TheIdentifying “Go-to-Market” Costs* After the product is made, suppliers incur ~40% of the selling price to get the product to the customer, e.g., “go-to-market costs” “Go-to-Market”

© 2017 Frank Lynn & Associates, Inc. All Rights Reserved 1 MCAA | April 2017

The Efficiency Rationale for Distribution

Manufacturer 1

Manufacturer 2

Manufacturer 3

Customer 1

Customer 2

Customer 3

Customer 4

Customer 5


The Efficiency Rationale for Distribution

Manufacturer 1

Manufacturer 2

Manufacturer 3

Customer 1

Customer 2

Customer 3

Customer 4

Customer 5

Distributor


The Effectiveness Rationale for Distribution

Indirect channels can sell more than manufacturers’ direct sales teams in many situations:

Local presence/relationships/knowledge/inventory

Multi-vendor, logistics-focused orders

Multi-vendor, systems-focused orders

Small customers trust distributors more than manufacturers


Distributor Manufacturer

Partnership

Customer Satisfaction

Distributor

Building Partnerships


Key Elements of the Partnership

Shared strategic goals, vision

Frequent, open communications

Moderate – high degree of loyalty, commitment

Agreed-upon customer targets

Agreed-upon roles, functions

Compensation reflects functions performed


Economic Role of Channels

“Selling” costs �  Inventory

�  Selling and marketing

�  Order handling

�  Credit

�  Support/service

“Buying” costs �  Search

�  Inventory, storage, shrinkage

�  Freight

�  Order handling

�  Maintenance

END USER

MANUFACTURER

CHANNEL Cost Transfer

$

$


Identifying “Go-to-Market” Costs*

After the product is made, suppliers incur ~40% of the selling price to get the product to the customer, e.g., “go-to-market costs”

“Go-to-Market” Costs

* Costs for a “mature” market (as opposed to a new/introductory market)

Sales 10% Inventory 10% Service/support 6% Order handling 4% Advertising/promotions 4% Credit 3% Freight 2% Overhead 1%

~40% End-User $

Product Cost •  R&D •  Manufacturing

Manufacturer Profit

Industry Total Revenue


Transferring “Market” Costs

Manufacturers “transfer” some costs to distributors, and pay them through discounts, rebates, etc. to perform specific go-to-market functions

Transferred “go-to-market” costs ~25%

Retained “go-to-market” costs ~15%

Sales 8% Inventory 7% Service/support 2% Order handling 3% Credit 2% Other 3%

~25% Distributor cost 22% Distributor margin 3%

* Costs for a “mature” market (as opposed to a new/introductory market)

End-User $

Industry Total Revenue


Barriers to Partnership

Poor executive understanding of channel role, strategy

Delegation of channel strategy to salesforce

Lack of “professional” channel management training/process

Focus on ends (volume) not means (functions)

Inattention to channel conflict issues

Poor choice of partners


Market Life Cycle

ê Customer needs change across the Market Life Cycle

Channels evolve as end-user buying requirements change. Economic relationships differ in each phase.

Introduction Growth Early

Maturity $

t

Late Maturity

Classic evolution of B2B market:


Market Life Cycle and Channel Coverage

$

CUSTOMER MATURITY

t

BROAD-LINE CHANNELS

INTRO GROWTH EARLY MATURITY LATE MATURITY

DIRECT SALES

TECHNICAL SPECIALIST

HYPEREFFICIENT CHANNELS


A Complex World


Online Strategy

Channel

Strategy

E-commerce policy, direct channel

E-commerce policy, indirect channels

Online price policies, restrictions

Content management

Partner sales enablement

Partner resource management (PRM)

New channels

Channel mindshare and

“push”

Online customer “pull” programs

Online service opportunities

The 10 Components of a Manufacturer’s Integrated Online Channel Strategy

A manufacturer must consider 10 elements that comprise a comprehensive online strategy:


Develop an Online Strategy

(Why) do you want to allow online sales? Ø  To defend share of price-sensitive segment Ø  To reach new (non-traditional) customers Ø  To boost sales of accessories or other products not

well-promoted by distributors Ø Other

(Why) don’t you want to allow online sales?

Ø Stop price erosion without any gain in volume (e.g. channel “shift”)

Ø Protect margin Ø Protect investment of “brick and mortar” sellers;

manage channel conflict


Amazon Business – Point, Counterpoint

Still mostly sells to SMBs

But now offers more B2B services

Leads with low price Now willing to adhere to tier 1 or MAP pricing limits

Great brand name/awareness Most B2B buyers want more

product breadth, technical support

Amazon now helping sellers promote products to targeted customers

Over time asks for better terms, “givebacks” and pricing

Has potential to reach new customers via powerful technology


How Manufacturers Can Handle Low, Online Prices

Create a policy that defines the rules for selling online:

a.  Can’t sell online at all b.  Can sell online but only to end-customers, not

other resellers c.  Allow some resellers to sell online, but not

others d.  To sell online, must set up a separate entity

with a separate contract (at a lower discount)

Create a “function-based” discount policy that:

a.  Separates “brick and mortar” channel functions from online channel functions

b.  Offers deeper discounts to “brick and mortar” resellers


How Manufacturers Can Handle Low, Online Prices

Resale Price Policy a.  Manufacturer can establish maximum, minimum, or exact

(online) prices for distributors b.  Must be a unilateral policy, just like return policy,

payment policy, etc. c.  U.S. vs. Colgate case in 1920 allowed for resale price

policies d.  Can be multiple strikes and penalties and allows for

some exceptions, but must ultimately end in termination e.  Requires strong brand power

Create a Minimum Advertised Price (MAP) policy that:

a.  Includes “into cart” price*, coupons, rebates, “better price” click, “free freight,” bundling, promo codes, etc.

b.  Can use multiple strikes before incurring penalty c.  Penalty must matter (e.g., to online resellers) d.  Requires differentiated product to easily enforce MAP


How Distributors Can Handle Low, Online Prices

Evaluate suppliers based on their online policies

Determine actual level of risk from online competitors

Online or not, pursue a strategy that fits your strengths:

Ø  Deep versus broad product line

Ø  Bundling efficiencies

Ø  Provide online technical support

Ø  Focus on value-added services

Avoid head-on competition with giants, but polish online skills to fit your customers’ unique needs


Summary

Unique challenges on multiple fronts

Partnerships are more important than ever

Partnerships take significant care to establish/maintain

Compensation must reflect roles

Online sales is growing issue

Multiple policy/strategy options exist to manage online opportunities and conflicts


Contact Information

Frank Lynn & Associates, Inc.

Bob Segal Principal 312.558.4808 [email protected] www.franklynn.com


Documents

TheIdentifying “Go-to-Market” Costs* After the product is made, suppliers incur ~40% of the selling price to get the product to the customer, e.g., “go-to-market costs” “Go-to-Market”