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 These clients have realized that they are managing a current channel strategy based on outdated channel programs.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 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 designated 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 / proposals 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 product
A formal channel program, as described above, provides a 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."
This 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 authorized
territory 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 relationship
Pricing / Economics
The 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 reimbursements, rates / policies, minimum order quantities, product discontinuance policies, etc.
Sales / Marketing
It 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 invites 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 additional
investments / capacities of the channel are important to you? How does the channel qualify for each? And what support do you offer to assist this
> 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 contractual materials — Does the channel partner need literature and contractual 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?
This 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 / capacity 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, engineering
degrees / 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.
> Reference sites — Is it important that your channel partner has 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 in
warranty administration? What is the policy to process warranty claims?
Operations / Logistics
This 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 secure 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 penalies (if any) associated with each?
> Minimum inventory requirements — Do you place minimum inventory requirements and what is the rational 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?