|
Distribution – Vs – Direct
What
should you consider?
We
had been working with the new client for a couple of months.
I was looking forward to this opportunity to “tag along” with their
lead salesman on a visit to one of their best customers. The salesman
had a reputation for identifying the buyer’s needs and presenting
the product features that met those needs. When we got out
of the truck I was surprised to see we were at one of his dealer
locations. As we went inside he introduced me to the owner
of the dealership and we then proceeded to solve a problem the dealer’s
technicians were having with installation of one of the units they
had sold. I met the dealer, but I never saw the end user.
Neither did the salesman. As we drove away I tried to understand
what had happened. This guy was a really good salesman.
The service he had provided to the dealer was certainly valuable.
The installation problem was solved, so the dealer was happy now.
Although everyone seemed satisfied, nothing seemed right.
The
problem was, that salesman was only an adequate technician, so while
he had gotten the unit installed that afternoon, he was not the
best person for that task. Unfortunately, such tasks made
up the majority of his daily duties. It turned out that he
spent almost no time actually selling to end users, where his unique
skills could be put to best use. I began to see what was wrong…the
company had forgotten the difference between dealers and customers.
Dealers can be a vital component of your sales, marketing, and distribution
programs, but what your dealers need from you is different from
what customers (end users) need, and companies that confuse the
two are not going to do what is best for their customers or their
dealers.
Dealer, Customer, What’s the Big Difference?
Dealers carry your product for resale. Customers purchase
your product to consume it, to use it up. Dealers don't "want"
your product, they want a sale!
To
be effective through a dealer network you need someone on your team
who will recruit the dealers who will do the best job for your company,
selling them on the idea of carrying and promoting your
product. It may require a different person on your team to
train those dealers to sell your product. Remember, those
dealers don’t need to be sold your product, they need to know how
to sell it to end users. Those dealers will also need someone
who will provide them with support when they need a problem solved.
Finally, you need someone to be your “cheerleader”, to keep the
dealers pumped about your product.
The
most important thing you need to appreciate is that your dealers
are not actually buying your product, they are reselling
your product. They are only interested in your product to
the extent that their customers are interested in buying it from
them. Your “sales” efforts are not properly directed at encouraging
dealers to buy from you…those efforts should be spent showing them
how to sell for you. Because of this not so subtle distinction,
too many manufacturers have sales forces trying to accomplish the
impossible task - selling product to the dealers.
The
only person actually purchasing your product for “consumption” is
the customer. Features and benefits make a difference to your
customers because they make your product more useful, better able
to accomplish whatever they purchase it for. Your dealers
are also interested in your product features, but only because those
features help them sell to the end user, your mutual customer.
Your Product
If
you want a pound of nails, you go to a hardware store and buy them.
If you expect to use 10,000 pounds of nails, you may wonder whether
you need to go through your local hardware store to acquire them.
A dealer is the only logical source of some products and some quantities
of products. On the other hand, as the products become larger
in quantity or more custom in nature, the dealer’s role may become
less important. In fact, the dealer is sometimes viewed as
an inconvenient buffer between the producer and the user.
What determines whether a dealer is valuable or unnecessary?
Value added.
We
all need to be reminded that the product is more than the contents
of the box we ship out. The product (from the consumer’s perspective)
is also the technical support the customer can reasonably expect,
the warranty, the credit terms, and the host of other intangible
and often unspecified (on the order) features the customer expects
to receive. Dealers offering service and local parts availability
may be adding value to that product, and a company able to offer
those features may have a competitive advantage over a company that
cannot. On the other hand, if a customer needing a part has
to go to a dealer, have the dealer call your plant to order the
replacement part, then later come back to the dealer, pick up the
part, and self install it, what did the dealer contribute other
than a layer of inconvenience that could have been avoided by calling
you directly? It is critical that you understand what your
real customer (the end user) actually wants, and then strive to
offer that product. If your dealer network is
offering something that a significant portion of your market does
not need, you may have to reevaluate your dealers’ role. You
also need to be sure that your dealers are not preventing
you from offering your market what it really needs.
Why
Have a Dealer Network?
Dealers and distributors can benefit your company and your customers
in several different ways.
1)
Dealers are a fast
and relatively inexpensive means to achieve wide distribution for
your product.
2)
Dealers permit
you to focus more on production and concentrate less on developing
and maintaining a sales organization.
3)
Dealers may know
their local market better than you do.
4)
Dealers stock necessary
parts and provide service for your product
5)
Dealers can “demo”
your product.
6)
There are some
products that customers want to purchase in a “shopping” environment.
They want to walk around and look at the selection, not call an
800 number and place an order.
In
short, dealers can add value to your product.
What About “Going Direct”?
A
paradigm shift is occurring with automobiles. Advertisements
promote automobiles that go 100,000 miles without any required dealer
maintenance. If that claim proves true, the customers’ need
for the dealer begins to shift. More reliable and service
free automobiles lessen our dependency on the dealers. This
could open up many new options to the traditional dealer network
for automobile manufacturers. While some people will want
to continue purchasing from a traditional showroom, some of us may
prefer to buy directly from the manufacturer over the Internet,
especially if buying direct saves us some money. Why might
a manufacturer consider a direct channel? Let’s consider some
of the potential benefits:
1)
Increased margins
- Let’s stop talking about cars and consider a lower priced product.
You make a product and sell it through your dealer network.
So does your competition. The product has a retail price of
$500. Your dealers purchase your product at a 50% discount
from retail ($250), and sell it for 10% off retail ($450).
Your production, marketing, and distribution costs are virtually
identical to those of your competition. Your bottom line shows
you making a net profit of 10% ($25.00) per unit. If you were
to sell your product direct at 75% of list price, not only would
you be the lowest priced competitor in the market, you would earn
$250.00 profit per sale instead of $25.00 (a 1000% increase)
- a difference worth considering. Sure, your unit sales might
drop a bit, but you can afford fewer units with margins like that.
Remember, you aren’t in business to make units, you’re in business
to make money. If you chose to lead the prices down, you could
starve out your competition and their dealers while still making
more profit than ever before. If nobody’s dealers are adding
much value to the sale, your direct approach could make you the
only survivor in the market. With luck, your competition would
not be able to set up direct sales and distribution quickly enough,
and your lower retail prices would not leave enough room for manufacturers
and dealers to make adequate profits to justify staying in the game
together. You win.
2)
A chance to
actually sell your product - Your product has
a lot of characteristics, and some of those characteristics, properly
presented by a good salesperson (or advertisement), are valid reasons
for a customer to choose your product, even if it costs a little
more. Ask yourself the question, are your dealers actually
selling your product or are they simply accepting orders for products
your marketing efforts have pre-sold? What extra value has
the dealer added to this transaction? Did you make the product,
and then sell the product with your marketing efforts, only to then
let a dealer take the lion’s share of the profits? Too many
manufacturers are discovering that their dealers are simply taking
orders for products their customers already wanted. You may
not need to lower your price or add features in order to dominate
your market….in too many cases all you need is to start selling
the features your product already has!
3)
Better compete
with small competitors - Your dealer margins may be providing
an opportunity for small competitors to flourish. Let’s say
a national producer establishes fair market value for a product,
and sells through a dealer network. Local (less efficient)
producers sell direct to the end users at a discount. In spite
of their lower efficiency, the small producers maintain the same
(or greater) margins as the larger organization. How?
No dealer. Plus, the local manufacturer has plenty of opportunity
to actually sell his product’s features, and in the process,
obtain valuable customer feedback, helping him improve his product.
4)
Better customer
feedback - Your dealers tell you what you need to know about
the market, right? Maybe. Some dealers will be totally
honest with you, but they can’t tell you what they don’t know, and
the end user isn’t always honest with them. For example, an
end user who is negotiating to get a better price on your product
may make a big issue of certain product “weaknesses” that are actually
unimportant. Feedback from that dealer could cause you to
fix something that isn’t actually broken. On the other hand,
some dealers will send you off chasing your own tail as they blame
their weak sales performance on imaginary product deficiencies when
the real problem can be tracked down to their lack of skill (or
willingness to work) in promoting and selling your product.
5)
Control of the
customer - The end user has the power because the end user is
the only one putting money into the system. Whoever controls
the end user controls the game. If your marketing produces
leads that result in dealer sales, you control the game until you
turn those leads over to the dealer. You can stay in partial
control if you follow up with the end user to make sure they were
serviced properly. If the dealers generate their own sales
leads, you are simply a product manufacturer, they are in control,
and those dealers can make you or any other manufacturer meet their
product feature or pricing demands. Why? Because they
control the customer. Do you choose them to be your dealer,
or do dealers choose you to be their manufacturer? Whoever
controls the end user is in charge.
Free
enterprise is the economic version of survival of the fittest.
If your dealers are adding more to the value of your product than
they cost, they are worth keeping. If not, you may have to
consider other options.
Having it both ways
In
too many cases manufacturers believe they have only two choices,
to go direct or sell through a dealer network. In fact, many
have succeeded in having both distribution channels. Needless
to say, dealers are usually not too excited about competing with
their supplier. This means that you can either compete indirectly
or present your intentions openly and “take the heat”.
Going Direct, Indirectly
You
have several ways to reach customers that may not unduly upset your
dealer network.
1)
You can direct
market a rebranded version of your product line. This keeps
you from competing directly with your dealers, but it also prevents
you from taking advantage of your name recognition and product reputation.
2)
You can sell direct
to a market segment not being addressed by your dealer network.
This is one reason some companies choose to enter new markets, finding
that the cost of entering those markets is more than offset by the
increased margins produced by the direct sales.
3)
You can define
a portion of your existing market as direct sales. This may
be specific large accounts or OEM’s. Although this might upset
the few dealers actually affected, most will be unaffected, and
they will generally continue with “business as usual”. After
all, selling your product is still making them money.
Going Direct, Directly
Sometimes you cannot accomplish your goal of direct sales without
actually competing with at least some of your dealers.
1)
You may open company
stores in areas representing the greatest sales opportunity.
2)
You may sell direct
(perhaps using the internet, direct mail and the telephone) to consumers
that do not need a dealer’s value added services, and refer all
sales that need those services to your dealers. If this move
is made as you increase your marketing efforts, dealers may experience
no decrease in business.
3)
If necessary, you
may establish parts and service centers that do not sell your product
at all, making all of your sales direct to the end user, eliminating
the traditional dealer.
4)
You may improve
your product to reduce the need for dealer parts and service, selling
this new consumer friendly product directly against your competition’s
maintenance intensive unit. If your competition is working
through dealers and you are selling direct, you may be able to offer
this superior product for less money, achieving market dominance
by offering the end user more for less. Combine this new product
with overnight parts delivery and you are a force to be reckoned
with.
How
to Decide, Dealer or Direct?
The
decision is actually easy, it’s the implementation that may be somewhat
challenging. As previously mentioned, free enterprise is the
economic version of “survival of the fittest”. The
question you have to answer is “Do my dealers make my product more
or less “fit” in the marketplace?” You will have to
know your customers, your product, and your competition intimately.
Would your customers rather save some money and forego the services
offered by the dealer? Is it possible that some of your dealers
are only carrying your product in order to get your leads and establish
a price point so that they can more easily sell a (higher margin)
generic competitor?
The
basic mission of any company that wants to win in a competitive
environment is to sell the end users the products they want to buy,
the way they want to buy them. If your customers want
to purchase from a dealer, by all means, establish and maintain
a strong dealer network. If your customers would prefer to
deal with the manufacturer directly, they will, because some manufacturer
will eventually catch on and offer them what they want.
Can
I Start Selling Direct?
What
you want to avoid is a big drop in sales as you switch (totally
or partially) from dealers to direct sales. The first question
you must ask is, how necessary is your product to your dealers?
Even though they are not pleased to see their manufacturers start
selling direct, many dealers will continue to sell the product for
one simple reason - they are in business to make a profit, and the
product serves that purpose. True, they are generally displeased
with your lack of loyalty to your dealer network, but manufacturers
forget that most dealers are only “loyal” to product lines that
are selling well! How your dealers will respond to your new
way of doing business will be determined by their other options
and your market presence.
Disrupting your dealer network is a big step, one that should be
based on a thorough analysis of the market. Moving from a
dealer network to direct selling can take months (sometimes years)
of preparation, sometimes making it impossible for sleepy competitors
to respond before it is too late. While it may be scary to
contemplate such a bold move, it should be even scarier to contemplate
the risk of letting your competition be the first to go direct while
you play the role of the sleepy competitor!
|
