Sunday, March 11, 2012

Channel Tuneup: Are Dealers Distributing?

Are some of your dealers reselling your offering to other dealers? If so, is this helping or hurting? If there are dealers selling to other dealers, you may be sending mixed signals to channel partners and leaving profit on the table.

I make a clear distinction between resellers and dealers (who sell to end users) and distributors (who sell to resellers and dealers). When dealers resell your offering to other dealers you are giving up margin and may be damaging the channel you're working so hard to nurture.

Resellers selling to other dealers
can reduce your profit and damage
your channel program.
Sure, there may be special cases where it makes sense to have a reseller sell to other resellers; for example,  when you're just starting out and glad to have anyone sell your offering. Or, you've granted a reseller an exclusive territory and the reseller appoints sub-dealers to expand its sales reach. In the case of a newly emerging company you might save the expenses of hiring a channel manager and the administration costs of processing orders for a network of dealers. But there comes a time as revenue increases when it's foolish (and costly) to have a reseller distributing your products. Why not have a clear, clean reseller strategy from the beginning?

I recall the case of an entrepreneurial manufacturer that relied on the Internet and one dealer to sell its products as it started. The dealer received permission to sell to friends with dealerships in other states. Sales grew, but the manufacturer had no idea who was selling its products. (The default criteria for becoming a dealer was being "friends" of the first dealer, instead of a specific profile with key dealer success attributes.) By restructuring the go-to-market channel from a single reseller functioning as a distributor to a network of authorized resellers working directly with the manufacturer, within one year the company was able to:

* Increase revenue 10 X
* Raise it's average selling price to the channel by 25%
* Diversify its channel risk from relying on one company to a network of 40+ resellers

By working directly with a network of resellers, the company also benefited from developing sales and promotional plans with each reseller. The result was acceleration of sales and gross profit.

Resellers functioning as a distributor raise a number of other issues:

* Does the reseller have the bandwidth and knowledge to effectively support a network of resellers?
* Is there a conflict of interest between the "master" reseller's goals and the manufacturer's?
* How do other resellers feel about purchasing from a "master" reseller who at the end of the day could be a competitor?
* Dealers selling to unauthorized dealers can cause painful channel conflicts with authorized dealers.

It is not unusual to find resellers and distributors who want to have their cake and eat it too. For example, to avoid the conflict of interest of having resellers distribute products, I have seen resellers in Asia, Europe and the U.S. establish separate corporate entities that function as a "distributor" and vice versa.  The goal of such dual personality channel entities is to expand their business by increasing sales through a network of dealers, while at the same time enjoy higher reseller margins for their direct sales.  Channel managers are advised to evaluate such organizations on their merits. My advice is to keep the channel clean: dealers should sell to end users. Distributors should sell to dealers. They are Apples and Oranges. When dealers attempt to distribute (and when distributors sell to end users), results from mixing these apples and oranges may not be savory. In your reseller contracts, consider a clause preventing resellers from selling to other dealers, without express written consent.

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