Distributor/Reseller Marketing

A Riddle Wrapped in a Mystery Inside an

Enigma

© 2006 Frank Lynn & Associates, Inc. All Rights Reserved 0

Distributor/Reseller Marketing
Over the last 50 years, changes in distribution occurred at a snail’s pace. However,
over the past five years, and more significantly in the next five years, changes in
distribution will be fast and numerous. Marketing through distributors and resellers is
complex enough, but those companies that have not developed a clear understanding
of the basics of “channel marketing” will likely experience declining revenue and market
share.

Distributor/reseller marketing is more complex today because:

> The emergence of electronic commerce challenges the underlying rationale for
distribution channels
> Distributors are investing heavily in electronic commerce and other technologies to
offer better online systems and lower cost structures
> Integrated supply contracting is changing the relationship between manufacturer,
distributor and end user
> Outsourcing of logistics functions is emerging as an alternative to direct fulfillment or
traditional distribution channels
> Hybrid solutions that combine direct and distributor activities are now very common

© 2006 Frank Lynn & Associates, Inc. All Rights Reserved 1

Distributor/Reseller Marketing
Despite the increased complexity of distributor/reseller marketing, manufacturers are
being forced to answer the question, “How do we more effectively and efficiently market
our products through distribution?” Answering this question has become increasingly
important because:
> Most U.S. businesses have directed their purchasing departments to drastically
reduce the number of suppliers with which they do business. This trend favors the
use of distribution over direct selling
> Large distributors have gotten large through mergers, acquisitions and
consolidation. The investments they have made have significantly lowered their
costs of operation, making them very efficient marketers
> Conflict between channels is greater than ever with more channel options available
> New channels, including integrated supply contractors, electronic commerce,
catalog and even retail superstores, require different support/investment from the
manufacturer

Through our experience in helping companies increase their market share in

distribution, we have identified certain basic concepts that are common to all facets
of distributor marketing. In this booklet, a series of questions and answers provide
the framework for developing an understanding of these distribution concepts. They
are the key to resolving the distributor/reseller marketing.
© 2006 Frank Lynn & Associates, Inc. All Rights Reserved 2
Why Do End Users Buy from Distributors and
Other “Third Parties?”
End users buy from distributors and resellers for reasons other than the products they
provide. Distributors provide a number of advantages that cannot be obtained from
the manufacturer.
End-User Advantages in Distributor Buying

Distributor End User

> Bundling of products >Technical support

(hardware, software and services)
> Single-source convenience
> Ordering and delivery flexibility
> Single-source accountability
> Inventory cost/support
© 2006 Frank Lynn & Associates, Inc. All Rights Reserved 3
Why Do End Users Buy from Distributors and
Other “Third Parties?”
Many marketing textbooks describe three alternatives for marketing to the end user.
Distribution, however, performs a unique role in the marketplace and is not an
alternative to the field sales force, manufacturer reps or sales agents.
Marketing Channel “Alternatives”
Manufacturer

Company Sales
Distributor Rep/Agent
Force

Dealer/Reseller

End Users

It is increasingly common to find a manufacturer protecting specific large end-user

accounts for its direct sales force only to find that the end user would prefer to buy
through a distributor/dealer because of the unique value-added activities provided.

© 2006 Frank Lynn & Associates, Inc. All Rights Reserved 4

Why Does Distribution Change in the Marketplace?
Different stages in the market life cycle require different types or levels of marketplace
support. These conditions exist whether a product is marketed direct or through
distribution.

Changing Marketing Support Requirements

Maturity
> Standard products
> Account servicing
Growth
> Product line expansion
> Application selling expertise

Innovation
> Engineered products
> Missionary selling

© 2006 Frank Lynn & Associates, Inc. All Rights Reserved 5

 Why Does Distribution Change in the Marketplace?
Because end-user needs change from technical
support to account servicing as a marketplace
matures, the type of distributor that is effective in Market Life Cycle
Broad-Line
each stage also changes: Direct Sales Distributor

> Direct sales is required for missionary selling Technical Specialist

because distributors/resellers will rarely
develop new markets for you

Revenue
> Technical specialists provide the technical
support required during the growth period
> Broad-line distributors displace technical
specialists when markets mature and account
servicing is the predominant end-user
requirement

Failure to recognize distribution changes that

evolve during the maturation process usually Time

results in dramatic shifts in market share

positions.

© 2006 Frank Lynn & Associates, Inc. All Rights Reserved 6

Why are Different Types of Distributors Necessary?
New technologies almost always move down the user triangle. Marketers, therefore,
will need to market through broad-line distributors and technical specialists
simultaneously. This type of coverage will meet the needs of a broad range of end
users:
> Large, mature, repeat buyers with logistical needs
> New, smaller, first-time buyers with technical support and education needs

Big Users
(Few)

Small Users
(Millions)
End-User
Marketplace
© 2006 Frank Lynn & Associates, Inc. All Rights Reserved 7
Why are Different Types of Distributors Necessary?
The use of multiple channels adds further complication as each channel type has
significantly different costs/margin structures and significantly different support
expectations. Channels operating at various points on the life cycle incur dramatically
different selling costs (the total cost of the internal and external sales forces).

Channel Selling Costs

30%+ 15-20% 8-10% <6%

Time

© 2006 Frank Lynn & Associates, Inc. All Rights Reserved 8

What is the Economic Role of the Distributor?
Historically, the economic role of the distributor/reseller was to transfer marketing
costs from the manufacturer into its own business.
Today, with a greater focus on the total costs in the supply chain, the reseller’s role is
to take responsibility for the functions it can perform more efficiently than either the
manufacturer or the end user.

The Economic Role of the Distributor

Manufacturer Distributor End User

> Marketing costs > Cost transfer > Inventory/usage costs

© 2006 Frank Lynn & Associates, Inc. All Rights Reserved 9

 What is the Economic Role of the Distributor?
Marketing costs are defined as all costs incurred from the time the product leaves the
production line until it reaches the ultimate end user.
In mature markets, these costs typically amount to approximately 40% of a product’s
selling price (to the end user). In growth markets, marketing costs can account for 50%
of a product’s selling price.
Marketing Costs

Mature Market Growth Market

Marketing Costs Marketing Costs
Sales 10% Profit
Sales 18% Profit
Inventory 10% Inventory 8%
Service/support 6% Product Service/support 10%
Order handling 4% Cost Order handling 4% Product
Cost
Advertising/promotions 4% Advertising/promotions 4%
Credit 3% Credit 3%
Freight 2% End-User Buy Price Freight 2% End-User Buy Price
Overhead 1% Overhead 1%
40% 50%

© 2006 Frank Lynn & Associates, Inc. All Rights Reserved 10

What is the Economic Role of the Distributor?
A distributor or dealer transfers out a portion of the marketing costs that the manufacturer
would otherwise incur. Transferred Marketing Costs

The manufacturer retains a portion of the Transferred Distributor’s Mature

Cost Economic Value Market
marketing costs, including: Sales 8%
Inventory 7%
> Managing the distributor marketing Service/support 2%
program through its field organization Order handling 3%
Credit 2% 15% Retained
> Developing marketing and promotional Other 3% Costs
programs to complement the 25%
distributor’s sales activities Transferred Distributor’s Growth
Cost Economic Value Market
> Carrying some finished goods Sales 14%
inventory Inventory 4%
Service/support 6%
> National advertising, trade shows, etc. Order handling 3%
Credit 2%
> Providing second-level technical Other 3% 18% Retained
support 32% Costs

The sum of the transferred costs represents the distributor’s economic value in
the marketplace. The discount the distributor receives merely compensates it
for the functions and activities performed.
© 2006 Frank Lynn & Associates, Inc. All Rights Reserved 11
What is the Value of the Distributor Discount
Pricing Structure?
The discount pricing structure is the mechanism which defines a buyer’s price and what
the buyer must do to achieve that price. A properly designed discount structure
compensates the buyer (dealer, distributor or end user) for the activities performed on
behalf of the manufacturer. It also allows for the differentiation among buyers based on
the different activities they perform.
The Role of the Distributor Discount Pricing Structure

Manufacturer

Transfers
Marketing Costs

Distributor

© 2006 Frank Lynn & Associates, Inc. All Rights Reserved 12

What is the Value of the Distributor Discount
Pricing Structure?
A well-designed pricing structure satisfies the following requirements:
1. It equitably transfers marketing costs from the manufacturer to the distributor
2. It is legally justifiable
3. It fits the characteristics of the marketplace
> Primary vs. secondary vs. tertiary products
> New vs. mature markets
> Distributor size

4. It provides an economic basis for resolving common problems encountered in

supplier/distributor relationships
> Drop-ship business
> Distributor and direct selling in the same marketplace
> Different distribution channels handling essentially the same product line

5. It complements and supports your overall marketing strategy

© 2006 Frank Lynn & Associates, Inc. All Rights Reserved 13

Discount Pricing Structures
Discounts based on volume (order size and/or annual volume) are effective in
directing a reseller’s buying behavior. However, there are several problems with
solely using volume discounts:
1. They are rarely legally justifiable based on a cost transfer defense
2. They often reward large broad-line resellers at the expense of small
technical (value-added) resellers
3. They often create gray marketing or simply shift sales from one quarter to
the next

Volume
© 2006 Frank Lynn & Associates, Inc. All Rights Reserved 14
Discount Pricing Structures
Discount structures that reward resellers for activities performed in combination with
appropriate volume incentives allow you to more precisely shape your resellers’
buying, selling and operational behavior to meet customer needs.

Impact Reseller Behavior

Manufacturer Reseller End User

If we can measure success, we can shape behavior.

© 2006 Frank Lynn & Associates, Inc. All Rights Reserved 15

What is the Field Sales Force’s Role in
Distributor/Reseller Marketing?
The manufacturer’s sales force is responsible for managing market coverage through its channel
marketing program. To do this effectively, they must understand each reseller’s business. If you market
through thousands of dealers, this is not possible. To deal with the complexity, the manufacturer should
understand each dealer/reseller subsegment or type.
Every distributor serves as a “window” to the marketplace; its unique perspective stems from its:
> Product line
> Customer base
> The nature of its business

If a distributor’s window does not match your marketplace window, it cannot deliver your market share
objectives:
> The distributor cannot write business that it does not see
> The distributor will not call on new customers just to sell your product

A distributor cannot deliver more than its share of the market.

In distribution, the manufacturer’s market share is the sum of the market shares delivered by individual
distributors. Therefore, a manufacturer must select the distributors capable of delivering its share
objectives. Since knowledge of each distributor’s window is critical in managing marketplace coverage,
distributor selection must be done on a territory-by-territory basis. This becomes the primary
responsibility of field sales management. © 2006 Frank Lynn & Associates, Inc. All Rights Reserved 16
How Can Channel Conflict be Eliminated?
IT CAN’T! Manufacturers seeking share and revenue growth typically have to expand the
types and numbers of distributors/resellers marketing the manufacturer’s products.

As manufacturers expand distribution, they achieve greater market coverage, but create
channel conflict in the process.

Channel conflict cannot be eliminated, but it can be managed. Approaches to managing

conflict are numerous and include:
> Activity-based discount structures
> Dual credit/compensation when the direct channel competes with the distribution
channel
> Exclusive territories (geographic or vertical markets)
> Dual branding strategies
> Product differentiation by channel
> Placing restrictions on distributors
> Utilizing dealer/distributor councils to communicate and resolve problems

Remember, a little conflict is a good thing – it means you have good market coverage.
© 2006 Frank Lynn & Associates, Inc. All Rights Reserved 17
What are the Major Mistakes that Manufacturers
Make in Marketing Through Distribution?
In designing and operating a distributor/reseller marketing program, management
must insure that the following basic concepts are not violated.

1. Channel marketing begins not with the channel, not with the manufacturer,
but with an in-depth understanding of end users

2. Manufacturers do not sell to distributors/resellers; they sell through

distributors/resellers:
> Distributors are not your customers; they are the means of reaching the
customers
> Loading programs only puts product on the distributors’ shelves. A sale is not
made until the product moves into the hands of the end user
> Manufacturers and their channels should engage not in adversarial or arm’s-
length relationships, but in partnerships. However, 50/50 partnerships do not
work; someone must lead

© 2006 Frank Lynn & Associates, Inc. All Rights Reserved 18

What are the Major Mistakes that Manufacturers
Make in Marketing Through Distribution?
3. Distributors and resellers rarely develop a market for technology; rather, they
service existing markets:
> Manufacturers should be prepared to sell direct when introducing new
technologies
> Distributors cannot take an existing product into a marketplace that they do not
service – their product lines will not support the effect
> Manufacturers frequently expect distributors/resellers to develop markets and
are frustrated when they do not

4. Market demand determines how much of a product (all brands) will be sold by
the distributor/reseller:
> Market acceptance or rejection determines which brands the distributor sells
> Attempts to change distributor brand emphasis are limited by the end user’s
willingness to accept substitutes
> Channel mind share is 90% economics. Manufacturers must show how their
products will fit/improve the channel’s business model

5. Managing channels is very different from selling directly to end users.

Different programs, time horizons and salespeople are usually required
© 2006 Frank Lynn & Associates, Inc. All Rights Reserved 19
Final Thoughts
The basic distributor/reseller marketing concepts continue to appear deceptively simple.
They are, however, difficult to execute in practice. Marketing management’s typical
reaction to the concepts that we have outlined is agreement; nonetheless, existing
distributor/reseller marketing programs that consistently violate these concepts are
allowed to continue.
Decision-making responsibility for distributor marketing programs is often delegated to
the lower level of the marketing organization. Because of its complexity and its impact on
profit margins, final decisions on distributor/reseller marketing programs should be
retained by top-level marketing management. Day-to-day decisions should be passed to
the regional levels.
We know from experience that the concepts presented form the foundation for
constructing and operating a channel marketing program that will sustain and increase
your market share.
If you carefully apply these concepts to your present channel marketing program, your
business relationships with your distributors/resellers will improve. As a manufacturer,
you may not like some of the decisions that these concepts require you to make, but you
will avoid many of the costly marketing mistakes that we frequently encounter.
THE CONCEPTS WORK!

© 2006 Frank Lynn & Associates, Inc. All Rights Reserved 20

An Invitation
Work with Frank Lynn & Associates when you need an objective perspective from an
organization with extensive experience in channel marketing across numerous
industries. Our senior partners have more than 100 years of experience helping clients
to:
> Select the right channels
> Improve the effectiveness of their channel programs
> Improve the efficiency of their channel programs

To find out how we could work together, we invite you to schedule a complimentary half-
day meeting in our Chicago office to discuss your specific business challenges. To set
up a meeting, contact Karl Edmunds at 312.558.4866 or kedmunds@franklynn.com.

© 2006 Frank Lynn & Associates, Inc. All Rights Reserved 21

Frank Lynn & Associates
Frank Lynn & Associates, Inc. is an international channel marketing consulting firm. Since 1973, we
have provided our clients with in-depth knowledge and expertise in channel marketing – the marketing of
products through dealers, distributors, specialty retailers and other types of resellers. We are known in
the marketplace as “The Channels People” because of our expertise in this field. Our mission is to
utilize our knowledge of marketplace dynamics and economics to help our clients generate creative,
actionable solutions.
During our 33 years, we have assisted clients in:
> Growing their business
> Entering new markets
> Launching new products or new technologies
> Entering channels that are new to the company
> Reducing conflict among indirect channels
> Reducing conflict between a direct sales force and the company’s indirect channels
> Evaluating marketplace synergies for acquisition candidates
> Focusing marketing and organizational resources of the company
> Increasing profitability
> Segmenting end users into groups more likely to buy the company’s product or service
> Understanding their marketplace by providing market-based information and insight about customer,
channel and competitive behavior
> Developing actionable strategic and tactical marketing plans
© 2006 Frank Lynn & Associates, Inc. All Rights Reserved 22