For years, the sales growth playbook for wholesale distributors was relatively simple: build a large infrastructure to quickly deliver a wide selection of products to end customers, master lean operations, and provide service and issue resolution. However, recent macroeconomic, industry and technological shifts have disrupted this tried-and-true model.
Alexander Group has identified four trends across all distribution markets that potentially threaten distributor growth. To reverse these trends and reinvigorate sales growth, savvy distributors need to reevaluate and preemptively adjust their go-to-customer models.
Four Key Threats to Distributor Growth:
When suppliers move to a direct sales model, distribution partners suffer. For large distributors, losing a key supplier can mean a reduction in product line, an increase in competition and a drop in both top and bottom lines. For small and mid-sized distributors, losing a supplier can lead to extinction. However, distributors have retained a central place in the supply chain because the benefits to the supplier of going direct to all customers rarely justify the costs. Distributors recognize the continued threat of disintermediation. Smart organizations that understand the key issues underpinning this threat will position themselves best for future growth.
Suppliers have used a variety of methods to displace intermediaries: direct sales forces, company stores, vertical integration with owned distributors and online portals. Alternative strategies to selling through the distribution channel hinge on a few questions:
What has changed?
Today’s buyers are increasingly more sophisticated and demanding. Large organizations frequently prefer to buy from partners that have: global presence, on-demand fulfilment capabilities, dedicated account teams (sales, support and technical service) and deep knowledge of their business and end customers.
Serving all customers remains an expensive proposition for suppliers, so many organizations incorporate trends to segment, size and prioritize buyers. Advanced segmentation models allow suppliers to partially disintermediate distributors by taking a nuanced rather than binary approach to coverage. The question has shifted from Should we sell direct or indirect? Organizations now ask, What segments should we serve with a direct model? or What sales process steps should we perform ourselves?
Partial disintermediation allows suppliers to pick those buyers and activities that are most profitable and in line with their value propositions.
Suppliers are evolving the revenue generation organization (sales, marketing and service) to support direct-to-customer models. VPs of sales and marketing are investing to upgrade sales talent, adding features to productivity tools (e.g., Business Intelligence and CRM), increasing quality and availability of training, and strengthening value propositions to demonstrate value and become trusted advisors to buyers.
What are the risks?
The aforementioned trends can significantly impact the growth prospects of distributors large and small. Consider some traditional distributor value propositions:
These strengths guaranteed distributors a place in the supply chain because suppliers had neither the skills nor the appetite for the capital investment required to outperform distributors in these areas.
However, manufacturers rely on segmentation and technology to insert themselves into the areas of the value chain once dominated by wholesalers. Smart manufacturers realize that their end customers are far from homogeneous. Customers vary widely in terms of buying preference and behavior, wallet size, profitability, service demands and alignment with value messages. Segmentation models provide manufacturers with answers to the question, What types of customers (and how many) should we sell to directly? At some point (based on potential volume, profitability and cost to serve), it makes economic sense to remove distributors from the equation. The danger to distributors is that manufacturers take the growth-oriented customers direct and leave distributors with the rest.
Technological advances have removed barriers to manufacturers servicing customers with a direct model. Advanced web portals, app-based ordering and telesales enable manufacturers to cover large geographies without building regional centers. Amazon.com has also become a delivery channel for manufacturers.
How can distributors continue to grow alongside manufacturers?
If the trend of partial disintermediation continues and more manufacturers consider selling direct to the most profitable segments, how can distributors expect to thrive? Most distributors fall into one of two camps:
For those in the second category, growth can come through several strategies. Consider the following high-level sales process:
Manufacturers typically compensate distributors for performing activities across this process. Disintermediation impacts this model by allowing manufacturers to take on all steps for some customers (We run the play for our top accounts; you find other customers.) or some steps for all customers (We find and convert customers; you fulfill it.). In each instance, distributors have options to earn based on what value they provide in the process.
Manufacturer performs all steps for select customer set: As mentioned above, most manufacturers are unable to (or choose not to) cover large swaths of the market directly. A manufacturer might decide to explore a direct strategy for their top 10 accounts, many of which may be the distributor’s largest accounts. If customers are on board with this model (a big ‘if’ depending on the relationship with the distributor), the distributor has to make up a large amount of revenue and gross profit dollars elsewhere. The silver lining is that by drawing a line below the tenth largest account, the manufacturer has abdicated the rest of the market to the distributor.
Manufacturer performs some steps for all customers: Alternatively, a manufacturer might prefer to complete a certain step (e.g., acquisition) in-house. In this instance, manufacturers will likely reduce distributor pay because the distributor is performing fewer tasks.
A reduction in scope is not necessarily a bad thing. Some distributors find customer acquisition difficult and prefer to focus on fulfilment. If not asked to acquire customers, the distributor can reduce investment in lead generation and focus on operational excellence. However, there is a risk of being pigeonholed into a fulfilment arm, where the manufacturer’s sales team limits growth. To avoid “fulfilment prison,” distributors must prove that they can outperform manufacturers in value-added steps.
Distributors are well aware of the threats that partial or full disintermediation present. Smart organizations understand that there is enough opportunity in the market to thrive alongside manufacturers that pursue direct-to-customer models. Organizations should consider the following:
1) The abilities of their manufacturing partners to serve customers directly
2) What their own customers value
3) How their own organization meets these customer needs
Distributors who can answer these concerns will position themselves best for consistent profitable growth.
Until recently, go-to-market models for wholesale distributors were relatively straightforward. Distributors located branches near customer sites and deployed territory-based generalist sellers to cover all buyers within a geography. Account lists were easy to create, the model was relatively simple to manage and sellers engaged all customers with frequent face-to-face visits. Today, three key changes have altered the distribution marketplace, forcing distributors to reexamine sales coverage models:
Actions leading distributors take to maximize profitable growth
The result is a coverage model that is intelligently complex and delivers differentiated growth by placing the optimal combination of resources against well-defined customers and influencers (see Figure 2).
Figure 2Modernizing coverage models is not without risk, however. Sales manager roles require redefinition and training to avoid botched handoffs and roles moving outside defined swim lanes. Sales compensation plans that pay a commission rate on territory volume can encourage sellers to landlord accounts and undermine the process to promote or relegate accounts to different segments. Failing to train customers to buy in a company’s preferred way can disrupt relationships or create too many exceptions to the standard model.
The risks are real, but they are manageable through well-designed programs, processes and tools. What distributors cannot risk, however, is hanging on to legacy coverage models as the market and competitors embrace change.
Another strategy for sales organizations seeking consistent profitable growth is to empower sellers with accurate, tailored and impactful value propositions.
During a recent engagement with a distributor client, the topic of value propositions came up. The head of sales claimed that customers buy from the company because “they get products from us faster and cheaper than from anybody else.” The industrial sales leader disagreed. While visiting one of their largest warehouses, she placed two identical orders–one from the very same warehouse she was visiting, and another from Amazon. The order from Amazon (for goods that were in stock at the client’s warehouse) came a full two days earlier (and cost less) than the order from the same facility.
The story above illustrates one key shortcoming with value propositions: If they cannot be backed up with evidence, they absolutely will not lead to measureable differentiation. Best-in-class value propositions are the product of a sound process and share three key traits: accuracy (backed up by evidence), specificity (tailored to resonate with unique buyer segments), and impact (move the customer or prospect to action).
The process
Well-managed value proposition creation processes follow a specific progression. First, organizations collect voice of customer inputs in a frequent and consistent manner. Valid methods include web surveys (e.g., net promoter score with additional qualitative feedback), focus groups (e.g., customer councils), or face-to-face discussions between customers and sales leadership or executives. Second, distributors map key customer needs (e.g., acquiring new customer of their own) to their own specific strengths. Lastly, sales or sales operations leaders have a mechanism to disseminate messages (e.g., playbook) and measure their efficacy.
Stakeholders differ from distributor to distributor, but three teams are almost always involved in creating impactful messages: sales (understands the customer needs), marketing (understands strengths and weaknesses across competitors) and product management (knowledgeable on features and benefits). The combination of these three teams can align the tactical benefits of products we sell to the needs of the customer and present data that show how and why we are the best at solving specific customer needs.
Traits of powerful value propositions
For value propositions to answer the question “Why buy from us?”, they must satisfy three criteria:
Accuracy–One of the hardest things to do for a distributor leadership team is to admit when they don’t stack up well against competitors in areas long considered strengths. When distributors are losing on price (according to voice of customer) they ought to consider new segment-specific pricing strategies. When they are losing on delivery time, an ops review may be in order. When interactions from the sales force are not frequent or high-quality, there might be opportunity improvements needed in the go-to-customer model or sales talent. In any case, before sales leaders develop value messages in sales playbooks, they must verify the evidence and pressure test it with trusted customers.
Specificity–Are value messages based on price, specs, or availability inherently bad? Certainly not. However, transactional value propositions often fall flat when used with customers who value higher-level sales motions (ROI, risk mitigation, value co-creation). Segmentation models that dictate customer coverage must also influence the types of value messages. Total cost of ownership, new market planning and minimization of field resource downtime are all higher-level value propositions that distributors can solve through products, services and people.
Impact–Any worthy value proposition should move customers to a decision, preferably a buying decision. The “so what?” of a value proposition should include a concise business case as to why a partnership with your distributor team is best. Data-backed messages tend to resonate best of all.
Next generation value propositions are a necessity in today’s ultra-competitive market. Distributors who follow a healthy process and craft messages that move customers along the buying continuum will flourish.
A swelling economy has many distributors looking to reinvest gains into the revenue generation organization. Investments in sales, marketing and customer support will cover multiple roles (field sellers or generalists, product specialists, industry specialists, inside sales, first-line sales managers, channel managers, sales operations) and digital tools. In a growth environment, one key question emerges: Where should distribution revenue leaders invest to create the greatest ROI?
To answer this question, revenue leaders must examine three key inputs:
Distributors fall into one of four growth phases: Start-up, Volume growth, Re-evaluation or Optimization. Each phase has a related investment strategy based on the commercial organization’s complexity, current share and expected growth compared to the market.
Role focus and support ratios
Sales roles require focus to reach maximum productivity. Field sellers who spend 40% or more of their time on engaged selling (account development, needs assessment, solution development, proposal) are considered best-in-class. Most distributor roles, however, fall in the 15-25% range. Common issues that decrease engaged selling time include account “landlording” (sellers accumulate too many accounts, perform maintenance on largest customers only), administrative or customer service requests, or broken processes. At a median level of $105k total target compensation (TTC) for a field seller¹, ROI will be limited if the job is spending the equivalent of one day per week generating sales. Rather than hiring three new field sellers, organizations might be better served cleaning up roles and hiring one new seller and two new support or operations resources to take important non-sales tasks off of the sellers’ hands. Healthy distribution organizations have a sales-to-support ratio of 1:0.75¹.
Segment focus and workload
Common questions Alexander Group hears from distributors include: “How many accounts should a seller have?” “When does it make sense to split a territory and hire a new seller?” “Should sellers be generalists or focus on one type of customer?” Answers to these questions depend on growth phase, customer set, market share and other factors, but they must be answered to understand where the next sales dollar should be spent. We have seen examples of field sellers with 1,000+ assigned accounts–far too many to actively service no matter what the product or industry. When workload exceeds bandwidth, multiple investment options exist. Distributors can hire another field seller and split territories, which typically results in growth for customers that were not previously visited. It may make sense to hire an inside sales rep to take the smaller customers off of the hands of the field seller to encourage the field seller to go deeper into remaining accounts and to increase touchpoints to smaller more remote customers. It may also make sense to build up the web channel to move the long tail of smaller customers to a self-service model. The associated ROI with any of these options depends on upstream inputs but must be considered before committing to an investment.
The role of distributors is changing at an increasing rate. The trends mentioned above, while not all new to the industry, are coalescing to create an uncertain path to growth. Organizations that can build on existing strengths and create optimized go-to-customer models will have a distinct advantage to define the role of the distributor and control their own fates. Those who wait and pursue “business as usual” as a plan may find themselves relegated to ever-shrinking pockets of opportunity by smart suppliers, nimble competitors and demanding customers.
To learn more about our point of view and experience solving revenue growth challenges for clients, please visit Alexander Group’s Distribution practice.