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Most Americans know Kellogg’s Corn Flakes, Viagra, and the Apple iPod. They probably also know the manufacturers of these products — Kellogg’s, Pfizer, and Apple – and the name of their local supermarket, drug store chain, and big box store where they can buy them. Most of them, however, probably have never heard of the McLane Company, McKesson, or TechData. These three firms are multi-billion dollar companies that distribute Corn Flakes, Viagra, and the iPod, respectively.
Distributors are a key part of the channel, which is the set of companies that delivers a product or service to market. In many cases, the only way your product will get in front of a customer is via the channel. Understanding how the channel works is essential for marketers because they need to design go-to-market strategies and marketing programs that work with the channel. Recall that the channel is a key component of McCarthy’s fourth ‘p’ – place (If this reference doesn’t sound familiar, then you might want to review our discussion of the Four Ps in Chapter 1.).
This chapter is meant to help marketers understand the overall purpose of the channel and how to choose the right channel partners. It describes the various players in the channel that a marketer can utilize in their route to market, contrasts selling through the channel and working with a company’s direct sales force, and covers how to profile channel partners to help select the right ones.
Purpose of a Channel
Quite simply, the channel is the set of parties that combine to move products from the manufacturer, producer, or developer to the business or consumer that purchases them. These parties are known as your channel partners.
An organization’s channel and channel partners, along with its own sales people and online store, are its routes to market. Field salespeople, inside telesales reps, and a company’s online store are known as direct routes to market. Channel partners are indirect routes to market, sometimes called indirect channels.
Understanding the channel is critical for marketers because it will affect all of an organization’s marketing programs. An organization has both direct and indirect routes to market will need to adjust its programs to compensate for both. Even an organization with only indirect routes to market but different types of channel partners will need to make adjustments. Generally speaking, adding indirect routes to market adds work for the marketing team.
So why bother with a channel? In some industries, the channel is the only way to reach the end customers, which is discussed later in the chapter. There are cost advantages in many cases. Sometimes a channel partner performs functions your company or your customers need, known as value add. Below is a list of common value add functions performed by channel partners.
- Ordering – A helpful channel partner makes it more convenient for your end customer to purchase your product or service, sometimes by offering attractive payment terms.
- Shipping and handling – Partners frequently possess expertise in handling and shipping certain types of products, from perishable produce to multi-ton excavation equipment.
- Storage – Some partners provide warehouse space to store your products, ideally in a location that is close to your customers.
- Display – In the case of retail sales, how and where your products are displayed is critical. Having stores where your customers are, and attractive shelf space for your products, is vital.
- Promotion – Partners may be adept at promoting products like yours through diverse media ranging from newspaper circulars to direct mailings to financial incentives.
- Selling – Naturally, you will rely on channel partners to sell for you.
- Services – Some partners have skilled consultants that can provide services, such as installation and maintenance, for your products.
- Information feedback – Partners are the ones who interact directly with your customers, and they often serve as surrogates for customer feedback.
Although a channel offers many benefits to marketers, it also poses several challenges. The most fundamental challenge is that you are relying on people who don’t work for your company to sell your products and services. To compound this issue, they may also carry your competitor’s products, in which case you need to convince them to sell yours. Further, as with your sales force, your partners need to be trained and motivated to do the job. This challenge frequently involves moving your product or service to the “top of the sell” rather than being treated as a “throw-away” product that is bundled with others. This is one of the most challenging tasks that a channel marketing manager must perform.
Channel Players
There are many pieces to the channel. A channel will look different for different businesses and different geographies, and it can change over time. Understanding the different players in the channel is critical to building a route to market that fits your business. In this section we focus on the following key players:
- Direct marketing reseller
- Distributor
- Large account reseller
- Original equipment manufacturer
- System integrator
- Value-added reseller
- Wholesaler
A direct marketing reseller (DMR) is a company that sells directly to businesses or consumers over the phone or online without operating storefront operations of any kind. DMRs fill the gap between big box retailers, who may also sell online, and distributors, who sell to resellers and retailers. DMRs offer their customers convenience in that they carry thousands of products, they can take orders quickly, and can streamline purchasing. CDW is a DMR that sells technology products to businesses and government organizations. Amazon is an example of an etailer, a company that sells goods or commodities to consumers electronically over the Internet.
Sometimes called a ‘disty’ for short, a distributor is a company that moves products from the manufacturer to resellers — both wholesalers and retailers. Distributors play a key part in the supply chain between manufacturers or suppliers and their retail channels. Value-added distributors, or VADs, add a number of services in addition to distribution, such as recruitment, training, centralized quoting, and financing for their “downstream” reseller partners. TechData, mentioned in the introduction of this chapter, is an example of a VAD. In the international market companies rely on VADs not only resell their products but also to support, train, and develop solutions for the products in a particular region.
A large account reseller (LAR) is a company that sells hardware and software to large organizations, typically those with more than 250 employees. Because LARs deal in bulk quantities, they can offer volume discounts and special leasing and purchasing programs that resellers geared to small companies cannot. Some LARs also operate as DMRs. CDW, for example, is a LAR of technology products.
The original equipment manufacturer (OEM) is a company that builds products or components that are purchased by a company and retailed under the purchasing company’s brand name. AC Delco and Bosch are well known automotive OEMs. Intel and Samsung are two of the largest personal computer and tablet computer OEM chip providers. The term OEM is also used by software companies who integrate rather than manufacture software components. A system integrator (SI) builds computing systems for clients by combining hardware and software products from multiple vendors. SIs typically recommend products rather than resell them. In this sense, SIs are important influences and can be part of an organization’s influencer marketing efforts.
A value added reseller (VAR) adds features or services to an existing product and then resells it — usually to end-customers — as an integrated product or a complete solution. VARs are common in the electronics, computer hardware and software industries. While there are many large VARs, it is not uncommon for them to be smaller, regional businesses. VARs offer specific product expertise and valued services, such as installation and ongoing maintenance.
Finally, a wholesaler purchases goods in bulk to obtain a favorable discount and then distributes them to other wholesalers or to retailers. Wholesalers typically operate in B2C markets. They may buy from a manufacturer, a supplier, a distributor, or another wholesaler. Wholesalers exist in almost every market segment – food, beverage, timber, fuel, chemical, fabric, and on and on. Many specialize, for example, Segrest Farms, the Gibsonton, Florida wholesaler that supplies tropical fish to over 1000 pet stores across the United States.
Profiling Partners
What kinds of channel partners do you need, and how many of them do you need? These questions have been around channel selling forever. To answer these questions, companies rely on several basic criteria, which we discuss below.
Customer fit – Do these partners have relationships with your target customer, and does your target customer purchase from these partners? Geographic coverage, customer relationships, and government buying contracts are all examples of customer fit.
Industry fit – Often times a particular partner is the deemed “expert” in the industry and is the first choice of end customers within that industry. Understanding who these partners are and how you can best utilize their services is essential to winning sales in specific industries. Healthcare, for example, is a common industry specialization for VARs. Their added value to customers stems from knowledge of how hospitals operate, health and privacy regulations, and new advances in medical technologies.
Product fit – Do these partners have experience selling products like yours? Or, if your partners provide value-added services, are these services a good fit with your products, and are your products a good skill match with the partner’s consulting team?
Economic fit – Are the price point and revenue potential attractive to the partner, and can the partner realize a profit by selling your products? Some partners, like DMRs, can make money selling large volumes of low-dollar orders, whereas others have more expensive cost structures and need larger deals. {think about inserting chart that shows continuum low high volume vs margin}
Capacity – Can the partner effectively manage the amount of business that you will direct toward them?
Determining Routes to Market
As mentioned above, although the principles that underlie all channels are similar, channels can appear quite different for different businesses. Obviously, for example, there is no need for a system integrator to distribute food products to grocery stores. Likewise, a commodity electronics wholesaler makes no sense in the software business, though it may benefit companies that manufacture the hardware the applications run on. How an organization builds a channel depends on the nature of its business, its maturity, and what the competition is doing. For a mature company, for example, mimicking the competition’s strategy might be sufficient. If the organization is operating in a new market, however, or if it is not mature enough to emulate the strategy of a larger competitor, then it may have to start from the bottom and build over time.
In the software business, a common pattern is for companies with a direct sales force to first recruit SIs to install and configure – but not resell – their software. Only after they have captured sufficient market demand would a software company consider recruiting VARs to install, configure and resell . Finally, when the software company starts taking orders from large business or government customers, they can add LARs.
DMRs are usually signed on when a company has a commoditized product – easy to understand and sell – with significant enough demand from customer organizations of all sizes to be profitable. The company would add a VAD when it has a sufficiently large number of VARs and/or LARs to manage. There may also be a regional need for a VAD if the supplier does not have a significant footprint in a particular region.
By contrast, Selling through retail stores usually requires distribution, either wholesalers or distributors, depending on the product. This route to market is well established and marketers may find themselves working to gain the attention of wholesalers and distributors who control distribution to their desired retail outlets.
Tiers of Distribution
A channel not only is comprised of various players, but it can consist of multiple levels, or tiers. The number of tiers typically increases with the size of the business. When handling more and more resellers or retailers becomes a strain on a supplier, the supplier can add distribution tiers. These tiers provide additional reach and logistics capacity. In addition, they offer practical benefits that the supplier themselves cannot; for example, a distributor’s business model or capitalization may allow them to offer attractive financing programs. Channels can consist of one, two, or three tiers. Each is described below.
In single-tier distribution, resellers – VARs, LARs, and DMRs – purchase directly from the supplier. The supplier is responsible for recruiting, training, and collecting revenue from the resellers directly.
In contrast, in two-tier distribution, resellers – VARs, LARs and DMRs – purchase from a distributor who purchases directly from the supplier. Depending on who the distributors are and whether they add value, they may also recruit resellers, train them, provide quoting and ordering assistance, and offer attractive financing programs, for example, 60 days for payment. Selling through wholesalers is also considered two-tier distribution.
Some business add a third tier of distribution, such as when wholesalers buy via distributors and then resell to retailers. Alternatively, a company can set up a master distributor, who in turn sells to other distributors. Table 1 summarizes single-, two-, and three-tier distribution.
| Type | Description |
| Single Tier | LARs, VARs, DMRs, and etailers buy directly from the manufacturer or supplier. |
| Two Tier | LARs, VARs, DMRs, etailers, and retailers buy from a distributor, who purchases directly from the manufacturer or supplier. |
| Three Tier | Distributors buy from wholesalers; or a master distributor sells to other distributors. Resellers, etailers, and retailers still buy from distribution. |
Table 1: Tiers of distribution
Mixing Direct Sales and Channel Partners
A fundamental challenge confronting companies considering indirect routes to market is to determine the optimal mix of channel partners and direct salespeople. Most companies base this decision on their go-to-market strategy, which was covered in Chapter 4. As we mentioned previously, a company can rely on its channel partners to augment a direct sales force in specific geographic regions or market segments that are not sufficiently covered by its direct sales force. Channel partners can also help scale the business faster, with their established sales teams, distribution networks, and order processing systems. In many cases, companies cannot hire and train salespeople fast enough, or they do not want to invest in the creation of a large direct sales force. Particularly in smaller markets, the costs of setting up a direct sales force can far outweigh the margin the company must pay to the channel (Margin will be discussed further in the next chapter.).
Ideally channel partners and the direct sales force should augment each other. This is also known as a leveraged sales model. Channel partners give the direct sales force more reach and allow them to focus on key accounts or markets.
Unfortunately, in the real world, tensions between channel partners and the direct sales force frequently materialize. These tensions are generally referred to as channel conflicts. and typically have two causes. The first occurs when direct sales becomes convinced that the partners are not working hard enough for their business, but instead are merely waiting for sales to “flip” deals to them for fulfillment. Sales and executive management may have similar feelings, wondering what they are paying the partners for. To avoid this common bias, it is important (1) to appreciate the contributions of partners in handling contracts, product fulfillment, installation services and financing, and (2) to incentivize partners to identify their own opportunities.
The second cause of tension is the channel partners’ concern that the supplier’s direct sales force will “cherry-pick” the best opportunities for themselves and leave the less-desirable deals for the partners. Opportunity registration, also known as deal registration, helps resolve this problem by allowing partners to claim any sales opportunities they identify. These opportunities are “hands off” for the direct sales force for an agreed-upon period of time. We examine deal registration in greater detail in the next chapter.
Some companies resolve their channel conflicts by segmenting their customer base. A common strategy is to assign their direct team to oversee large, strategic accounts, where sales are complex or maintaining loyalty through contact is paramount. Smaller accounts – say, midsize companies – are managed by value added resellers who specialize in providing services needed by these size businesses. Finally, small, transactional deals can be handled by a company Web store or a DMR. Figure 2 below shows this type of coverage model.
The decision to integrate channel sales can also be motivated by cost. Partners are typically 15-40% less expensive to maintain than a direct sales force.[1] Calculating this differential can take a bit of work, and it is not an exact science. The easiest method is to compare the company’s sales, general & administrative (SG&A) cost, usually expressed as a percentage of revenue, against the combined margin and other benefits a channel partner would receive.
Case Study
Most Americans probably don’t recognize the name Avnet. In fact, the $26-billion dollar company with more than 17,000 employees distributes thousands of computer and electronic products that touch our lives just about every day. Interestingly, over its history, Avnet’s distribution network was critical to building up three media that marketers rely on today: radio, television, and the Internet.
In 1921, Charles Avnet, a Russian immigrant, began selling surplus radio parts in New York’s “Radio Row.” This portside area located in Manhattan’s Lower West Side was a mecca for ham radio enthusiasts. Significantly, Avnet entered the radio business just as it was about to take off. In 1922, roughly 100,000 radios were sold in the United States. By 1924, that number had increased tenfold.
In 1929, Galvin Manufacturing introduced the first car radio, the Motorola, short for “motor Victrola.” Avnet started assembling and selling antenna kits, his first attempt at value-added distribution.
Then the Great Depression hit. Like so many people, Avnet found himself in debt. Despite the severe economic crisis, however, the demand for radios remained robust. In addition, the newest novelty — television — was beginning to make inroads. Responding to these trends, Avnet closed his retail operation to cut costs and moved into electronics wholesale. Then as the United States geared up for WW II, Avnet shifted his attention to military and government requests, supplying military antennas and electronics connecters[2].
Following the war, Avnet expanded to supply critical components to aviation and missile manufacturers on the West Coast. He later distributed critical transistors and microchips to the new breed of computer manufacturers in Silicon Valley in the 1960s.
Throughout the 1970s, 1980s and 1990s, Avnet continued to represent the “who’s who” of the computer industry – IBM, Texas Instruments, Cisco, HP, Sun, and Microsoft, to name a few. By 2000, Avnet was making $1B in revenue every month. Quite a journey from Russia to Manhattan to Arizona, and from the brink of bankruptcy to international high-tech distribution powerhouse. Avnet reinvented itself from a so-called “box pusher” by adding value to the sale through training, service, quoting, and other services. The result? Avnet became one of the first VADs in the computer industry.
Learning More
- The Channel Advantage, Lawrence Friedman and Tim Furey, Butterworth-Heinemann, 1999
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