Increasingly, it is not unusual to find a manufacturer of strategic importance with a website that sells to the wholesale customer direct, bypassing their distribution partners. Our recent surveys on manufacturer B2B e-commerce plans find that somewhere between 30 percent to 50 percent of vendors are engaging online commerce with the primary goal of selling direct and bypassing channel partners.
When this occurs, it is often met with dismay as if the vendor was saying the value added by their distributor(s) is not sufficient. Many manufacturers, however, open up direct sales to counter a competitive threat or serve a channel that distributors are not interested in pursuing.
There are numerous instances where manufacturers sell direct online:
Extremely large sales revenue orders where account credit is sound and price competition is significant.
Applications where the installed base is large, diffuse in product technology, and where performance is time- and cost-sensitive.
Applications where downtime cost is significant and involves unique or aging product(s).
Geographies where quality distribution is not available.
Competitive events where the existing channel structure has redundant elements and is too expensive.
Applications where the homeowner makes the final buying decision.
Our work has found that, in these instances, when manufacturers have a good understanding of their channels and competitive dynamics, they are often justified in setting up a direct online offering. All too often, however, we find where manufacturers offer their products for sale online without researching their channels and end users and are without a solid financial evaluation of the channel costs.
The efforts are usually unsuccessful. Channels are competitive and their value propositions are easy to benchmark. If an online-direct strategy is not thoroughly vetted, the efforts can backfire for the manufacturer — financial loss, customer dissatisfaction and damaged relationships with the channel partner.
Six Steps to Making Good Channel Decisions
Investing in new channels is not a quick or necessarily easy decision. To help manufacturers and distributors in evaluating new channels, including selling direct online, we list the following steps to help in decision-making and successful investment in alternate channels.
1. Clearly define the market need not being met by the existing channel. Note that a market need is not necessarily a competitor using the channel. Competitors may make poor channel decisions and you may simply follow them, or they may have different products and marketing goals which aren’t necessarily right for you.
2. Trace your products. If you are unsure if a new channel is needed, trace your products through your existing channels to see if they are being used by customers who also use the new channel. If existing channels are filling the need, there may not be sufficient reason to add a new channel.
3. Evaluate the new channel and its efficiency. Successful new channels are efficient and use technology to reduce costs to the customer. If you determine the new channel can reduce costs significantly over the old channel, you should investigate.
4. Review the order size of the prospective channel. It is difficult to financially serve a channel where the average order size produces a gross margin of less than $100 to $150 per order. Too often, manufacturers set up channels where the order size is small and doesn’t cover fulfillment costs. Manufacturer cost accounting is no help in financially evaluating channel costs. Activity costing including fulfillment cost allocations should be used to evaluate a new channel financially.
5. List channel supports. Financially evaluate any channel supports that need to be added to serve the channel and make sure you can supply them including post-sales support.
6. Look at the channel from your channel partners’ perspective. Will it take significant business away from any of them? If so, review means to work with your channel partner to serve the channel before setting it up.
These steps should help. Making good channel decisions is one of the most important marketing decisions manufacturers and distributors make because they are extremely difficult to change. The ability to evaluate and change channels takes preparation, putting pencil to paper and understanding the value added by the channel.
Far too many channels are entered into without sufficient preparation and study, and the results can be very costly.