Over the past several years, B2B customers have been changing how and where they source products. A short list of factors driving this change includes: Buyer demographics that are trending younger; Decreased value placed on personal relationships; Increased price transparency due to technology.
The growing transparency in pricing also uncovered many cross-subsidies that, when exposed, break. This results in reliable integrated supply chains that commoditize product differences and increase competitive intensity with new competitors entering the market.
These forces have placed pressure on every channel partner in the product value chain. As an analogy, consider that the manufacturer makes the hot dog, and the channel provides the bun and condiments. All the customers want is lunch and their mantra is, “If you are just going to sell me a product, do it for less.” They aren’t concerned with how you deliver the hot dog; they just want it fresh, hot and fairly priced.
There are lessons from recent history for those who are playing the game to win. Back in the ’90s, Walmart told suppliers it wouldn’t accept paying manufacturers’ rep commissions on its purchases. It wanted those dollars as they had automated all replenishment activity.
At the time, many thought it would be the end of the independent rep business model. The net result was that it created a two-tier commission structure, a base rate for servicing existing purchasers (zero at Walmart) and a higher rate for creating a new customer. The channel terms used to describe these are market-serving and market-making.
Why talk about Walmart in a B2B article? Manufacturers had a tried-and-true tool that worked for years, but it doesn’t work anymore. Manufacturers provide discounts on the front end or back end for distributors to buy faster. The idea is that the manufacturer could buy mindshare with the distributors through discounts and it would result in revenue growth — and, hopefully, share growth as well.
Distributors would do their best to sell this linkage to their suppliers, and many would make large end-of-year purchases to get the rebates offered. Sophisticated distributors own ERP tools that let them maximize rebate income with strategic share shift.
IMR Version 1.0 and
IMR Version 2.0
Where is all this going? Every traditional business is faced with unbundling. Airbnb unbundled hotels, and Uber unbundled taxis and rental cars, providing customers a new alternative.
A distributor provided credit, broke bulk, provided one-stop shopping and proximity, and provided product advice. Amazon Business is unbundling the traditional distribution business as it offers product to the consumer at low prices when they don’t need all the other bundled traditional distributor services.
This unbundling is happening in every field as it is enabled by the technology that allows buyers to find sellers. The independent manufacturer representative (IMR) industry is also going through a major transition as founders age out and data science moves in. In many industries, this transition is referred to as IMR Version 1.0 and IMR Version 2.0.
I had dinner last week with a national IMR firm in the industrial market. It knows more about market share, product available market and competition than its supplier principals. The company provides third-party warehousing services (last-mile delivery) for its suppliers and uses analytics and artificial intelligence to find new opportunities to make markets for their principals.
In IMR 1.0, the only path to growth was adding additional lines or geography. IMR 2.0 uses these new tools to find new growth in their existing footprint for their existing suppliers.
The punch line is that some manufacturers, especially those that are not market-share leaders, are now looking at this as a potential alternative to the high costs (their view) of traditional distribution. Many members of the Association of High Technology Distribution have already evolved into being a distributor and a rep firm.
Imagine a manufacturer who sells directly to contractors as a Fulfilled by Merchant (FBM) Amazon Reseller, fulfilling orders from third-party logistics centers run by IMRs, with the IMRs doing the market-making, face-to-face selling. Conceivably, the distributor could end up with a two-tier compensation model.
The famous management guru Dr. Peter Drucker said that there is opportunity in chaos and change.
Tradition and complacency are poor foundations for strategy in today’s world. This represents opportunities for growth for those who are looking for them. You will find no shortage of information out there on analytics, innovative talent management, digitization, sales enablement and sales transformation; the American Supply Association is a great place to start.
It is time to think about adapting your traditional business model, so these disruptions become a wind at your back instead of in your face. With distributors growing their private-label offerings, they have become manufacturers. When manufacturers source globally, they become distributors. The distinction between an IMR and a distributor will continue to blur, as well.
Planning for Change
So what should executives do about this? Have some thoughtful discussions with your team around what to do about it, but don’t think of it as reacting to change. Rather, think about it as a means to go on the offensive in your own market. Once you gather your insights, try the three-step market access model:
1. Analyze the market to identify where your real growth opportunities lie. This often involves some behavioral segmentation based on customer buying behavior and value proposition design.
2. Identify your firm’s selling costs, including selling, rebates, identifying profit-losing customers, trade shows, etc. When we do this for clients, they are always surprised at the scale of their investment and their money-losing customers. Once the list is complete, identify areas where the investment is wasted activity and build a plan to reduce or eliminate them.
3. Reallocate these recovered costs in the second step to areas of growth opportunity. This is easy to describe but hard to do as it requires a fair amount of analysis in areas that are new. The net result, however, is higher growth with no increase in costs.
Remember how much fun it was to grow fast? The fast-growing firms have gone through a process similar to the one just described. Whether you choose to go down this path or not, please make your choice conscious and intentional.
Mike Marks co-founded the Indian River Consulting Group in April 1987. He began his consulting practice after working in distribution management for more than 20 years. Over the years, his narrow focus in B2B channel-driven markets has created an astonishing number of deep executive relationships with virtually every business vertical in construction, industry, OEM, agriculture and health care.