In this series, we’ve concentrated on growth for distributors in a new economic environment of reshoring, higher borrowing rates and continued consolidation. Of the 10 separate growth strategies we’ve identified (Part 1), we’ve concentrated on a handful that offer ongoing revenue growth that is more robust and more profitable than traditional sales growth of existing products to existing accounts.
In this final installment, we review the category of omnichannel partners and growth through online businesses. B2B online businesses began to flourish soon after the Great Recession with the formative event being the launch of Grainger’s Zoro Tool in 2011.
Zoro Tool along with Amazon Business represent a class of online firms knows as marketplaces. Recent research finds over 400 marketplaces cover 18 sectors in the B2B space with sales approaching $60 billion in 2021.1
In addition to marketplaces, numerous online specialty resellers serve different sectors with differing value propositions. Some resellers focus on parts and schematics, while others’ value propositions are difficult-to-find stock, obsolete inventory or high-end products. The explosion of online sites represents a new opportunity for distributors to sell their products.
However, many distributors have no process to evaluate these channel partners or determine if partnering with them is financially profitable.
Basics of Channel Management
Traditional full-service distribution has gone to market with outside sales for generations. The result is that the wholesale firm is sales-driven and focused on revenue over profit. Sales-driven firms tend to have more actively negative customers who require the firm to seek profits from loyal customers to cover losses of those who overuse the firm’s services.
We often find where sellers are keen to sell through all online channel entrants – without proper consideration of the strategic fit and overall profitability of the channel partner.
A sales-driven approach to channel strategy is, too-often, a disaster in the making. Somewhere, downstream of the initial partnership arrangement, the distributor recognizes that the customer is not a good fit and often costs more to serve than they are accruing in gross margin dollars. This can be avoided if distributors learn the basics of channel management and, for larger firms, create a position of channel manager.
The basic tenets of channel management are listed in the remainder of this installment:
Start at the end customer. When evaluating the fit of a channel partner, look at their customers to understand if they are a good fit. Look at the segments they serve, their value proposition, positioning, pricing and service offerings in addition to products.
For instance, if your firm is a high-touch/high-service distributor but your sellers are advocating for a low-cost/no-frills channel partner serving a price-sensitive market, you should question the fit. The primary rule is to know as much as possible about who the potential channel partner is selling and their value proposition before consummating a working agreement.
Conduct an activity profit pro-forma before setting up the channel partner. If you don’t have activity costing or use it to evaluate a channel partner, you probably have inaccurate assumptions about their profitability. Most channel partners charge a transaction or listing fee for putting your products on their site. This is especially true of marketplaces.
For instance, if a marketplace charges 12% of sales and the end market is 22% over distributor cost, the pro-forma should model truncating the traditional full service including no sales assistance, limited ecommerce marketing, limited online content, reduced credit risk, etc. If the arrangement can be made for 10% of sales (22% GM Market/12% Marketplace Fee) without providing these services, it is likely activity positive.
Our consulting finds that many distributors don’t conduct a pro-forma for online partners and simply evaluate them on gross margin percent. We often find, with accurate activity costs, many online channel partners are activity negative and destroy the ongoing profitability of the firm.
Additionally, we find transaction size for marketplaces is often small; this is a warning bell for activity profits as there aren’t enough margin dollars in any one transaction to cover its processing costs.
Consider the value alignment to the final customer. Channel partners define, in large measure, your value proposition to the end customer. If your channel partner is a pain to deal with, sloppy or unethical, the end customer will associate your firm with the same. In short, check the marketplace reputation of the channel partner and if it aligns with that of your firm and what you want to project.
Have a written agreement for each channel partner. The agreement should specify products covered, market segments covered, financial arrangement, returns and warranty policies, payment terms and marketing support elements required of the partnership. In addition, we recommend the agreement be signed and dated by officers of the respective parties. Agreements should be kept on file and can be of the evergreen variety.
Final Thoughts on Online Partnerships
Online partnerships are a growth option that will become increasingly important to distributors as B2B commerce moves online. Online partners can be marketplaces or specialty entities serving unique segments with unique value propositions.
The past and present direction of most distributors is to sell to any customer that wants to buy. Unfortunately, this attitude for resellers can be disastrous. Channel partnerships can be easy to consummate but difficult to extricate from if the relationship is unprofitable or one-sided, or the strategic focus/end-customer value propositions are incongruent.
We highly recommend that distributor management evaluates the potential channel partner with the basics above. For large distributors, establishing a channel management position can help the firm avoid unpleasant, unnecessary and unprofitable ventures when establishing new and profitable online reseller relationships.
1 “B2B Marketplaces enter digital commerce mainstream,” Digital 360 Commerce, July, 2022.