Profitable Channel Management: What Questions Should You be Asking?
Are your channel programs costing you share and profit?
Frank Lynn
& Associates has observed an interesting similarity among our clients
recently, particularly those in traditional mature markets. These clients have
realized they are managing a current channel strategy based on outdated channel
programs. Often through benign neglect, these programs have failed to keep pace
with both market evolution and changes in the manufacturer's channel strategy.
When did you last review your channel programs?When most manufacturers think of channel programs, the focus immediately turns
to economics; the channel pricing structure and other elements of the economic
relationship with your channel partners. Most manufacturers have done a good job
of keeping their channel pricing current with the channel strategy. However,
your channel programs go well beyond the economics--they impact virtually every
element of your channel relationships. In this paper, we review the elements of
a well crafted channel program, and address some common questions we hear
manufacturers asking today regarding those programs.Q. What is a
channel program?The most actionable definition of a channel program
includes all the formal written and stated elements of your channel
relationship. The program goes well beyond just a contract or a pricing
structure--it defines all aspects of your relationship with the channel. As
such, the program becomes the "recipe book" from which to manage your channel
relationships.The common elements of your channel program
include:
>
The contract or legal framework for your channel
relationship
>
Your price/discount structure and all related economic
policies
>
Any sales/marketing or merchandising/promotions
offered to the channel or through the channel to the end user
>
Technical requirements of the channel and a
description of your technical support offering to the channel
>
Policies and procedures outlining the operational
relationship with your channel (including order transaction and movement of
productA formal channel program, as described
above, provides structure to the channel relationship. It provides clear
direction to your channel partner regarding the channel's role and what you
value. It outlines the process and metrics you will use to evaluate your
channel's performance. It also assures the channel partner objectivity in its
dealings with you.Q. What are the components of a successful
channel program?The components you choose for your channel program will
be unique based on the needs of your target end user and the role you'd like
your channels to play in meeting those needs. However, our experience shows that
the most effective programs share a broad set of common elements. Envision your
channel program as a series of "chapters."AgreementThis
chapter defines, in general terms, the conditions under which you and your
channel partner agree to do business together:
>
The contractual agreement of a defined scope and time
frame; the most effective agreements specify a time period (usually 1-3 years)
to the channel authorization. The intent here is obviously not to change out
channel partners frequently. Rather, the defined timeframe provides a basis for
regular review of the relationship
>
The general definition of channel responsibilities;
while these responsibilities will be spelled out in detail later in the channel
program, the contract of agreement provides some insight into your expectation
of the channel
>
A statement of your distribution policy; are you going
to offer your distributor exclusivity? Will you have multiple channels serving a
defined geography or market segment? This can be spelled out
through
>
A description of the "primary area of responsibility"
or authorizedterritory for the channel
>
Reference to the products that the channel is
authorized to represent for you
>
An outline of the process for review of the
relationship, business planning goal setting and forecasting; you should set
expectations that there will be regular performance reviews. The specific
metrics can be spelled out later in the channel program
>
A basis for termination of the
relationshipPricing/EconomicsThe
purpose of this paper is not to explore the nuances of a channel pricing
structure. However, a section of your channel program should outline in detail
that economic relationship. All program elements that affect how money changes
hands between you and the channel are captured here:
>
Your price/discount and channel compensation
structure
>
Policies for price changes and any price protection
for the channel
>
Payment terms and freight policies
>
Invoicing/billing procedures
>
Other items, including warranty reimbursement,
rates/policies, minimum order quantities, product discontinuance policies,
etc.Sales/MarketingIt is critical
that you tailor this chapter to the needs of your target end user. The reason
you have authorized a channel partner is to help acquire and retain your
customers, and this section of your program outlines in detail what you expect
of your channel to do so. It is this section of your program that defines how
and to what degree your channel invests in the sales and promotion of your
product (as well as the consequence should your channel partner fall short of
your expectations). Common elements included in the sales/marketing chapter:
>
Detailed channel requirements for sales representation
and a basis for measurement of each; do you expect the channel to employ
inside/outside sales dedicated to your line? What are the capabilities expected
in these individuals?
>
Product line-specific sales/marketing investment; what
additionalinvestments/capabilities of the channel are important to you? How
does the channel qualify for each? And what support do you offer to assist
thisqualification?
>
Sales training--Will you certify your channel
partner's sales force? What training is required to qualify, and what benefit
accrues to the channel partner for achieving this certification
>
Advertising/co-op--Is there a mandatory investment by
your channel partner? How do you support this through a coop program, and what
is the administration for this program?
>
Merchandising/point of purchase--Is merchandising
relevant, and if so, do you put any parameters around the way your channel
partner merchandises your product?
>
Literature and collateral materials--Does the channel
partner need literature and collateral material? To what extent do you make this
available and/or charge for it?
>
Trade shows--Is the channel partner expected to attend
and/or display at trade shows? How many and which ones? Will you make display
materials available?
>
Lead generation/qualifications--Will you supply leads
or expect the channel partner to develop these? Are there any reporting
requirements to follow-up and qualify leads you
provide?TechnicalThis is
particularly important if your channel participates in a technical selling
scenario or adds technical value-add on your behalf; spelling out the technical
elements of your channel relationship helps ensure the consistency of support to
your end user. Typical technical requirements address:
>
A detailing of the technical knowledge/capability
expected of the channel sales force, along with your basis for measurement; this
may tie back to the way you train or certify the channel sales organization. You
may also specify background of the channel partner's technical sellers (for
example, engineeringdegrees/experience)
>
Technical support elements provided by you to the
channel including:
>
Training--Do you offer training to the technical
support organization within your channel partner? For repair/service? For
aftermarket technical support? Etc.
>
Demo units/material--Are demo capabilities required as
part of the selling process for your target customers? If so, what investment do
you expect the channel to make in terms of demo materials/capabilities? (For
many products, this shows up as a significant investment in samples. In other
cases, it may be a fully equipped product/system demonstrationsite.)
>
Reference sites--Is it important that your channel
partner has available a number of reference sites? What are the specifications
for such a site, and are there guidelines for enlisting these references?
>
Application data base/application support--What
applications support is required by your end users? Will you provide a
centralized database, or are your channel partners expected to create their
own?
>
Warranty--What is your warranty and what is the
channel's role inwarranty administration? What is the policy to process
warranty
claims?Operations/LogisticsThis
section of your channel program focuses on the efficiency of your relationship
with your channel by outlining policies and procedures that allow you and your
channel partner to fulfill the order at lowest possible cost. This area is the
one that should be most often updated to assure your policies keep up with
changing technology that allows for efficient operations. It includes:
>
Order process definition--What are the alternatives
for your channel partner to place orders, and what information is available to
allow the partner to track order progress?
>
Order expediting/rush shipments/"specials"--Under what
conditions do you accept each, and what are the economic penalties (if any)
associated with each?
>
Minimum inventory requirements--Do you place minimum
inventory requirements and what is the rationale for each? How will you "audit"
or measure the channel's adherence to these requirements?
>
Product lead time/fill rates--To aid in the channel
partner's inventory planning; can you specify your lead times by product
category?
>
Return goods policy--Under what conditions will you
allow your channel partner to balance inventory by returning goods? Through what
process and at what cost to the channel?Q.
Why is it important to offer the channel a current and effective
program?In two words, "mind share"--an effective channel program can
keep you "top of mind" to your channel partner by providing a range of benefits
in the relationship. A channel program sets the ground rules for
your channel relationship; expectations are clearly spelled out across all
functions of the channel's business. Just as importantly, you set expectations
for what the channel can expect of you in each of these functional areas.
Obviously, this puts a spotlight on your performance, or lack thereof, in living
up to these promises.A channel program provides a basis for
evaluation/measurement of the performance of both parties to the relationship.
The most effective programs become "living documents" that can be referred to
frequently while managing the channel. By understanding which areas of the
program are being delivered and where the channel is falling short, you can
tailor your conversation/support to the individual distributor to directly
address areas of weakness and non-performance.The channel program
acts as a "how to do business guide" by going beyond a basic agreement or
contract and spelling out policies and procedures in detail. This should help
cut down on those calls you receive that are strictly clarification of a
process. Our experience has consistently shown that channels are drawn to
manufacturers that are both predictable and easy to do business with. A "how to
do business" manual supports these qualities.The channel program
creates a context for consistency and discipline in your channel management
efforts. Through formalization of ground rules, policies/procedures and channel
qualification requirements, you will reduce the "deal making" that often occurs
in the field. This is likely to lead to efficiency (cost saving) in your channel
management and serve to reduce the channel conflict that is often an out growth
of deal making. The channel program provides legal protection for
both parties by taking ambiguity out of the relationship and out of the
interpretation of performance.Q. How effective is your channel
program today?Frank Lynn & Associates has created a simple audit
process to measure the relative effectiveness of your channel programs. Based on
our extensive experience in this area, the audit will provide you guidance in a
number of areas:
>
How effective is your program?
>
What elements appear to be particularly effective? Or
ineffective?
>
For what elements of your program should you consider
changes? And why
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About Article Author

Carl Cullotta, Vice President and Principal of Frank Lynn & Associates directs the firm’s building and construction practice group. He has managed numerous engagements with global companies during his 22 years with the firm.
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