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In earlier installments, we explored new sales models as commerce digitizes — the commodity sale/transactional distribution, the value sale, the negotiated sale and the assisted sale. They are unique in that they, more than less, describe new business approaches where technology is closely linked to a new and often unique model of business.
However, they often require specialized technology or changes to the infrastructure. We highlighted some of the more common infrastructure changes in the second part of this series. In this last installment, we go over some of the more common functional and managerial changes needed for these sales models to flourish.
One of our more enduring observations as distributors digitize is that online progress, to any significant degree, has to be preceded by management, operating and IT changes. Without this, the online journey is likely to be ineffective and a regrettable investment compared to firms who plan out their online efforts. It is important to note these changes may be painful; distributors are not known to change management functions and definitions with regularity, and the industry is known as slow to change. However, this is a waning truism as digital commerce grows.
In Exhibit I, we list the new models, attributes and changes to the organization to support the model. The most disruptive model is transactional. It is the use of e-commerce to sell commodity products online with limited sales support, limited inventory locations and great prices. Grainger’s Zoro Tool is a prime example of a transactional model in action.
Transactional models fit products that are easy to handle and ship, and where demand forecasting has limited variation. They often reduce prices by 10 percent or more and deliver a higher return on sales than full-service distribution. Transactional distribution is almost never launched from a full-service platform using sales and operating personnel from the full-service parent. Why? Employees from full-service firms want to take care of the customer instead of letting technology provide a self-serve environment.
Hence, to start a successful transactional effort, the full-service firm is better off investing in a new business with new people, new management, and a new set of sales and marketing variables to go to market. It is, more or less, what Grainger did with Zoro Tool. We challenge full-service distributors who want to start a transactional effort to carefully consider our advice that it is a unique model of business.
The value sale is the movement of the distribution firm further into the value chain. Typically, this means developing efforts in light manufacturing, specialized services and post-sales service(s). The value model is a natural effort for full-service distributors who have, over the years, engendered new services for their Pareto customers.
The best value sales distributors, however, develop supporting personnel in marketing who can introduce and manage a new service development (NSD) process. Our 2017 research on fee-based services in distribution found distributors who had a formal NSD process were three times as likely to develop successful services.
Additionally, the value sale often requires in-house engineering talent for new technologies, as well as upgrading sellers from generalists to consultative or technical counterparts. We are bullish on the value sales model for distributors. However, it does require significant investment in new marketing and sales talent, upgrading IT to handle service billing, manufacturing cost accounting and post-sales technician services.
The negotiated sale is an offshoot of key account sales. For key accounts, wholesalers have changed basic service offerings and added or upgraded services for ongoing revenue streams. The negotiated sale involves customization of existing services to serve individual account needs. The change is largely incremental to existing service platforms.
However, because of the need for ongoing change to preserve relationships and accommodate differing accounts, there is considerable pressure on marketing, sales, IT and operations. Top negotiated sales firms carefully plan individual account offerings and have teams to uncover and develop individual sales approaches; this is done for the largest accounts offering the most upside growth and attention should be paid to the careful estimation of an account’s upside potential.
Changes in services across large accounts can cause service quality to fall unless there is a good understanding of operating capacity. Often, IT can help with reworking interactive processes to alleviate capacity constraints, but this usually means expenditures on new software to drive efficiency.
The assisted sale is new to distribution, at least as a separate subject matter. Distributors have long worked with manufacturers on key accounts and top sales opportunities within these accounts; however, the pace of co-operation specific to the account or order is increasing.
Our research on vendor monies finds distributors are increasing front-door funds with their manufacturers. Front-door funds are co-op programs, marketing development funds and special pricing agreements, as opposed to back-door funds based on purchases (volume rebates). As front-door funds increase, distributors will need to examine their processes of tracking, applying for and receiving vendor support.
Today, most of these processes are divided up into different functional areas and often recorded on spreadsheets. A growing group of bolt-on software options is available to help track, apply for and manage vendor funds. As their capability increases, so will their essential need in handling the growing volume of assisted sales. Additionally, we find larger firms are developing the position of vendor relationships where there is a dedicated resource, often at the V-Level, who works with the vendor on all aspects of the relationship from acquisition to supply chain to mutual selling and marketing efforts.
Geographic-based sales generalists still dominate distribution ranks. However, as technology makes search and ordering easier, the salesforce will be driven to deliver new and different value streams. New sales models of transactional, value, negotiated and assisted selling are already in play in distribution ranks. While they require different management and technology supports, these models will, in many areas, supplant generalist sales efforts.
It is not uncommon to find larger distributors with three to four of the new models competing, concurrently, for the customer order. As technology improves and management becomes more comfortable with the new sales models, it is likely that wholesalers will specialize in two models and have limited to no engagement with the others.