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About the Author ChannelCorp Workshops
3.3 Coverage ModelsDistribution intensity as delivered by coverage models is a key component of channel strategy. Distribution intensity should be consistent with the level of activity of the channel (push vs. pull), the segmentation approach, the nature of the product (bought vs. sold), the size and characteristics of the target market, and the requirements of various channel partners for a sound business proposition from the vendor or distributor. The purpose of this chapter is to outline the variety of macro-coverage models and relate them to the concepts presented in the previous chapter. In addition, the chapter will present a framework for considering intensive and exclusive coverage models. The chapter is divided into three sections: intensive vs. selective vs. exclusive intensive distribution - red flags exclusive distribution - relevant issues Intensive vs. selective vs. exclusiveThree generic coverage model/distribution intensity options exist intensive selective exclusive Figure 9 - distribution intensity/coverage model The coverage or distribution intensity issue is related to the number of channel partners in a market marketing/selling a vendor’s products and/or services. In an exclusive distribution arrangement, the vendor’s brand is carried by a few number of channel partners in a particular vertical (industry) or geographic market. In an exclusive arrangement, channel partners are typically highly focused on the marketing, sale and servicing of their key vendor’s products. In some situations, the channel partner may be truly exclusive and will not offer products/services of competing vendors in certain categories. The exclusive distribution arrangement requires extremely active channel partners and true business partnerships between vendors, distributors and customer facing channel partners. Exclusive distribution arrangements are more likely to exist in situations where the channel partner investments to become a viable channel are very high ($1.0M plus) and the payback period on the capability development investments are long (in excess of 2 years). In order for channel partners to make the required investments, they require enough time and enough market to earn their investment back and generate a return. Products that lend themselves to exclusive arrangements include mainframes and other expensive pieces of hardware, some “big ticket” software products, complex professional services, and small developing geographic/country markets. With selective distribution, a vendor’s product or service is available from more than one channel partner, but the product is not available from all businesses in the market that carry the category of product. For example, all channel partners who market and sell UNIX servers and workstations in a marketplace do not sell all brands. Vendors have selected those channel partners in a market who meet their financial, marketing, sales and technical criteria. In doing so, the vendors have executed a selective strategy. Customers seeking a particular brand of product will seek out the businesses in the market that the vendor has selected as partners. Intensive distribution exists when a vendor sells products or services through all (or most) of the channel partners likely to market and sell a particular category of product in a given market. Intensive distribution (or near intensive distribution) is much more prevalent in today’s market for computer hardware, software and telecommunications products and services than it was even five years ago. Products and services that only a few years ago were being distributed on an exclusive or selective basis are now being pushed to the limits of intense distribution (Hewlett-Packard has piloted selling printer supplies in vending machines). These intensely distributed products and services are being consumed by highly experienced customers and end users on a regular basis. They are frequently purchased and/or are seen as “low risk” purchase where the product/service brand means more than the name of the institution where it is purchased. Examples of categories being intensively distributed include sub-$1000.00 PCs, sub-$500.00 printers, printer consumables and some software. Products being intensely distributed in conventional “bricks and mortar” channels are very easy to market and sell through electronic channels. There are clear relationships between the notions of market coverage/distribution intensity and the concepts introduced in the previous chapter. Figure 10 - Intensive Selective Exclusive Exclusive distribution is most compatible with the push market and channel strategy. The exclusive distribution provides high enough levels of channel partner profitability to allow them to provide functionality appropriate with their roles in the push strategy. As the level of selectivity drops, the goodness of fit of the push strategy drops dramatically. Intensive distribution is most consistent with the pull market and channel strategy. An intensive distribution approach assures vendors that they have the highest probability of selling their products or services after they have made the required investments in demand generation. Large scale investments in customer and end user demand generation must be coupled with an approach to the market that assures the product/service will be available when and where the customer wants to buy it (Figure 11). Figure 11 - Intensive Selective Exclusive Exclusive distribution is an excellent fit with a concentrated approach to market segmentation. The focus on one segment of the market, coupled with a strategy of very few, high functionality channel partners is a powerful coupling in a marketplace. The downside of the strategy is the potential for the intense focus to limit the size of the available market. Although replicable, the strategic pairing may not always be scalable. Selective distribution is a good fit with a differentiated approach to market segmentation. As a multiple execution of the concentrated approach to market segmentation, the differentiated approach fits well with the broader availability of products/services from the selective distribution strategy. The pairing works best when the vendor can manage to build a strong brand and effectively target specific target markets. The intensive model of distribution is the “kindred spirit” to the undifferentiated approach to market segmentation. Intense and pervasive demand generation targeted at “all who will listen” coupled with near ubiquitous product/service availability is the goal. Coupled with a push strategy, this strategic pairing is evolving as the key to sub-$1,000.00 transactions and the “trojan horse” for etailer incursions into the markets previously held by the various species of in-store volume resellers. Figure 12 - Bought vs sold vs coverage model Sold products and services are best sold and marketed through a selective or exclusive coverage model (Figure 12). The cost of “selling” products requires that the business model have adequate margins available to fund the required channel partner functionality. The few number of channel partners in a given vertical market or industry increases the chances that partners will be profitable. The pairing of sold products/services and selective or exclusive distribution is almost always coupled with a push strategy and concentrated approach to segmentation. Bought products and services go “hand-in-hand” with intensive distribution. Bought products, with their low selling costs, low profit margins and high need for volume at the vendor level, require the near ubiquitous availability that an intensive approach can provide. This strategic pairing usually is coupled with a pull strategy and an undifferentiated approach to market segmentation. Figure 13 - Increasing intensity
Intensive distribution - red flagsIncreases in distribution intensity can be planned or unplanned (Figure 13). Planned increases in distribution intensity take place when vendor management makes an explicit decision to increase the number of channel partners in a given marketplace. Increases in numbers of channel partners result in increases in channel capacity (measured in units) and increases in channel capability (measured in technical skills, sales skills and marketing skills). Unplanned increases in distribution intensity happen without vendor intervention (or even awareness). As average selling prices (ASP) and margins fall, the gross margins available in a market with stable unit volume falls. If the number of channel partners stays constant in a market with falling available gross margins, the effect will be the same as increasing distribution intensity. Reductions in gross margins available to a constant group of channel partners is the same as adding channel partners and diluting the number of gross margin dollars available to each partner. In a market that is flat (from a unit perspective), the number of channel partners theoretically must be reduced in order to eliminate the “channel intensity effect”. In a market that is growing (from a unit perspective), unit volume increases must first be generated to keep the gross margins available to all channel partners constant. Further unit volume increases need to be generated to meet the growth needs of existing partners. If new partners are added, still more unit volume growth needs to be generated to provide adequate gross margins for new channel partners. The following simple quantitative example highlights the problems of unplanned increases in distribution intensity (Figure 14). Figure 14 - Channel intensity effect As can be seen from Figure 14, in the absence of unit growth, the channel intensity effect from Year 1 to Year 3 dramatically reduces the number of channel partners that can earn the minimum amount of gross margin dollars required to stay in the market. Unit growth in the market has to be 50-60% per year in order to replace the gross margin dollars lost through falling ASP and falling margins. Increasing distribution intensity (by adding channel partners) in the situation depicted above would be a disaster without explosive growth in units, increases in margin or lower CPOD at the channel level (Figure 15). Figure 15 - Limits to intensive distribution Planned increases in distribution intensity also has risks. Newly added channel partners, whose use of price as a marketing variable may be more active than the traditional channel partner, can begin to use vendor’s product to drive traffic by aggressive pricing (loss leading). This activity forces ASPs and margins down rapidly. This sometimes results in the stranding of the historic channel with expenses that it can no longer get customers to pay a share of. In the absence of specific programs to fix the problem, increases in channel intensity reduce the amount of presale service that channel partners are willing to provide to a customer. The addition of more volume oriented channel partners to a channel system can also put pressure on the amount of postsale service provided to end users. Vendors must take care to make sure that their products are truly “channel-ready” before dramatically increasing distribution intensity. Increases in distribution intensity very often cause vendors to move more towards a pull approach to marketing and channel strategy. As the profits channel partners can earn on their business are reduced, vendors find that channel partners reduce the functionality that they are prepared to provide. Vendors must be ready to step in and replace the functionality that has been lost or risk reductions in volume or losses of customer satisfaction.
Exclusive distribution - relevant issuesThe “free for all” of intensive distribution is replaced with contracts, business plans, and channel management process that establish the intertwining of the activities of the vendor and those of the channel partners. The following subjects are often points of discussion/negotiation between vendors and channel partners in exclusive distribution strategies: products - the specific products/services in the vendor’s product/service portfolio that the partner can sell are clearly delineated to the channel partner customers/end users - the specific target markets that the channel partner is responsible for covering is clearly communicated to the channel partner geographic territory - the vendor’s expectations of the geographic territory that the channel partner will cover is clearly communicated to the channel partner inventories/investment levels - the vendor’s expectations of channel partner investment levels in the business are clearly articulated. Certification and accreditation schemes are methods by which vendors can manage investment levels in sales, marketing and technology service/support/training/consulting (SSTC) - the vendor’s expectations of the channel partners’ involvement in the SSTC business are clearly outlined. Programs are created to assist channel partners to sell and/or create service offerings at the reseller level prices - vendors may provide price protection to channel partners to help mitigate the impact of falling ASP and margins quotas - the vendor’s expectations of potential channel
partner revenue performance are embodied in sales quotas. Quota attainment
is used to manage channel partner behavior and ties back into investment
levels agreement duration/renewal/termination - the vendor, in the contract, makes it clear to channel partners the duration of the relationship, the basis for renewal, and the activities and behaviors that can result in a channel partner termination. Poorly executed, exclusive distribution strategies are fraught with channel conflict. The channel conflict usually occurs as a result of unclear roles and expectations of the vendor and the channel partner. Classic areas of conflict include: product/service conflicts customer/end user conflicts geographic territory conflicts SSTC conflicts Currently, the four key drivers of channel conflict in the computer hardware, software and telecommunications industry are: Internet/e-commerce sales programs whereby vendors are taking transactions direct that were previously going to the channel direct sales programs whereby vendor direct salesforces are taking accounts direct that were previously managed by the channel channel partner business models changing (to survive) so that too many partners in a market are attempting to make money with the same business model resulting in not enough gross margins to go around vendor service organizations competing directly with the service organizations of their channel partners. The channel partners are being forced to rely on the service business due to the “channel intensity effect” outlined earlier in this chapter.
Chapter summary
There is a natural tendency in markets, as ASP/margins decline, for distribution intensity to increase. Substantial unit growth must take place in markets in order to provide constant profit opportunities for channel partners over time. There clearly are limits to the level of distribution intensity that can exist in a market for a product or service. Many vendors are currently increasing the level of exclusiveness in their channels. At the distributor level, serious cuts are being made by vendors in the number of channel partners that they plan to work with. At the reseller level, vendors continue to reduce the number of partners that they have as vendors search for a mix of fewer, better partners. The increases in cooperation needed to run channel strategies with higher levels of exclusiveness can result in conflict. Channel conflict in the computer hardware, software and telecommunications industry is higher now than it has been in the past decade.
ChannelCorp Consulting services ChannelCorps’s management consulting expertise is built on a solid foundation of fifteen years of researching and analyzing the evolving business models and marketing strategies of the vendor and solution providers worldwide. Suggested Reading Availability For information on republication, contact Bruce Stuart - channelcorp@telus.net Back to ChannelCorp Intelligence |
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source:
ChannelCorp Management Consultants Inc.
Source:
ChannelCorp Management Consultants Inc.
