Download B2B Chapter 10

Chapter 10:
Managing Business
Marketing Channels
PowerPoint by:
Ray A. DeCormier, Ph.D.
Central Connecticut State University
I.
II.
The alternative paths to business market
customers
The critical role of industrial distributors and
manufacturers’ representatives in marketing
channels
III.
The central component of channel design
IV.
Requirements for successful channel strategy
GO TO MARKET STRATEGY
Lawrence G. Friedman’s influential
book states that:

The ability to make smart decisions about
going to the market depends on how well
you understand your customer.
Who are they?
 What do they buy?
 How do they buy?
 How do they want to buy?
 What would motivate them to buy from you?

Importance of Channel Component

Selecting the channel design mix is challenging
1. The alternatives are numerous
2. Marketing goals differ between channel members
3. Business markets segments vary, thus it may require
numerous channels concurrently
4. Business market environment constantly changes
5. Competition is stiff
6. Customer requirements change
7. Internet technology is changing the landscape

All of this creates new opportunities and the need
for fresh channel strategies
Managing the Channel
• Once a channel structure is specified and goals set,
marketing managers need to:
Develop procedures for selecting intermediaries
b. Motivate them to meet goals
c. Resolve conflict between them
d. Evaluate performance
a.
•
The following discussion centers around
designing and administering the business
marketing channel.

The link between the manufacturer and the
customer is called the Channel of Distribution

The channel accomplishes all the tasks necessary
to get the product/service to market

Tasks can be performed by the manufacturer or
be delegated throughout the channel

The question is: “What is the best way to execute
the tasks?”
Channel Tasks Include:






Contacting potential
buyers
Negotiating
Selling
Contracting
Transferring title
Training





Financing
Servicing the product
Inventorying
Transporting
Storage
Direct and Indirect Channels

Who performs the TASKS?

Direct is when the manufacturer
performs all the marketing functions

Indirect is when some type of
intermediary sells or handles the product
Manufacturer
Direct Channels
Direct
Sales
Online
Marketing
Indirect Channels
Telemarketing
Manufacturers’
Representatives
Industrial
Distributors
Customer Segments







Sale is complex
Product/service is highly
customized
Customers are large
Products are complex
Sales involve extensive
negotiations
Professionalism is required
Customer requires direct
contact

Then, seller must
control the process to
ensure proper
implementation of total
product package and to
guarantee quick
responses to market
conditions
Indirect Distribution:
Generally Found Where…
 Markets are fragmented and widely dispersed.
 Low transaction amounts prevail.
 Buyers typically purchase a number of items.
Lead Generation
Triggered by sales call, by customer’s response to direct mail, or by Web
request for information; firm makes initial contact with prospect.
Lead Qualification
Potential customer screened: prospect’s need for product or service,
buying interest, funding, and timeframe for making the purchase are
assessed.
Bid and Proposal
Bid and proposal prepared to meet customer’s requirements (a complex
task for large technical projects).
Negotiations and
Sales Closure
Negotiation of prices, terms, and conditions, followed by agreement on a
binding contract.
Fulfillment
For standardized product or service, delivery of offering to customer.
Configuration, customization, and installation for more complex sales.
Customer Care and Support
Post-sale problem resolution, customer guidance, and ongoing contact to
ensure customer retention, loyalty, and growth.
SOURCE: Adapted from Lawrence G. Friedman, Go To Market Strategy: Advanced Techniques and Tools for Selling More Products, To More Customer, More Profitably (Boston: Butterworth-Heinemann, 2002), pp. 234-236.

Multi-channel strategy is used when it is
necessary to reach a large business market that
is composed of large, mid- and small-sized
customers.

First, arrange customers in terms of “relative
cost of sales” from top to bottom. Use:
1. Direct sales for large accounts
2. Indirect distribution for middle and smaller
accounts.
A
key role is to generate leads for channel
members.
 They



can do it by:
Internet
Direct mail
Tele-channels, etc.
 More
complex roles will be performed by
more sophisticated members (professional
sales people – direct or indirect)
Simple Example of High-Coverage Partnering Model
Sales
task
Channel
Lead
generation
Qualification
Bid &
proposal
Negotiation/
sale closure
$$$
Direct sales
channel
(field reps)
Business
partners
Tele-channels
Direct mail
$
Occasional support
by sales reps to
help partners
close key
strategic deals
Internet
Sales Cycle
Fig. 10.3
Fulfillment
Customer care
& support
CRM Systems



Tracking activity on prospects/customers used to
be a difficult task.
Before computers (Internet), no one could really
track a prospect’s situation from beginning to end.
Today, with virtual CRM programs, all activities
can be recorded at every level, thus making it
easier to serve the customer by coordinating all
sales channel activities.
Distributors

There are two primary intermediaries:
1. Industrial distributors
2. Manufacturers’ representatives

These two groups handle a very sizeable
share of B2B sales.
Distributors
 Industrial Distributors are:
a. Most pervasive (10,000+)
b.Sales exceed $50b
c. They are heavy into the Maintenance, Repair and
Operations (MRO) supplies businesses
d.Generally about 75% of all business marketers sell
some product through distributors
e. Most are small, independent businesses serving
narrow geographic markets
Distributors
 Distributors are full-service intermediaries, that
19
is they take title (carry inventory) for the
products they sell
 They provide credit, deliver, offer an
assortment, offer technical skills, maintain
customers and find new ones
 Sales average $2m
 Profits around 4% ($80-$100K)
 They employ both inside and outside sales
people
 Most are small but some are very large
 Distributors
are in every industry.
For example they are in:
1. Food
and Beverage
2. Maintenance,
Repair and Operations (MRO)
supplies
3. Hardware,
Electronics and Fabrication
4. Furniture,
Clothing, and Personal products
EXPANDED DISTRIBUTOR ROLES

To add more value for their customers many
large distributors have expanded their roles to
include more services:
1.
2.
3.
4.
5.

Inventory management
Automatic replenishment
Product assembly
In-plant stores
Design services
Many charge a separate fee for
additional services
Primary Distributor Classifications
General-Line Distributors
• Stock extensive variety of low tech
(commodity) products
Specialists
• Focus on one or few related lines geared
around high tech or industries demanding
complex customer requirements
Combination House
• Operates in two markets: industrial and
consumer
CHOOSING A DISTRIBUTOR

Choosing a distributor depends upon the market a company
wishes to target

What are some distributor qualifications?
1. Financial
2. Good functional operations
3. Skills & technical expertise
4. Contacts

In other words, “What can they do & who do they know?”

E-collaboration between manufacturer and distributor from
planning to servicing is a critical strategic force in the B2B
arena

Outsourcing of manufacturing, high cost of
salaried people and for other reasons, the
result is that B2B is substantially increasing.

This leads us into the next type of B2B player:

Manufacturers’ Representatives
Manufacturers’ Reps
 Manufacturers’ Reps fill a different role than
Industrial Distributors.
 They perform a much higher level of service.
 They:
1.
2.
3.
4.
5.
Are more technically advanced
Know their territory better
Are able to sell professionally
Are experienced in the industry
Usually represent several companies
Manufacturers’ Reps
 Used by small, medium and large firms.
 Often, small and medium firms cannot support a
full time salesperson.
 Large firms use them to supplement their direct
force for introducing new products to an area not
covered by their sales force.
 The main reason for using Reps is because it is
economically correct to do so. Little or no training
costs, no benefits, no outrageous risks, and Reps
are highly motivated vs. employees.
• Product is not standard—closer to made-to-order
• Reps do not take title nor hold inventory
• Reps are normally paid commission, however deals
can be made to be paid a monthly minimum
• Commission rates can range from 3%, 20% or more
• Gross margin is not large
• Relatively few customers or concentrated
geographically or concentrated in few industries
• Customers order relatively infrequently and allow
fairly long lead times
Channel Design Process

1.
2.


Channel design is a dynamic process:
They can be developed (new channels) where
none existed (i.e., Internet)
Or modify existing channels
Channel design is a vigorous activity rather
than passive one.
One of the most difficult jobs in marketing is to
develop a channel(s) of distribution
 Primary
goal is to satisfy (solve) end users’
needs (problems)


Define target market segments
Isolate each segments’ buying and usage behavior



What do they buy
How do they buy
How do they use their purchases
 Don’t
consider channel members as customers.
Instead, look beyond them to the buying unit
who has the real need.
 Example:
A manufacturer of ball bearings
should not consider the wholesaler as their
customer. They should consider the various
OEMs or repair shops that need good bearings
as their customer.
STEP 2: CUSTOMERS’ CHANNEL NEEDS BY SEGMENT
 Identify
and prioritize channel functions
requirements for each segment.
 Next,
align the function with the customer’s
needs.
 Example:
One customer may need product
information as their top priority while
another may need product quality assurance
as their top priority.
 Refer
to Table 10.2 for list of channel
functions.
STEP 2: CUSTOMERS’ CHANNEL NEEDS BY SEGMENT –CON’T.
Channel Function
Customer Need
1.
Product Information
Customer seeks more information for new or more complex
products especially in rapidly changing environments.
2.
Product Customization
Some products must be technically modified or need to be
adapted to meet the customer’s unique needs.
3.
Product Quality
Assurance
Because of its importance to a customer’s operation,
product integrity & reliability might be given special
emphasis.
4.
Lot Size
Purchase of products with a high-unit value or those used
extensively represents a large dollar outlay, thus being
important.
5.
Assortment
Customer may need a broad range of products and may
assign special importance to “one-stop shopping.”
6.
Availability
Some customers’ environment demands that the seller
support a high level of product availability.
7.
After-Sale Service
Customers require a range of services from installations
and repair to maintenance and warranty.
8.
Logistics
Customer may require special transportation and storage
services to support its operations strategy.
Table 11.2
Step 3: Assess the Firm’s Channel Capabilities
 Once segment is defined, functional requirements
isolated and prioritized, the next step is to:
 Analyze the segment’s channel strengths and weaknesses
 Identify gaps between what the segment functionally
desires and what the channel is providing

Fill that gap!
 Customers base their choice on the bundle of benefits
(channel functions) the channel offers.
Step 4: Benchmark to Competitors

What go-to-market strategies are key
competitors using?

Understanding what competitors are
doing, or not doing, offers opportunities
to discover gap(s) that might need to be
closed.
Step 5: Create Channel Solutions for
Customer's Latent Needs
 Sometimes, by reviewing what competitors are doing, or not
doing, latent customer needs emerge.
 Latent needs are those that are not obvious. Sometimes
discovering them can even lead to a whole new service.
 Example: An office products supplier that mainly sold print
cartridge products to the copy repair industry noticed that some
of their customer also supplied “magnetic platters” (hard drives)
to mainframe users. They informed some of their other copy
repair customers about this related service. Some of them
decided to try it and became successful. These customers now
had a new service to sell, and the office products supplier had a
new product (platters) to market to them.






Channel options need to be considered in light of a
cost/benefit analysis.
Some gaps may offer opportunities.
More often, channel members can work together to better
align themselves with their customers.
The idea is to enhance value for their customers.
Channels must be open to change as customers and
competitors change.
Channel management is an ongoing process.
Channel Transformation
 According to V. Kasturi Rangan, channels are not
a series of product & information flow from
manufacturer to the customer.
 Instead, it is the customer who demands certain
services and it is the provider’s responsibility to
meet those needs by developing roles and rewards
to meet them.
 See Fig. 11.5
Channel Administration Addresses:
1.
Selecting good channel participants and
making sure that all tasks and obligations
are assigned and understood.
2.
Motivating members to perform tasks
necessary to achieve channel objectives.
3.
Controlling inter-channel conflict.
4.
Controlling and evaluating performance.
Channel Administration
 Finding and selecting good people is a very
difficult tasks manufacturers have to do.
They can use:
1. Industrial Distribution magazines
2. Manufacturers’ Rep Directory
3. Advertisements in business newspapers
Convincing a rep to come on is a two-way
street. The rep asks the question, “Is this a
good opportunity for me?”
Motivating Channel Members
 Distributors and Manufacturers’ Reps are:
A.Independent
B.Profit Oriented
C.More concerned about their customers’ situation
than the manufacturer’s state of affairs.
D.Thus, Distributors and Mfg. Reps have a different
outlook and perception than the manufacturer.
PARTNERSHIP

The channel is motivated by the understanding that
the relationship is a partnership.

d.
Relationship Marketing demands:
Trust
Working together
Open communication
Support during “good” and “bad” times

This relationship leads to meeting performance goals.
a.
b.
c.
Dealer Advisory Councils
 This approach to motivating the distribution
channel is to bring in the players for the
purposes of:
1. Developing policy
2. Developing strategy
3. Attaining advice to correct problems
4. Taking advantage of opportunities
 Progressive companies bring them into the
decision-making process as much as possible
(AMAP).
45




Margins and commissions are the driving force to
motivate this element of marketing.
Margins and commissions must meet market norms.
Companies and products that offer higher
commissions and margins do get the attention over
those that don’t meet norms.
Many companies ask the distributor to do more and
those extra services need to be compensated for.
Example: Market research.
Trust – The Ultimate Compliment
• Another way for trust to occur is for each
member to make the system work and to
reduce channel conflict. Techniques
include:
a. Joint decision making
b. Joint goal setting
c. Cooperative programs
d. Arbitration committees to settle problems

Needs communication and trust. To
manifest this:
1. Members
offer benefits and resources
superior to what other partners could offer.
2. Corporate values are similar throughout the
chain.
3. Members share information on
expectations, markets and performance.
4. Members don’t take advantage of each
other.
Competitive Advantage
 By working together, business
marketers and their channel members
can enjoy sustainable competitive
advantage over their rivals and their
networks.