Our previous series dealt with structural and cultural changes that distributors should consider for online success including using technology to streamline the firm. Specifically, we talked about the sales effort and how the number of branches are trimmed to compete against New Age competitors and manufacturer direct sales. So far, this has only been done in the most progressive firms with a significant portion of sales online. As online New Age competitors grow, however, we believe many firms will undergo a rationalization of sales and location services as price falls.
The necessity, pace, and type of internal change is based on our research and review of top performing online firms; whether they are distributors, New Age competitors, or manufacturers. In this vein, internal changes have precedent and there are examples in the marketplace. In the end, these changes are dependent on the beliefs and wishes of executives and they should be made with significant care.
In this next series, we review the strategic growth options for distributors. Unlike structural and cultural changes due to technology, strategic growth is heavily influenced by existing practice. If the firm is financially healthy and growing, management, generally-speaking, finds little reason to substantially change growth efforts. In this series, however, we advocate for a more expansive understanding of growth and how to obtain it as technology will alter the customer’s supplier selection. Distribution executives should become sanguine with the idea that a significant increase in PHCP suppliers is available because of online commerce.
The Sales Splat! Effective but Increasingly Inefficient
The predominant vehicle for distributor top-line growth is of two varieties: acquisition and sales. Acquisitions are, more often than not, insufficient to maintain ongoing, reliable growth. The sales effort has been the dominant method of incremental growth for the distribution firm. Most sales territories are a combination of margin dollars and geography. The territory needs to generate enough margin dollars to afford a seller and the accounts should be grouped close enough together to minimize travel time. Despite many calls for new sales models to allow for greater productivity, our research finds that over half of distributor territories are geographic generalist configurations. The generalist is effective in that he/she consummates the sale but the process is inefficient. The current cost of the full sales effort for distributors is in the range of 25 percent to 40 percent of operating expenses or 6 percent to 8 percent of top line sales. Typically, sales costs are the largest expense category in the full-service distribution firm. As New Age distributors are reducing the online price over full-service distribution by 10 percent and placing a similar amount to the operating profit line, the sales effort will need to gain efficiencies.
Our recent research on the future of the sales effort finds distributor executives willing to explore new models for efficiency with 90 percent agree responses vs.10 percent disagree responses. However, when the same executives were asked if the sales force in number would decline as commerce moved online, the responses were 50 percent agree vs. 50 percent disagree. In short, distribution executives will try new models and roles of selling to gain efficiency and show less of a propensity to cut actual sales staff as commerce moves online.
The problem with the existing geographic generalist effort is that it was most valued during a time when product features, benefits, price, and availability were difficult to obtain. The sales effort fulfilled this function. Ceding that the sales effort can still deliver value on the 30 percent or so of products that are not commodities, this still leaves 70 percent of traditional product information that can be secured online more quickly, accurately, and less costly than can be relayed by the sales effort. The reliance on a margin dollar pool to fund the sales effort is part of the problem. The focus is on amassing margin dollars and not on the value provided by the seller or the availability of technology to supply information value. We call the amassing of territorial margin dollars a “Splat!” deployment of the sales resource that resembles the pattern(s) of a water balloon thrown against a map to design the territory.
Future territory designs will need to carefully consider what the customer values and how this value can be delivered; sales roles of consultative, enterprise, and technical specialists will help. We also believe there is a need to rethink the entirety of the sales effort in light of digital commerce and new technology available to the distribution firm. This rethinking needs to be creative and not simply value-based from the customer perspective. The creative exercise is difficult for mature businesses that are dominant in their industry as are wholesalers. However, readers are reminded to heed Henry Ford’s comment on asking customers what they wanted at the dawn of the automobile. Ford commented that if he had asked customers what they wanted, they would have said “a faster horse”.
Four Kinds of Sales Relationships in the Digital Age
We will explore four distinct kind of sales relationships in the Digital Age. These relationships, although generally dominant and form the relationship with the account, are not true all the time. Accounts can, and often do, change sales relationships or have different relationships with different suppliers. We review the relationships in Exhibit I and the remainder of this section.
In the Exhibit, we have four types of sales events: Commodity, Value, Negotiated, and Assisted. Each sales event comes with unique online needs including:
The Commodity Sale is increasingly moving online to transactional specialists selling commodity products. These are firms that have a bare bones distribution platform including few, if any, sellers and few branches to streamline their supply chain. Examples are Zoro Tool at www.zoro.com or Titus Industrial at www.titusindustrial.com. These firms offer an attractive price with basic service and good online experience.
The Value Sale is a transaction where additional service value is added. Services can include light manufacturing, assembly, kitting, or other. Value additions can be greatly helped by offering an online menu of services and prices before final checkout.
The Negotiated Sale is a transaction where the client goes through a negotiation process on the order. Often negotiations involve pricing but also delivery, storage, substitutes etc. Negotiated sales are often in the form(s) of quotations which can be aided by online quotation software that captures the customer requests and pricing history of negotiations.
The Assisted Sale is one in which there is sales assistance needed from the vendor often in the form of pricing assistance or specialized product assistance. Assisted sales are increasing as online information becomes easier to obtain and customers can get numerous prices and availability from any number of suppliers. The Assisted Sale can enter a Negotiated Sale environment but only after unique vendor support has been secured. Software to help track vendor commitments is recommended due to the volume and variation on customer requests.
Successful consummation of these sales types are enhanced by various digital investments. They are also enhanced by new conventions in sales management. Increasingly, we recommend that distributors not try to cover all sales types; it is a recipe for operational and strategic disaster. We cover these observations, issues, and solutions in the next installments of this series.