Profitable Channel Management: What
Questions Should You be Asking? White Paper
By: Carl Cullotta
Are your channel programs costing you share and
profit?
Frank Lynn & Associates has observed an interesting similarity
among our clients recently, particularly those in traditional
mature markets. These clients have realized they are managing a
current channel strategy based on outdated channel programs. Often
through benign neglect, these programs have failed to keep pace
with both market evolution and changes in the manufacturer's
channel strategy. When did you last review your channel
programs?
When most manufacturers think of channel programs, the focus
immediately turns to economics; the channel pricing structure and
other elements of the economic relationship with your channel
partners. Most manufacturers have done a good job of keeping their
channel pricing current with the channel strategy. However, your
channel programs go well beyond the economics--they impact
virtually every element of your channel relationships. In this
paper, we review the elements of a well crafted channel program,
and address some common questions we hear manufacturers asking
today regarding those programs.
Q. What is a channel program?
The most actionable definition of a channel program includes all
the formal written and stated elements of your channel
relationship. The program goes well beyond just a contract or a
pricing structure--it defines all aspects of your relationship with
the channel. As such, the program becomes the "recipe book" from
which to manage your channel relationships.
The common elements of your channel program include:
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The contract or legal framework for
your channel relationship |
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Your price/discount structure and all
related economic policies |
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Any sales/marketing or
merchandising/promotions offered to the channel or through the
channel to the end user |
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Technical requirements of the channel
and a description of your technical support offering to the
channel |
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Policies and procedures outlining the
operational relationship with your channel (including order
transaction and movement of product |
A formal channel program, as described above, provides structure to
the channel relationship. It provides clear direction to your
channel partner regarding the channel's role and what you value. It
outlines the process and metrics you will use to evaluate your
channel's performance. It also assures the channel partner
objectivity in its dealings with you.
Q. What are the components of a successful channel
program?
The components you choose for your channel program will be unique
based on the needs of your target end user and the role you'd like
your channels to play in meeting those needs. However, our
experience shows that the most effective programs share a broad set
of common elements. Envision your channel program as a series of
"chapters."
Agreement
This chapter defines, in general terms, the conditions under which
you and your channel partner agree to do business together:
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The contractual agreement of a
defined scope and time frame; the most effective agreements specify
a time period (usually 1-3 years) to the channel authorization. The
intent here is obviously not to change out channel partners
frequently. Rather, the defined timeframe provides a basis for
regular review of the relationship |
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The general definition of channel
responsibilities; while these responsibilities will be spelled out
in detail later in the channel program, the contract of agreement
provides some insight into your expectation of the channel |
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A statement of your distribution
policy; are you going to offer your distributor exclusivity? Will
you have multiple channels serving a defined geography or market
segment? This can be spelled out through |
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> |
A description of the "primary area of
responsibility" or authorized
territory for the channel |
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> |
Reference to the products that the
channel is authorized to represent for you
|
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An outline of the process for review
of the relationship, business planning goal setting and
forecasting; you should set expectations that there will be regular
performance reviews. The specific metrics can be spelled out later
in the channel program |
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A basis for termination of the
relationship |
Pricing/Economics
The purpose of this paper is not to explore the nuances of a
channel pricing structure. However, a section of your channel
program should outline in detail that economic relationship. All
program elements that affect how money changes hands between you
and the channel are captured here:
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Your price/discount and channel
compensation structure |
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Policies for price changes and any
price protection for the channel |
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Payment terms and freight
policies |
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Invoicing/billing procedures |
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Other items, including warranty
reimbursement, rates/policies, minimum order quantities, product
discontinuance policies, etc. |
Sales/Marketing
It is critical that you tailor this chapter to the needs of your
target end user. The reason you have authorized a channel partner
is to help acquire and retain your customers, and this section of
your program outlines in detail what you expect of your channel to
do so. It is this section of your program that defines how and to
what degree your channel invests in the sales and promotion of your
product (as well as the consequence should your channel partner
fall short of your expectations). Common elements included in the
sales/marketing chapter:
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Detailed channel requirements for
sales representation and a basis for measurement of each; do you
expect the channel to employ inside/outside sales dedicated to your
line? What are the capabilities expected in these individuals? |
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Product line-specific sales/marketing
investment; what additional
investments/capabilities of the channel are important to you? How
does the channel qualify for each? And what support do you offer to
assist this
qualification? |
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Sales training--Will you certify your
channel partner's sales force? What training is required to
qualify, and what benefit accrues to the channel partner for
achieving this certification |
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Advertising/co-op--Is there a
mandatory investment by your channel partner? How do you support
this through a coop program, and what is the administration for
this program? |
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Merchandising/point of purchase--Is
merchandising relevant, and if so, do you put any parameters around
the way your channel partner merchandises your product? |
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Literature and collateral
materials--Does the channel partner need literature and collateral
material? To what extent do you make this available and/or charge
for it? |
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Trade shows--Is the channel partner
expected to attend and/or display at trade shows? How many and
which ones? Will you make display materials available? |
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Lead generation/qualifications--Will
you supply leads or expect the channel partner to develop these?
Are there any reporting requirements to follow-up and qualify leads
you provide?
|
Technical
This is particularly important if your channel participates in a
technical selling scenario or adds technical value-add on your
behalf; spelling out the technical elements of your channel
relationship helps ensure the consistency of support to your end
user. Typical technical requirements address:
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A detailing of the technical
knowledge/capability expected of the channel sales force, along
with your basis for measurement; this may tie back to the way you
train or certify the channel sales organization. You may also
specify background of the channel partner's technical sellers (for
example, engineering
degrees/experience) |
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Technical support elements provided
by you to the channel including: |
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> |
Training--Do you offer training to
the technical support organization within your channel partner? For
repair/service? For aftermarket technical support? Etc. |
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Demo units/material--Are demo
capabilities required as part of the selling process for your
target customers? If so, what investment do you expect the channel
to make in terms of demo materials/capabilities? (For many
products, this shows up as a significant investment in samples. In
other cases, it may be a fully equipped product/system
demonstration
site.) |
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Reference sites--Is it important that
your channel partner has available a number of reference sites?
What are the specifications for such a site, and are there
guidelines for enlisting these references? |
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Application data base/application
support--What applications support is required by your end users?
Will you provide a centralized database, or are your channel
partners expected to create their own? |
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Warranty--What is your warranty and
what is the channel's role in
warranty administration? What is the policy to process warranty
claims?
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Operations/Logistics
This section of your channel program focuses on the efficiency of
your relationship with your channel by outlining policies and
procedures that allow you and your channel partner to fulfill the
order at lowest possible cost. This area is the one that should be
most often updated to assure your policies keep up with changing
technology that allows for efficient operations. It includes:
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Order process definition--What are
the alternatives for your channel partner to place orders, and what
information is available to allow the partner to track order
progress? |
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Order expediting/rush
shipments/"specials"--Under what conditions do you accept each, and
what are the economic penalties (if any) associated with each? |
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Minimum inventory requirements--Do
you place minimum inventory requirements and what is the rationale
for each? How will you "audit" or measure the channel's adherence
to these requirements? |
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Product lead time/fill rates--To aid
in the channel partner's inventory planning; can you specify your
lead times by product category? |
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Return goods policy--Under what
conditions will you allow your channel partner to balance inventory
by returning goods? Through what process and at what cost to the
channel? |
Q. Why is it important to offer the channel a current and
effective program?
In two words, "mind share"--an effective channel program can keep
you "top of mind" to your channel partner by providing a range of
benefits in the relationship.
A channel program sets the ground rules for your channel
relationship; expectations are clearly spelled out across all
functions of the channel's business. Just as importantly, you set
expectations for what the channel can expect of you in each of
these functional areas. Obviously, this puts a spotlight on your
performance, or lack thereof, in living up to these promises.
A channel program provides a basis for evaluation/measurement of
the performance of both parties to the relationship. The most
effective programs become "living documents" that can be referred
to frequently while managing the channel. By understanding which
areas of the program are being delivered and where the channel is
falling short, you can tailor your conversation/support to the
individual distributor to directly address areas of weakness and
non-performance.
The channel program acts as a "how to do business guide" by going
beyond a basic agreement or contract and spelling out policies and
procedures in detail. This should help cut down on those calls you
receive that are strictly clarification of a process. Our
experience has consistently shown that channels are drawn to
manufacturers that are both predictable and easy to do business
with. A "how to do business" manual supports these qualities.
The channel program creates a context for consistency and
discipline in your channel management efforts. Through
formalization of ground rules, policies/procedures and channel
qualification requirements, you will reduce the "deal making" that
often occurs in the field. This is likely to lead to efficiency
(cost saving) in your channel management and serve to reduce the
channel conflict that is often an out growth of deal making.
The channel program provides legal protection for both parties by
taking ambiguity out of the relationship and out of the
interpretation of performance.
Q. How effective is your channel program today?
Frank Lynn & Associates has created a simple audit process to
measure the relative effectiveness of your channel programs. Based
on our extensive experience in this area, the audit will provide
you guidance in a number of areas:
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How effective is your program? |
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What elements appear to be
particularly effective? Or ineffective? |
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For what elements of your program
should you consider changes? And why? |
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