The ‘Channel’ – we all hear about it, but what actually is it?

For years, I swear my kids thought I was some kind of ‘overweight swimmer’ when they heard me talking about this! They watched me with bemused looks on their faces as I didn't sleep, left early, returned late, disappeared for weeks at a time, lost my hair and all the while hearing me muttering a strange and mythical phrase ….. ‘The Channel’

Having worked within B2B ‘channel structures’ for many years it is an area (that those of you who know me will understand) which is very close to my heart. I have worked both with, and at all levels within a channel, so I have a large level of expertise to discuss and advise businesses how they should operate and how they can maximise their return in this complicated arena. Here today, I just wanted to give a very summarised overview of how a basic channel works and some potential issues that quite often arise in this model.

Having an efficient ‘Channel Strategy’ is key to anyone whose industry utilises this ‘route to market’ and it is used to ensure a continued supply of goods, products (or service) to the End-User. Budget is often at a premium for all the businesses in this type of model, as margins are very thin all around as every level has to make a margin out of the final cost to the End-User. Therefore, whatever Budget is available to spend on driving revenue is normally focused on the product or itself – and yet incorrectly ‘the route to market’ is quite often overlooked for the best place to spend this valuable money.

It has long been agreed that Supplier/channel relationships are inherently adversarial – with debates over whose customer is it, what role each should play, what margins and prices each player can/should make and what loyalties each protagonist should have and to who.. When I was managing a European channel for Xerox utilising a channel route to market, I wrote an article on the relationship between the manufacturer and its partners which even though was 6 years ago, it is still valid today:

(https://channelpartner.blogs.xerox.com/2014/11/17/channel-partners-and-vendors-a-marriage-of-equals/)

An important point highlighted within this is that irrelevant of how many levels there are in your particular channel model, each partner/level is as important as each other. Each one is trying to grow (revenue and profit) and each one also requires all the others to succeed for them to thrive. In the end though, the Customer must come first and the channel (in its entirety) must come second if the model is to really work.

It is true that every channel in every industry is different, some are more complex, some may have more levels, some may have Sub-Distribution partners, etc.. But to help, I have created here a very simple and standard 'Channel' model to explain how it may operate. Using this, the next stage is to understand what part each ‘level’ plays in the process:

OEM/Manufacturer

Generally, these guys make the products or create the service which ultimately ends up with the End-User. Involved here (amongst other things as I am grossly understating what they do for ‘time and word-count’ purposes) is R&D, Manufacturing and importantly they have created, market and deliver the ‘Brand’. Generally, the Manufacturers here will choose and appoint its own Distribution network to cover the required geographies, partners, and markets to suits its needs. The Manufacturers will forecast the demand for products and utilise factories and global logistics to source parts, make products and then deliver the products into the distribution network as close to actual requirement time as possible - and with generally large lead-times this is an especially important and difficult requirement.

Distributor

These can often be known as the ‘muscle’ (and I mean no disservice to my many friends in Distribution here and actually this is meant as a positive) in that they will take stock from the manufacturer, service the reseller and do a lot of the ‘hard graft’ in terms of supplying credit, stocking and distributing (sometimes even to the End-User as well). The Distributors will also take, run, and deliver many of the programmes, promotions and incentives that the manufacturers create to reward and sometimes fund the resellers and end-users (and many will create their own programmes as well). However often, the Distributors will not just work with one OEM/manufacturer and instead they will work with as many as they can and over as many product ranges as possible. The rationale here is that they are giving their customers (the resellers) as wide as range of products to buy from them as possible and to benefit from Economies of Scale in terms of logistics, stock, etc. It is also worth noting that margins for the Distribution channel are generally very thin and therefore maximising volumes is especially important.

Resellers

A Reseller can be a product, brand or market expert and could be focused solely on taking one range to market or, (as has happened over recent years in many sectors) it can have diversified and become a ‘one stop shop’ in a specific sector/geography. In a similar way to the Distributor, a key tactic here is to take as much of the ‘Share of Wallet’ from their client has as possible – thus increasing revenue, ‘stickiness’ (one of my favourite business terms ever by the way – which means sticking the customer to you as closely as possible to stop them from being able to go elsewhere) and profit. The resellers in this model ‘own’ the end-user relationship and therefore can decide/influence/manage/guide what brands are purchased. A great example here is in the Printer market – the reseller who sells to the business or home user and has ‘stickiness’ with them can determine what Printer brand they actually end up buying. Yes, the end-user will have experience of the brands, seen the marketing, read the reviews, checked on-line, etc to have an idea of what they want – but being a trusted advisor (which is what every reseller aims on being) means you can help the client go down a path that either suits them (or in some cases - suits the reseller). So, as you see – every part in this complex model has its own part to play and like Dominoes - if one falls then they can all fall..

However, it is worth noting that while there is an inherent risk to all levels/parties involved, the Manufacturer/OEM does has a very large risk in this channel model of ‘trust’ as it doesn't really own the End-User or the Reseller (who is servicing the End-User). It therefore needs to focus on supporting and having relationships at all levels especially with the resellers! After all, a Distributor is probably playing ‘all sides’ (i.e multiple manufacturers and OEMs) and therefore will potentially sell to the reseller no matter what brand the end-user actually buys. And the same goes for the reseller, who can actually (if their sales advisors are good enough) push the end-user down the path that makes them most profit, get them higher rebates, reduce their stock levels, hit OEM and Distributor targets or whatever other KPI the Reseller wants to achieve at that point.

So, what have we learnt here? Well, for me there are many important areas to look at for each level in developing a good Channel Market Strategy, but here are just a few key take-aways that each protagonist MUST do.

The Manufacturers MUST understand that all levels (especially the Resellers and End-Users) have choices on which brand they choose, and therefore they need to develop Partner, End-User Programmes and Initiatives to make themselves the first choice for each level within their channel. Training, market intelligence, contact, and relationships with both the Distributor and Reseller Sales Force are also critical (and often under-utilised) in determining which brands are pushed and which are not.

The Distributors MUST not only have a wide range of choices available for their reseller customers, but they also need to be that ‘key pin’ in the relationship between Manufacture and Reseller – also if they don’t push one of the Manufacturers ranges enough then they risk being taken out of that network (as the OEM cannot support under-performing Distributors) and that will endanger the Distributor’s brand offering to their customers. Managing both ‘up’ and ‘down’ the chain is not always easy, but both must be managed very cleverly here to ensure their own relevance and success.

The Resellers MUST work with Manufacturers to understand what they want and what their brand is all about. Yes, they maybe able to ‘switch’ some End-User’s buying decision to suit their short-term requirements – but at what long term cost to themselves? Rebates, leads and stocking deals can be extremely important to Resellers and having a manufacturers ‘Brand Authorisation’ can play a big part in an End-Users choice of Reseller – especially for contracts, tenders and larger scale opportunities. It is also extremely easy for Resellers and their salespeople to end up chasing their Month/Quarter targets ahead of everything else. But for me - Resellers must be looking to back a ‘long-term’ brand and strategy!

Many years ago, when I was just starting out as a Commercial Director for a leading Reseller (just before we went through a period of monumental growth, due in no large part to the building of very strong OEM relationships) someone that I very much admired (and still do) told me that we should always:

‘Back a manufacturer/brand who will be there in 10 years’ time’

And I still fully agree with this as from a Distributor and Reseller point of view; backing a long term brand that has been through the difficult times, who’s still around today and that you know will still be around tomorrow (and into the future) is the kind of partnership that will mean ‘you’ will still be around in the future.

I really hope this summarised overview has been useful and yes, I could write another 50+ blogs on how channels operate, why they act the way they do, what each level should be focusing on and how they should be doing it. But in the meantime if you have any 'Channel' questions or want any advice on anything linked to this article or related to a Manufacturer/OEM, Distributor, Sub-Distributor or Reseller then please feel free to contact me at julianpatel@clivedenhouseconsulting.co.uk. I am also more than happy and equipped to help you in developing an effective Channel Management Strategy or Structure bespoke for your business, industry and sector if required.

As always, please stay safe and good luck ….

Julian