Optimize Your Distribution Channel to Drive Growth
For most industrial manufacturers, distribution channel partners account for 50 percent or more of net revenues. Close customer relationships, adaptability, efficiency, and specialization are all key capabilities that a well-functioning distribution channel offers manufacturers.
Unfortunately, many manufacturers have yet to find the most optimal ways to engage their numerous, diverse channel partners to drive better performance.
In this article, I’ll highlight five key channel performance areas – in this case analytical in nature – that are critical for manufacturers to effectively drive profitable growth within their channels. In each of these areas, vendors and their channel partners should assess not whether they are performing these activities but rather what level of maturity they have attained in optimizing these areas.
5 Ways to Improve Distribution Channel Performance
It’s no surprise that manufacturer and distributor business performance drivers are interrelated and rely on mutual execution. To go to market and serve customers most effectively, manufacturers must work to integrate processes within their distribution channels. Today, with more ways to leverage data, connecting the dots with each of your distribution partners is both easier and more important than ever.
Here are five analytical areas where a formal channel management approach can make a significant impact on results.
1. Manage Point-of-Sale Data
In many industries, such as automation, electrical or plumbing or HVAC, distributor Point-of-Sale (POS) data are essential to the calculation of independent rep-agency compensation. Because rep agencies drive end-customers’ vendor demand (served through distributors), those vendors need to know the sales of products by geography, or often by customer, to fully and timely compensate the rep agencies involved.
In addition, accurate and complete point-of-sale data can also enable a manufacturer to analyze its business at a deeper level to uncover sales and marketing opportunities that can boost performance. This makes POS data extremely valuable beyond simply supporting rep agencies with on-time and accurate compensation.
Point-of-sale data transfer is certainly already happening to some extent; many distributors provide sales data to dozens or hundreds of vendors. The process, however, is often inconsistent. Based on our experience in key industries, distributors are most often sending spreadsheets and most often doing so by email. Each vendor, in turn, receives sales data in inconsistent formats from dozens or hundreds of distributors through non-secure channels. A process like this requires significant amounts of time on both sides of the channel to simply sort through and apply the data. This sub-optimal approach meets the minimum requirements of channel rep compensation, but typically does little to provide the manufacturer with clean data that can be used to capture insights that drive sales and marketing activities.
What can an effective POS process look like? For one, manufacturers need to have clear standards in place and ensure that all distribution partners provide clean and complete information that meets the standards. In addition, the process must be handled securely to protect the sensitive data, and on a timely basis to guarantee that rep agency payments are turned around in an appropriate time frame.
With the right tools and process, point-of-sale doesn’t have to be a struggle or put companies at risk of incorrectly paying rep partners. Even better, the data captured for point-of-sale purposes can even generate sales analytics to help vendors empower their distribution channel with sales and marketing support.
2. Build Demand Generation
To expand on the idea of sales analytics, let’s consider how manufacturers can use data to build demand and enable sales growth within their channels.
Channel demand generation activities include leads, prospects, customer nurturing/recovery and promotion of new-product launches. To maximize channel growth, vendors need to actively collaborate with their channel partners to identify, assign, manage, and convert a variety of sales campaigns. These include warm leads from manufacturers, selling additional product lines to existing customers, and even collaborating on a prospect list of best fit prospects. As you may have guessed, step one of generating these opportunities is analyzing clean and complete channel sales data, as we discussed above.
Lead conversion is a very time-sensitive activity and cannot afford to be slowed down by ineffective processes. Unfortunately. without the right tools and processes to take a formal approach to lead transfer, vendors struggle to quickly assign and transfer organic leads to the appropriate distributor sales teams. To capitalize on opportunities gained from end-customer engagement on websites, phone/email inquiries, digital marketing, tech downloads, and other marketing efforts, companies need to quickly distribute to the right salesperson quickly, and be able to monitor to ensure that the opportunity is converted.
Distributors don’t always know which additional products from a given vendor they could successfully sell their existing customers if it’s not something they already sell regularly. Most distributors only know their own transactional data and lack the visibility required to expand accounts in this way. Manufacturers, however, have the ability to study channel-wide sales patterns to identify existing account growth opportunities much more effectively than individual distributors. Unlocking these insights within channel data can significantly improve revenue and profit performance for the manufacturer and its channel partners.
Similarly, manufacturers with complete data visibility have the ability to identify green-space sales opportunities where distributors can gain net new accounts. Distributors often don’t prospect for net new customers regularly due to resource limitations and current customer demands. And, when they do, wide-net prospecting yields minimal results and devalues the activity altogether. Guidance from manufacturers can direct prospecting activities to best-fit targets.
Manufacturers can help distributors in each of these areas by providing specific, action-worthy sales guidance based on their rich channel sales data. In each case, a distributor cannot gather the same depth of insights on its own that a vendor partner can provide. A large volume of high-value and high-likelihood sales opportunities maximizes growth potential for the manufacturer as well as the distributor partner.
3. List Pricing and Channel Multipliers
Over the years, we’ve studied pricing data from a long list of manufacturers and distributors. Certainly, some companies bring more formal and thoughtful approaches to setting list pricing than others. However, the typical manufacturer is leaving money on the table in this area and can benefit by building a smarter pricing strategy based on its own channel data.
The Standard Into Stock list pricing and channel discount multipliers that most vendors take for granted often fail to capture appropriate value and price premiums from the stock/MRO purchases from their distributors. This is commonly a result of product managers, who lack marketplace visibility and analytics, not being able to properly optimize price premiums. Instead, list prices and distributor discount schedules are often the result of cost-plus or legacy structures with across-the-board increases applied to them over time.
Like the other areas of channel management discussed above, this is a missed opportunity for manufacturers. What if manufacturers’ list price multipliers included appropriate premiums on lower-sensitivity items? If that were the case, distributors would simply mark up accordingly with virtually no negative impact on customer behavior. By doing so, manufacturers discover small margin improvements throughout their product lines and distributors can gain additional margin dollars as well.
Beyond that, ineffective list prices and channel multipliers are a major source of profit leakage and driver of tedious and unnecessary SPAs, rebates, and claim-backs. If list pricing is derived from a thoughtful, data-driven approach, some of these processes may not be required for distributors to get to the right price point on a given opportunity.
4. SPA/Rebate/Claim-Back Data
A data-driven approach can also help manufacturers optimize their business in the area of SPAs and rebates. This is extremely valuable in industries where vendors regularly provide specially negotiated pricing to distributors to support specific projects or large end-customers.
While negotiated SPA pricing is almost always set up with the best intentions, to drive win rates and address competitive pressures, these agreements are often poorly managed over time. With relatively significant discounts on a large chunk of channel revenue, SPAs and rebates quickly snowball to become a common profit drain for both manufacturers and distributors when they aren’t managed properly. In our experience, over 80 percent of SPAs produce either underperforming sales, wasteful discounting or both.
A formal SPA and rebate process can help manufacturers by ensuring that pricing is appropriate for the agreement based on its performance and that rebates are calculated against appropriate cost bases. A regular contract review cadence enables manufacturers and their distribution partners to stay ahead of these agreements and prevent out-of-control SPAs from draining profitability.
5. Inventory Optimization
Every distributor’s ERP system includes some level of inventory-planning tools and process support. Many companies rely on this functionality to optimize stock levels and monitor trends. Built-in inventory functionality is capable of functioning in this way, but most inventory optimization algorithms predictably fail to account for three key factors:
- Market/sales potential outside their historical transactional data and existing market coverage
- The customer loyalty and retention effects (beyond narrow sales value) of inventory availability
- Low-volume products where it’s difficult to optimize economic order quantities and trigger points
What if, instead of simply setting reorder points and optimizing for turns, distributors knew which products to add to stock which would grow customer share and build loyalty? With proper channel engagement, manufacturers can leverage their macro view of the marketplace to provide recommended stock levels that can help distributors do exactly that.
As is the case with each of the other key channel engagement areas discussed in this article, leveraging data is the key to driving revenue and profitability.
How Are You Engaging Your Distribution Channel?
These are five key areas in which market-leading vendors can engage their distribution channel partners: POS data, demand generation, list pricing and channel multipliers, SPAs and rebates, and inventory optimization. With data-driven analytics, processes and engagement models vendors can work with distributors to accelerate profitable growth. In each case, virtually every manufacturer has some experience providing information to distributors. It’s not a matter of if companies should do each of these activities, but how.
Ask yourself how well you’re capitalizing on each of the opportunities mentioned earlier. Grade yourself below:
With revenue from channel sales commonly exceeding half or more of total revenue, improving channel management processes yields significant results. The time has come for elite vendors and market-leading distributors to align on modern, data-driven engagement models to ensure a bright future for all involved.