A week doesn’t go by without a manufacturer questioning a decision to sell direct rather than selling through the channel model they have historically used. Something happens with a channel partner that doesn’t sit well with the vendor and the immediate reaction is “we should just sell direct.” It’s a knee jerk reaction, often without merit or forethought. Often an emotional response.
As manufacturers embark on 2023 business plan and possibly a 3–5-year strategic plan, the subject will likely surface again throughout the leadership meetings. “Should we sell more products direct?”
Moving to a direct sales model after using a legacy channel model is not a simple exercise. However, in the right circumstances the change can be justified. It shouldn’t be a decision taken lightly as the transition will have significant costs and will impact legacy customer relationships. And it’s not always a model that suits all your products. Depending on the product, market, or region, the decision of direct or channel could be different.
Let’s look at the 3 most important factors to provide clarity.
With more complexity comes more hands on the transaction. Complex products typically require inputs from numerous professions to ensure customers specify, select, and install the right product for their unique application.
When you think about the most complex of mechanical products, gas turbines fit the far extreme of the complexity spectrum.
Sizing and selection can be a time-consuming process with various options in configuration, material specifications, and operating interfaces. When you consider the number of engineers involved in this process, specialization in the vendor’s product is paramount. When sales reps are referred to as sales engineers, the technical aspects of the product are likely extreme.
This complexity, combined with the nature of the operating environment, creates high risks in getting it right. For this reason, contracting the commercial process can be lengthy and complex with the unique legal and commercial requirements to satisfy both the customer and the manufacturer. The penalties of late deliveries, non-conformance, missed performance expectations are often risks that the customer requires the manufacturer to take responsibility for.
Is your product extremely complex? It’s likely better to sell direct.
Cost of Sales
In a 2015 survey by Industrial Supply Association, they found an average industrial channel partner has annual revenue under $10M USD. Considering channel partners typically fall into this small business category, they likely have a lower cost of operations than typical manufacturers.
Typical distributors operate without the need for complex ERP systems, lower facility costs including rent, utilities, and taxes, and due to their location near customers, have a lower cost in T&E. This lower cost of sales and service is accomplished below the value of commissions paid or markup applied to products sold to customers. When you look at the manufacturer’s costs of sales, I ask this question:
“In comparison to channel partners, can the manufacturer provide the same sales volume with the same customer satisfaction at a cost lower than commissions/discounts provided to the channel partner?”
If the answer is “yes,” there’s a good argument to sell directly to customers.
Let’s look at Alaska as an extreme example. It is likely you have a few customers, or potential customers, in the remote state of Alaska. Have you considered the cost of labor in Alaska is likely higher than your home state (if you could find anyone qualified)? Have you considered the cost of operating a warehouse or repair center (in the frozen tundra)? Is there enough business volume to keep a staff busy full time? Or does it make sense to “outsource” these activities to a channel partner who can provide an high level of customer service at a lower cost than a vendor owned facility with vendor employed staff?
Can channel partners provide the sales volume and customer satisfaction at a lower cost than direct? It’s likely better to sell through channel partners.
It’s been said, “customers are a finicky bunch.” Customers have preferences and are much more likely to choose a product or solution if it meets “their” preferences.
And as people make decisions, people choose to do business with people they know, like, and trust.
When the purchase risk is low, the value of the relationship is often a quality that is hard to put a price on. Buyers are often willing to pay a higher price from sellers they are more comfortable with. This comfort comes from community (our kids go to school together), simplicity of the transaction (seller will take a verbal purchase order), and the transaction can happen quickly without complexity (seller’s T&Cs are easier to accept compared to the manufacturer).
Channel partners can also provide complementary products and services which vendors might not provide. Customers buy more than the vendor’s product alone; they buy everything required to put the product into beneficial use. Pumps need motors, HVAC units needs ducting, cutting tools need coolants. Channel partners often specialize in applications of products beyond the products themselves. And in doing so, partners often provide these complementary products and services and simplify the buying process for customers.
Do you customers to buy locally? It’s likely better to sell direct.
Direct or Channel? Good question. And not an easy one to answer. Staying customer focused and leveraging the value channel partner offer are building blocks to address this decision.
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.