solved.  Other times, published studies point out detailed economic justifications for our products.  Our table is set; the sale is half made.

I recently came across an article so valuable to the economic sale; I forwarded a copy to many of my clients (it’s linked below).   If you happen to be a Sales Manager responsible for new guys selling pumps, drives, or other process related equipment, I recommend you devote time to ensuring your staff can talk intelligently about all of the points mentioned.
This wasn’t intended to be a sales brochure, but I believe it could be one of the most powerful tools in a new salesperson’s arsenal.  The short piece outlines the current state of many plants, the economic value of fixing the problem and everything the new guy needs to jump start the selling process. 

To get you started, here’s how I would approach my customer:

“Mr. Customer, I ran across this article in Plant Engineering.  I know you have many pumps in your plant and wanted to get your feedback on the points they made.  Do you think the numbers they present for cost of ownership are correct?  I know you have a plan and priorities for attacking the economics of your plant.  Can you share a bit about your plan of attack?”

 

Then I would pull out my notebook, shut up and take notes.  No product pitches, no fancy selling techniques – just listen.  Why?  Because only through a solid understanding and the ability to talk about these problems can a distributor salesperson become the provider of key business decisions.

 

Now a question for the new guys:  Was this difficult?  And for the new guy’s manager:  How many of your sales people use trade publications to further their cause?  If not, we need to talk.

 

Here’s the promised link…

Distributor Planning Made Easy.  Check out our Distributors Annual Planning Workbook:
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Don't Let the State of the Economy be an Excuse

The State of the Economy – a down and dirty analysis

Everybody always wonders how the economy is impacting business.  The topic comes in Numero Uno in the cocktail chat at most distributor association meetings.  No distributor to distributor phone conversation excludes the topic.  We are in some uncertain times.  In general I have heard stories of great Januarys followed by pathetic Februarys or some permutation of the story.   

Privately held distributors often won’t provide sales data for the record and sometimes exaggerate when asked.  Yet I believe most of us are still interested in what’s going on.  With this point in mind, we thought about providing a short recap of the publically held companies in our sector.  They are required by law to report sales so the information is real.  While there is a difference between their business model, territory and scope, I think it gives us a subtle insight into the economy.

Grainger

Up 4% compared to the same period in 2012.  This is a difficult number to contrast as Grainger is in a constant state of expansion in products and territories.  Here is an interesting little tidbit for distributors out there. “The company's gross profit margin increased 0.8 percentage points to 45.2 percent versus 44.4 percent in the 2012 first quarter, primarily driven by the United States segment.”   If your team is dropping their prices because of price competition from Grainger you better inspect the data.

Fastenal

Sales growth of 4.9% with the highlight announced… “during the first three months of 2013, we installed 4,352 new machines.”   We took a tongue in cheek look at this vending machine thing here.

AIT – coming May 2^nd

Motion Industries

Down 2%  (EIS – their sister electrical supply division was down 5%)

Wesco

Up overall, but organic sales were down 3.4%.  Using some hocus-pocus of numbers of days in the quarter and other stuff for the financial world, they are saying down between 1.8% and 2.2% let’s just say down 3.4%.  For those of you wondering about gross margin at Wesco here is what they reported.

Gross profit of …. 21.1% of sales, for the first quarter of 2013 improved 120 basis points compared to 19.9% of sales, for the first quarter of 2012.

We believe the gross margins of these companies are trending upwards as they apply more sophisticated pricing process to their business.  If your organization does not have a similar plan, we recommend you give us a call.  We are not in the pricing business – but we have studied it pretty thoroughly and have some recommendations for you.

A final note: What does this have to do with on-boarding?

The answer is probably nothing.  However, we feel you should share this information with your new sales guys.  There are two messages. 

First, if you are a knowledge-based, value creating distributor you should be outperforming these national players.  Why?  Well for one thing you are most likely doing more for your customer.

Secondly, gross margins are going up.  Distributors are making more money.  And, my guess is none of their customers are sharing that message.  They need to hear it from somebody.  You are hearing it from me.

As a footnote – these guys are not distributors but since a number of the distributors subscribing to this series serve the automation and electrical space.  And, because they enjoy such a large marketshare in the US it might be good to note this comment from the Rockwell Automation Quarterly announcement - Rockwell said U.S. sales rose 2.5 percent in the quarter.

Distributor Planning Made Easy. Check out our Distributors Annual Planning Workbook:

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The Rationale of Following Your Passion

Steve Jobs, Mark Zuckerberg and me.

During research for our book covering the onboarding process, we have talked to a lot of young people.  More than a couple are fond of quoting Steve Jobs.  He’s a rock star of business; one of those rare guys who crosses generations like a Keith Richards or Sir Paul McCarthy.  And while most of us prescribe to the follow-your passion theory, I believe the majority of business leaders have made a few conscious decisions to position ourselves professionally along the way. 

Does it make good business sense to follow your passion?

_______________________________________________________________________________

Distributor Planning Made Easy. Check out our Distributors Annual Planning Workbook:

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Calculation of optimum selling price using differential calculus

By Jackie, Researcher

Topic: Education

Area of discussion: Management and Cost Accounting

Chapter: Pricing decisions and profitability analysis

The primary objective of this posting is to demonstrate the computation of optimal selling prices using differential calculus. Ideally, the theoretical solution to pricing decisions is derived from economic theory, which explains how the optimal selling price is determined. Interestingly, it is possible to derive simultaneously the optimum output level and selling price using differential calculus, if the demand and cost schedules are known. For discussion purpose, I have taken a past year question from ICAEW Management Accounting; this is an advanced question and it focuses a lot on “equation”.

Suggested answers with workings:

Solution for a:

Fundamentally, profit maximization is achieved when dTC/dx = dTR/dx (or when MC = MR). Therefore, it is advisable to calculate the marginal cost (MC) and the fixed costs (FC) first, so that we can use them to form the total cost (TC) function later. On the other hand, total revenue (TR) function can be found by multiplying selling price (SP) per unit with the output quantity. To solve ‘question a’, we need to calculate what is the maximum profit when the new machine is not leased and when the new machine is leased. Decision on whether to lease or not to lease the machine will depend on the option that can give a higher profit.

Note: The cost of materials per unit (i.e. £2/unit) could be found by dividing £400,000 with 200,000 units. However, do not apply this method (i.e. £90,000 ÷ 200,000 units = £0.45/unit) to compute piecework rate because the computed figure is a sunk cost and hence, it is irrelevant for decision making purposes as the price of the piecework rate will increase to £0.50 per unit in the coming quarter.

[Cont'd]

Note: If the new machine is leased, then the cost of materials will now be £1 (i.e. £2/unit x 50%) as the quality control problems will be eliminated, resulting in a halving of the usage of materials. Besides, the cost of leasing the new machine per quarter (i.e. £115,000) will now be an additional fixed cost element.

Solution for b(i):

Again, this is quite similar with ‘question a’. Profit maximization is achieved when dTC/dx = dTR/dx (or when MR = MC).

Solution of b(ii):

Please bear in mind that, profit maximization ≠ sales maximization. Total revenue will be maximized when MR=0.

Additional readings, related links and references:

For more questions on pricing decisions and profitability analysis, you may go to this link; there are a lot of past year questions taken directly from CIMA, ACCA and ICAEW.

http://www.tlint.com/emea/drury_6e/student/instreviewques/11questions.pdf

Product costing/Pricing strategy: Emphasize more on economics. Computations of profit maximization are included and well-explained. Ample graphs and tables are provided for illustration purposes.

http://www2.accaglobal.com/archive/sa_oldarticles/43958

For students who are interested to learn this in a greater level of details, you may download extra notes, print out, and keep a copy for your own references/studies purposes.

http://download.nos.org/srsec311new/L.No.41.pdf

Optimization problems & solutions in calculus. This is a very short article. It explains the formula: f'(x) = a(x^(a-1))

http://www.ehow.com/info_8062745_optimization-problems-solutions-calculus.html

Calculus review and minor short exercises.

http://www.sfu.ca/~zhent/files/Calculus%20Review.pdf