Sales Models In Business Markets With Complex Customer Chains
We have often described “major customer relationships” and “third-party channel relationships” as two of the most frequently observed characteristics of the business-to-business environment. Major customers, ones that often buy millions of dollars of products and services spanning multiple product lines and applications around the world, are the norm for suppliers whose customers make products such as cars, airplanes, telecommunications equipment, and appliances. It is not uncommon to find billion dollar customer relationships in such industries. Channel relationships, involving distributors, dealers, wholesalers, integrators, and other such organizations, are similarly the hallmark of other business-to-business environments, such as those involving repair parts for most of the products cited in the earlier list and for suppliers who serve contractors and other small businesses among their clients.
What is also common is the situation in which a firm has both situations simultaneously – a mix of very large customers and very significant channel partners. We have observed that mix on numerous occasions, often with the exact same mix of products and services being sold into both environments. A medical products firm had huge relationships with several major hospital chains and also sold its products into the offices of local physicians through several distributors serving the health care industry. A major automotive parts manufacturer sold its products to the globe’s largest carmakers and also sold them to the garages at which repairs were completed through various wholesalers across the country. A packaging supplier sold its products to the nation’s largest franchise chain and also to individual diners in cities throughout the country through various food service distributors. The examples involving a mixture of major customers and channel relationships are numerous and span virtually every business-to-business market.
On some occasions, the situation is even more complex, as the channel partner itself qualifies as a “major customer” of the supplier. In two of the examples above, this was the case. The health care products distributor and the food service distributor did so much business with the suppliers involved in the relationships that they ranked high on the list of “big customers” for the supplier, slotting in among the large hospital chains and the national restaurant franchises that were served directly. Even though the end customers served through these channel relationships were individually quite small, there were so many of them that the channel partner through which they were served attained the major customer status.
One organization with which we have worked faced this type of business environment. Their end customers were diverse, from the Global 100 through local Mom and Pop operations. Their own offerings were equally diverse, from highly-engineered products that had been customized to a particular application to other products that were commodities fifty years ago. The question that they felt was the key to their continued growth was identifying the right sales model to enable success in each of their markets. Their concern was not uncommon; another firm with whom we’ve worked even gave the label “Voicemail 666” to messages from customers who were seeing competing offers for the firm’s products from the various channels through which it went to market.[1] Along with the key question of defining the appropriate sales model for various customers and market segments, we often find that there are high levels of conflict between suppliers and their channel partners in situations in which some end customers are served directly while others are served through the channel partner.[2] Such conflicts can threaten success for both organizations.
Sales Models and Customer Chain Partners
Our approach to solving the challenge facing such organizations is rooted in an understanding of what is important to the customers who are the final users of the products and services in question. We have found that it is possible to quantify the importance to these end customers of two distinct categories of services.
First are product-specific services, those that are closely associated with the physical product manufactured by the supplier in question. Such services often involve design, customization for a customer’s particular application, engineering modifications, testing, commissioning, quality assurance, training in the use of the product, support related to upgrades and successive generations of technology, and other examples of services that are unique to a particular product technology, product application, or business environment.
The second category of services is distribution-related services, those associated with logistics and support to the eventual user of the product. Among the services often included in this category are order and fulfillment management, availability of a broad product line to allow low-cost purchasing, record keeping, inventory and expediting, finance and billing, returns and disposal, and other user support. More often than not, such services span multiple products from multiple manufacturers. In many instances the services involve the integration of a family of products from different suppliers into a functioning system that delivers performance in accordance with end customer requirements.
When the importance of services within these two categories is understood, it is possible to define the appropriate business model through which a customer or market segment should be served. We have identified three primary sales models that business-to-business suppliers can use to go to market as a function of this assessment. One model is a “Supplier Direct” model not involving any channel partner intermediaries, a second is a “Supplier Driven” model involving distributors or other channel intermediaries within which the supplier takes the lead role in end customer relationships, and the third is a “Channel Driven” business model involving distributors or other channel intermediaries within which the channel partner takes the lead role in end customer relationships[3].
We find that choices across these business models can be defined by considering the two service dimensions discussed above, as depicted in the following diagram:
Supplier Direct relationships are most likely to be successful in situations in which the end customer has significant needs for product or technical support. A Supplier Driven business model, involving distributors or other channel partners, is most appropriate in situations in which the supplier’s technical-know how is of paramount importance, but the end customer also values services from channel partners (e.g., the distributor’s expediting competencies, a dealer’s service department, or the breadth of products offered by a wholesaler). A Channel Driven business model, involving distributors in the lead sales and relationship roles, is most appropriate in situations in which the end customer does not require much in the way of support for the product, but where prompt delivery, credit terms, dependable product availability, or other such distribution services are critical.
These guidelines are quite operational for most firms, as they can typically sort out the labyrinth of customer chain segments and identify which ones fall into each category. Selecting the appropriate business model and implementing it through decisions on authorizations, bundling, and pricing can ensure that the customer chain participants are effectively guided and rewarded for providing the services that are valued by end customers. In the following sections, we provide a number of examples of the successful application of this model.
Applications
Situations in which product-related services are the only services of significant value and situations in which distribution-related services are the only services of significant value are frequently found in the OEM and service parts business-to-business markets. The OEM environment involves ingredients or modules supplied to an original equipment manufacturer – a carmaker, a computer manufacturer, a machine tool builder, or a manufacturer of some other type. These OEMs typically value the types of services that can best be provided by the supplier itself, as the OEMs are often looking for next-generation product improvements, solutions that involve the specific application of the supplier’s product in the OEM’s equipment, or other contributions. In the repair and replacement parts markets, the services of most importance to end customers are availability of the parts in a timely manner. In that the end customer is basically “replacing a broken Part X with a new Part X”, there is only a minimal requirement for product-related services and support. The two environments into which essentially the same part would be sold are thus on quite different points on the diagram, as shown in the figure below:
In this environment, the supplier must manage two very distinct types of service delivery. In the OEM environment, the services required are closely associated with the product and its use. Such services are typically best provided through direct relationships with the end customers involved. In the repair parts environment, the services of importance are those mostly associated with low-cost, timely product availability. Such services are typically best performed by distributor organizations. The supplier must therefore develop and manage two distinct customer chain segments and ensure that its key decisions (e.g., direct technical support, distributor authorizations) are focused explicitly on the appropriate service environment.
A different situation exists with respect to business environments in which the supplier’s offer involves a combination of equipment and consumables that are used within the processes embedded in the equipment. One example we have observed involved a major piece of diagnostic equipment involving state-of-the-art technology sold into the hospital environment. This use of this equipment involved “consumables” that had to be replenished almost daily. The expertise of the equipment manufacturer was critical at the time of the initial purchase, with the manufacturer’s team spending months at the hospital, doing commissioning, training, and integration of the equipment into the hospital’s technology environment. Subsequently, the hospital’s requirement was for on-time, in-full delivery of the daily requirement for the consumables used in the tests done on the equipment. Along with this example in the hospital environment, we have observed examples involving packaging equipment, automotive test equipment, and fastener tools. Such situations involve service valuation such as depicted in the figure below:
If the end customer is to realize value from the supplier’s offering, it is necessary that the supplier provide product-related services and distributor-related services. This requires supplier involvement and distributor contributions. The two organizations must be effective in working together, must have clarity as to each organization’s roles and responsibilities, and must be able to coordinate their efforts as partners and not as competitors.
While these two examples are clear when considered one at a time, what often happens is that both situations co-exist in a tangle of intertwined customer chains. All of a sudden, the logic of a supplier direct relationship for OEM parts, a Supplier Driven strategy for equipment and consumables, and a Channel Driven strategy for repair parts can become confused, and two organizations working together could start to think of “the business” rather than “a mix of businesses”. There is a constant challenge in such situations to ensure that the business and relationship models designed correctly for each situation remain clear and are not confused in the mixing bowl of complex business-to-business relationships.
For one of the largest business units in the one of the client organizations we described earlier in this paper, we identified six market segments in which it participated, and, through interviews with the customer organizations involved, developed a scoring system for the relative importance of product-specific services and distributor services within each of these six segments. This analysis is reflected in the figure below:
In this example, there were segments across the spectrum with respect to both groups of services. Remarkably, the pathways into the market were poorly aligned with this assessment. Direct sales were the norm in four of the segments, including one in which product-specific services were viewed as having very limited importance and distribution services were viewed as highly important. Distributors were authorized to sell the product line represented by the bubble to the far left of the diagram to end customers that placed little value on distribution services and that signaled the critical importance of product-specific services. Other inconsistencies were plentiful. Those outcomes were the natural result of “least common denominator” and “one size fits all” rules that evolve in environments in which complex customer chains get entangled. The firm involved began a journey of sorting out the complexities by focusing on the service requirements of the individual segments within which it was doing business.
As firms manage their customer chains in order to match their sales model to customer valuation, many have realized that there were some critical environments within which they had to have a “seat at the table” with customers. The combinations for which this was true were those in which product-specific services were critical to success. In these environments, successful organizations have implemented strong strategic account and service delivery organizations, ones that were able to build close, cross-functional relationships through which they were able to deliver high-value services to their customers. Firms must rethink their customer chains to take into account the factors that are critical to success with their customers, and strategic accounts should to be largely defined by the extent to which success depends upon the delivery of high-value product-specific services.
Another gain that firms can realize involves their perspective about third-party participants in its customer chains. It is often the case that the internal mindset of an organization about its channel partners was that these third-parties are, at best, a necessary evil, and, on other occasions, competitors threatening success with critical end customers. When authorizations of channel partners are linked to their competency in providing distribution services that are critical to end customers, this perspective can change and channel partners can become valued partners within the firm’s “family”.
Summary
Complex business-to-business markets often require a combination of sales models, which, over time, can become confused and create conflict at every stage of the customer chains that are involved. In such situations, the firms involved can see a deterioration of revenues and profits, and also find that they must consume a significant level of resources in problem solving and dispute resolution. A resolution of this challenge can result from a categorization of the services that are critical to success in each end customer market segment. Such a categorization can be straightforwardly translated into decisions as to whether a Supplier Direct, Supplier Driven, or Channel Driven sales model is most appropriate. Once customers and market segments are correctly classified, the firm can then focus its energies on the offerings and relationships through which its efforts will be translated into success with customers and rewards to shareholders.
[1] Atlee Valentine Pope and George F. Brown, Jr., Voicemail 666, SBusiness, Fall 2007.
[2] Atlee Valentine Pope and George F. Brown, Jr., Realizing Shared Successes in Co-Destiny Relationships, Velocity, Second Quarter 2004.
[3] Atlee Valentine Pope and George F. Brown, Jr. Supplier-Driven and Channel-Driven Business Models, Blue Canyon Partners, Inc., © 2006.
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