There comes a time when virtually all manufacturer reps ask the question “should move to a distribution model?”
Power Engineers approached Sarah, their Channel Account Manager, to talk about moving their relationship from an Industrial Manufacturers Rep (IMR or “Rep”) paid on commission to a Distribution Partner allowing the ability to buy and resell products direct to end users.
“That’s not our channel model” said the Channel Account Manager
“Power Engineers’ competition has moved in this direction. Those reps are now providing not only the product itself, but they also provide accessories and services on a single contract. For us to compete, we have to provide end users 3 different contracts and wait for commission payment from 3 different manufacturers.” Said the rep. “While this was good for us as a start-up, our business is much more mature now with the resources and desire to grow.”
“But that’s not our model.” The CAM insisted
“Well, we’ll have to make some hard decisions if that’s your position.”
John, the Managing Partner of Power Engineers started representing the manufacturer 10 years earlier. Following a successful run as a plant engineer and a top customer of the manufacturer, it was an easy transition to becoming a manufacturer’s rep. Startup costs were low, the manufacturer provided technical and product support, and the contracting and payment terms were on the shoulders of someone else. The only burden John had was floating operating expenses until commission checks arrived 30 days after customers paid the manufacturer. John was recognized by his customers as an application specialist with strong technical aptitude. In the years to follow, he added additional complementary manufacturers that aligned with his primary and original representation along with 4 more partners selling in an expanded territory.
But growth plateaued. John’s confidence had grown, and he wanted to build more than a rep agency; he wanted to establish a business that offered more than product alone. He wanted a business that created a revenue stream.
John and his primary manufacturer had recently lost a large order with a long-time customer. John’s proposal to the customer included contracts from 3 different suppliers he represented at a price less than his competition. When he debriefed the customer for reasons selecting the competition, it came down to ease of business. With recent cutbacks, new talent coming into the customer’s organization, they felt it was “easier” to execute the contract with the competition. The competitor’s offer was through a distributor who could bundle the offering into a single contract, was more flexible with legal terms, and offered favorable payment terms. Representing the manufacturer as a “rep” was becoming a competitive disadvantage.
John pleaded his case with the manufacturer by laying out the benefits of transitioning from Rep to Distributor. John and his partners in Power Engineering viewed two primary values in becoming a distributor:
- Become the “one stop shop” that can bundle an offering under a standard contract making it easier to do business with.
- Build a brand. While operating as a rep can be a lucrative income, the value of the firm is limited. Without assets, customer contracts, and a recuring revenue stream, Power Engineers is only as valuable as the people in the business. If John retires, the business has little to no capital value to someone who might buy his firm.
John went on to outline values to the manufacturer such as:
- Reduce the financial and legal risk by moving customer contracts to Power Engineering contracts
- Reduce inventory level at the manufacturer while the distributor invests in the right inventory for their region
While it sounded logical, the manufacturer had three key potential losses that bothered them:
- Loss of the end user visibility. While John was willing to share data, buy and resell naturally leaves the manufacturer out of direct contact with the end consumer.
- Price control. By selling through manufacturer reps, the manufacturer can control sales price based their market intelligence. Distributors would have the freedom to sell their products at any price they desired.
- Territory and competition control. The manufacturer has visibility of every transaction in the rep model. They manage territories and assign customer accounts. The distributor model loses this control and risks distributors competing with each other and selling outside their territories.
We see this play out time and again. What you see above are selfish reason each party wants their own business strategy. The real question is how does the customer want to buy?
In many industries, customers prefer to buy from the manufactures who use manufacturer reps. This is typically the case with high value products which are often complex in design. Examples include capital equipment configured or engineered for the customer needs. These transactions are often complex with multiple buying influences and long sales cycles.
While distributors are often preferred for high volume, low value products. In these cases, customers may buy products produced by several complementary manufacturers within a single contract.
It comes down to winning the customer’s business. If the rep loses the business, so too does the manufacturer. If customers prefer ease of business through a distributor, this should be the sales model.
Manufacturers must design their channel strategy with the customer in mind. Do not design the strategy for the selfish reasons of control and ease of execution. As a manufacturer, you design your products with the customer in mind. You design products to ensure customers received the maximum value possible. For these same reasons, the channel strategy should be designed around customer buying preferences.
Take advantage of aligning your channel strategy with the best practices identified in the Channel ACE model. Take a quick 10-minute survey to assess the performance of your channel strategy against best practices found in top performing channel selling organizations.
Navigant Associates is a global training, consulting, and research firm specializing in channel sales strategies utilizing 3rd party sales and service partners. We help sales teams design and transform channel sales strategies resulting in higher earnings and customer value.
We help clients recognize performance gaps, leverage best-in-class practices and build strategies that improve partner relationships, execution skills, ultimately satisfy more customers.