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"If
only we could get distribution … we’d have it
made."
I hear
this anxious declaration regularly. Particularly
from manufacturers and software vendors. I’ve
even heard it from a number of musicians!
Manufactures
want representation from agents or retailers.
Software vendors want to establish relationships
with resellers. And musicians want representation
from a record label.
But in
each case, this declaration can indicate a
potentially dangerous misunderstanding of the
dynamics of the distribution channel. And there’s
an important lesson in this for all of us – even
those who sell direct!
I
usually have two comments for those who are having
trouble getting distribution:
1. An
inability to get distribution is probably
symptomatic of a bigger problem.
2.
And, if this is the case, it is better to avoid
making a commitment to a reseller (I’ll use
this as a generic term) – even if such an
opportunity arises.
Before
we examine this ‘bigger problem’, let’s take
a look at the role that resellers play in the
distribution process.
Why
resellers typically don’t sell
Let’s
imagine a typical retailer for a moment. The kind
of retailer you’ll find in any shopping centre.
Picture, say, a music retailer.
Now tell
me this … what contribution does our music
retailer make to the ‘value chain’ that
stretches from an artist (with a guitar, a
microphone and a bad attitude) through to the fan,
(who willingly exchanges $29.95 for the artist’s
compact disk – and for the rights to play it, only
in the privacy of her home or car)?
It would
be fair to say that the music retailer’s
contribution to this value chain is the ‘sale’
of the artist’s compact disk, right?
Wrong!
The
reality is that this music retailer doesn’t add
value by ‘selling’, at least in the true sense
of the word. The retailer’s most important
contribution is the provision of a distribution
point – or a ‘point of presence’.
If you’ve
ever spent time in a music store, you’ll know
that staff members spend most of their time
simply operating the cash registers. Even those
more progressive music stores, with listening
stations and staff with specialities in
particular music genres, still generate more
revenues from Britney Spears CDs than they do
from the sales of CDs from lessor-known artists.
Now this
distinction applies to most resellers. They don’t
actually sell: they provide a point of presence.
The real selling is done higher up the value
chain. Or, to put it another way, they don’t
sell because they don’t have to. The customer
has already been ‘sold’ when she sets foot in
the store.
However,
there are some resellers that do sell – and who
are good at it. And these – believe it or not
– are the resellers of which we should be very
wary!
Why
you should be glad that most resellers don’t
sell
If we
stick with retailers for a moment, an example of a
reseller that does sell is a hairdresser.
Consider,
for a moment … which brand of shampoo do you
purchase when you visit your hairdresser?
The one
he offers you, of course!
You
don’t select your favourite brand from a
crowded shelf (as you would in a supermarket),
do you? Of course not. Your hairdresser makes
that selection for you. And, odds are, he
provides you with a ‘premium’
(hairdresser-only) brand, of which you’ve
never heard.
So far,
I’ve managed (at great length) to explain that
some resellers sell – and that some don’t. You
might be excused for thinking: so
what!
Well,
here’s the thing: whoever does the selling in a
value chain, owns the customer relationship, and
…
Whoever
owns the relationship with the ultimate customer
sets the terms!
That’s
right, the participant in a value chain with the
most power is generally the one who does the ‘selling’.
Our
manufacturer gains distribution and locks-out
his competitors
Now let’s
return to our anxious manufacturer, software
vendor and musician, and examine the real problem
each faces — and the opportunity that this
problem provides.
We’ll
look at our manufacturer’s situation first.
Assume
that our manufacturer has developed a technically
superior product (a chainsaw, perhaps). He’s
trying to convince hardware stores to stock this
tool.
To his
dismay, hardware stores appear to have little
interest in his product’s technical attributes.
Even though they seem to be at a loss for any
logical argument as to why they shouldn’t
represent his chainsaw, they simply fail to write
a purchase order.
While
this scenario makes no sense from our manufacturer’s
perspective, it’s understandable when we
consider what we’ve just learned about typical
resellers.
Because
a hardware store’s primary role in its value
chain is to provide a point of presence, it doesn’t
have a lot of sales infrastructure. Without the
sales infrastructure required to ‘make a market’
for a new product, this new chainsaw isn’t an
attractive proposition – regardless of its
technical attributes. It’s far easier for our
hardware store to simply promote the best-selling
brand.
So what
should our manufacturer do?
Well, he
has two choices:
1. He
can look for a retailer with the ability and the
desire to ‘make a market’ for his chainsaw.
2. Or,
he can accept responsibility for ‘making the
market’ himself.
While
the first option may appear initially to be
attractive, he should approach it with caution.
You see,
if he delegates responsibility for ‘making a
market’ to a reseller, the contribution he makes
to his value chain is limited to his product’s
technical superiority. And more often than not,
technical superiority is not a sustainable
competitive advantage.
This
fact is graphically illustrated in James Dyson’s
brilliant autobiography, Against the Odds. James
Dyson invented the enormously successful Dyson (bagless)
vacuum cleaner. In spite of its groundbreaking
technical superiority, Dyson struggled for years
to get distribution for his vacuum cleaner. In
the process, he was almost bankrupted by a
long-running court case with Amway Corporation.
He had been attracted to Amway by their market
intimacy. However Amway backed-out of
negotiations at the last minute, stole his trade
secrets and designed a copycat product!
(Fortunately, Dyson won his court case and was
awarded significant damages – including an
ongoing royalty stream.)
Our
manufacturer’s second choice is to accept
responsibility for ‘making a market’ for his
chainsaw.
He would
do this by running promotional campaigns designed
to drive customers to hardware stores, asking for
his brand of chainsaw.
If he
can successfully accomplish this, he will enjoy
the following benefits:
1. If
only one or two customers request his brand of
chainsaw, retailers will fall over themselves to
stock his product. We’ve already discovered
that retailers find it easier to supply the
brands that their customers request.
2.
Once hardware stores sense that this new product
is hot, they will start making it easier for
customers to purchase our manufacturer’s
product than they do his competitors’. They’ll
do this by giving our manufacturers’ product
premium shelf (and catalogue) space. (Of course,
this is the basis of retail ‘category
management’.)
3. If
our manufacturer uses appropriate direct
marketing techniques (e.g. couponing) to ‘make
a market’ for his product, he will probably be
able to build a database of existing and
potential customers. He will then be able to use
this database to drive demand (and distribution)
for his future products.
So, by
assuming responsibility for ‘making a market’,
our manufacturer easily gains distribution and locks-out
his competitors.
Software
vendor discovers that resellers’ dependence is
an asset
Our
software vendor’s situation differs in only two
subtle ways from that of our manufacturer:
1. His
resellers are service providers (rather than
product vendors). Accordingly, they tend to have
a more intimate relationship with their
customers (remember our hairdresser example.)
2.
Because of software’s rapid development cycle,
his product’s technological advantages are
likely to be even more transient than those of
our manufacturer.
Both of
these factors make our software vendor’s
contribution to his value chain more tenuous than
our manufacturer’s.
Therefore,
he should be even more wary of delegating the role
of ‘market maker’ to his reseller network.
It would
be tempting for our software vendor to consider
bypassing this reseller network altogether and
sell direct. However, this approach has three
shortcomings:
1.
Speed and expense. It will take a lot of time
and money for our software vendor to replicate
the reseller network’s infrastructure (their
points of presence).
2.
Market access. Existing relationships between
resellers and customers are likely to lock our
software vendor out of some segments of the
market.
3. It’s
not his thing. Our software vendor’s
stakeholders are likely to take a dim view of
his investing their capital in non-core
infrastructure. (For an innovator, research
and development and market making are
core activities. Logistics isn’t!)
Our
software vendor’s distribution strategy should
be similar to that of our manufacturer.
As well
as working hard to maintain his technology
leadership, he should take responsibility for ‘making
a market’ for his software. He should do this by
building the marketing infrastructure required to
provide his reseller network with a steady stream
of sales opportunities (qualified leads). (You can
review our article on Relationship-centric
Marketing for an outline of how to go
about building such infrastructure.)
Obviously,
if our software vendor is in a position where he
can provide a steady stream of sales
opportunities, he will have no trouble gaining an
audience with resellers.
The
reality is that resellers are generally strong
when it comes to maintaining existing customer
relationships — but weak when it comes to
establishing new relationships.
If our
software vendor can provide resellers with new
relationships (in the form of sales opportunities)
he will win the (current and future) business from
these relationships, but he will also unlock the
value resident in his reseller network’s existing
client base.
Unfortunately,
this thinking is counter-intuitive for many
software vendors — and for many other
organisations that utilise a distribution channel
comprising service providers.
Just
recently, I had a conversation with a software
vendor who advised me that he was looking for
‘resellers who could generate their own sales
opportunities’.
I
advised this vendor that, if I were him, I would
be encouraging my reseller network to become
dependent upon me for sales opportunities.
Long-term, this dependence is an asset, not a
liability!
Musician
must learn to be a ‘market maker’
Whilst
it may seem strange to group musicians with
manufacturers and software vendors, there are some
important parallels.
Typically,
musicians (and authors) are keen to delegate the
role of ‘market maker’ to record companies (or
publishers).
Of
course, this is not necessarily in the best
interests of the musician’s bargaining position.
Interestingly,
both record companies and publishers give
preference to talent with existing followings.
While this may weaken their bargaining position,
they view it as a risk management tactic.
Unfortunately,
musicians fail to recognise the opportunity that
this provides for them. They complain that it is
‘impossible to gain a following without a record
company — and impossible to get
"signed" without such a following’.
This is
simply not true.
INXS,
which, at one time, was one of the world’s
biggest selling rock bands, amassed an enormous
following prior to being signed to Polygram. In
fact, in the year preceding their signing, they
played an incredible 300 live performances!
Do you
think they came to the negotiating table with
bargaining power? I suspect so.
The same
is true of many best selling musicians (and
authors).
You
sell direct?
Organisations
that sell direct can also learn from these
examples. Too often, we come across organisations
where the responsibility for ‘making a market’
has been delegated, in its entirety, to the sales
team.
In such
a situation, we typically find the following
problems:
Salespeople
are difficult to recruit, almost impossible to
manage, and difficult to retain.
Salespeople
own client relationships — meaning
that, if salespeople leave, clients often
follow.
While
salespeople should obviously be responsible for
negotiating sales, they shouldn’t be responsible
for the generation of sales opportunities.
The
moral in all of these stories is that you
delegate total responsibility for selling (or, as
we like to say ‘making a market’) at your
expense.
If you’ve
been bemoaning the ability of your distribution
channel (or perhaps even your salespeople) to
sell, stop and be thankful.
Therein
lies an opportunity for you to strengthen your
strategic position.
[Agree?
Disagree? Please drop me a line and let me know.]
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