Jun
16
Paying for Performance: How Compensation Can Change the Behavior of Indirect Sales Channel Partners
Filed Under Marketing | Comments Off
John Henderson asked:
The “carrot-and-stick” approach to getting results from a sales channel–or paying for performance–is about as old as the practice of paying sales channel partners to represent you in the market.
According to John Henderson, President and CEO of Frank Lynn & Associates Inc., what often isn’t understood by channel partners (dealers, distributors) is that pay-for-performance is also about values–the values of the supplier (to increase margins, to be paid on time) and the expectations of the customer (100 percent satisfaction or one-stop shopping). Channel partners need to understand that they’re being compensated to help you increase margins, grow sales and satisfy end-user customers–not just to sell.
Smart Business talked to Henderson to learn more about this value/performance relationship.
Where should executive managers start in evaluating their sales channel pricing strategy?
Your channel pricing strategy and the individual elements of your channel pricing plan must first be weighed according to the likelihood that they can help you achieve your values and business goals, as well as the expectations of end-user customers.
If channel pricing is not aligned with values and business goals, chances are you’re missing opportunities to use channel compensation to more effectively motivate channel behavior and thereby achieve better financial results in the market.
Can and do all channel pricing programs influence dealer/distributor behavior?
Yes, and be careful what you ask for.
When you use a channel compensation plan to tell your channel partners what to do, chances are they’ll do it. And that includes changing their behavior–for good or for bad–to achieve the results you say you’re compensating them for.
For example, if you tell a channel partner to train all of his sales people on your product lines in order to receive a certain level of compensation, he’ll change his behavior and conduct the training. That’s because distributors are supportive of the concept of investing in capabilities that differentiate them from their competitors and thereby earn them differentiated pricing. It creates a win-win situation: you get more effective sales representation and your channel partner gets the differentiated pricing he wants.
Conversely, if you tell a channel partner he must achieve 15 percent growth in order to receive a certain level of compensation, he’ll change his behavior to do just that. But the change could be for the worse. The sales that are achieved might be at the expense of customer satisfaction, quality orders, receivables and returns. Often, the sales increase represents a shift in volume from one of your other distributors, resulting in flat sales to you, at a lower margin. In other words, the growth you pay the channel partner to generate might be completely contrary to your values and end-user customer expectations.
Are there common “pay-for-performance” practices that suppliers use to motivate channel partner behavior?
Suppliers use a number of incentives or penalties to encourage certain types of channel partner behavior like co-op advertising allowances and specification discounts. Of course, not using incentives or penalties can have the opposite effect by encouraging the channel partner to exhibit the opposite behavior.
Why do suppliers have trouble converting their channel partner discount structures to a “pay-for-performance” program?
First, unless specifically explained, channel partners often do not tie the discount received from the supplier to the activities the supplier has asked them to perform. When channel partners do not see the value in the activities, they focus on the costs of the activities.
Second, many suppliers do not differentiate the desired activities and the relative discount amounts associated with those activities. Channel partners that do perform the desired activities would like to be differentiated/rewarded for their support (versus those that do not perform the activities).
Third, many suppliers do not enforce the activity elements of their compensation systems by taking functional discounts away when they’re not earned. As a result, they pay for performance that is not earned and forfeit the corresponding margin dollars.
Does fine-tuning sales channel compensation help sustain long-term profitability and market share growth?
That’s correct. Carefully planned channel compensation systems do more than reward channel partners to sell. They also consider the values of the supplier and the expectations of the end-user, and they reward channel partners for helping achieve those goals.
In addition, channel compensation systems enforce the activities for which the channels are being compensated by having a mechanism in place to prevent margin dollars from being paid to channel partners that do not earn them.
HARGROVE
The “carrot-and-stick” approach to getting results from a sales channel–or paying for performance–is about as old as the practice of paying sales channel partners to represent you in the market.
According to John Henderson, President and CEO of Frank Lynn & Associates Inc., what often isn’t understood by channel partners (dealers, distributors) is that pay-for-performance is also about values–the values of the supplier (to increase margins, to be paid on time) and the expectations of the customer (100 percent satisfaction or one-stop shopping). Channel partners need to understand that they’re being compensated to help you increase margins, grow sales and satisfy end-user customers–not just to sell.
Smart Business talked to Henderson to learn more about this value/performance relationship.
Where should executive managers start in evaluating their sales channel pricing strategy?
Your channel pricing strategy and the individual elements of your channel pricing plan must first be weighed according to the likelihood that they can help you achieve your values and business goals, as well as the expectations of end-user customers.
If channel pricing is not aligned with values and business goals, chances are you’re missing opportunities to use channel compensation to more effectively motivate channel behavior and thereby achieve better financial results in the market.
Can and do all channel pricing programs influence dealer/distributor behavior?
Yes, and be careful what you ask for.
When you use a channel compensation plan to tell your channel partners what to do, chances are they’ll do it. And that includes changing their behavior–for good or for bad–to achieve the results you say you’re compensating them for.
For example, if you tell a channel partner to train all of his sales people on your product lines in order to receive a certain level of compensation, he’ll change his behavior and conduct the training. That’s because distributors are supportive of the concept of investing in capabilities that differentiate them from their competitors and thereby earn them differentiated pricing. It creates a win-win situation: you get more effective sales representation and your channel partner gets the differentiated pricing he wants.
Conversely, if you tell a channel partner he must achieve 15 percent growth in order to receive a certain level of compensation, he’ll change his behavior to do just that. But the change could be for the worse. The sales that are achieved might be at the expense of customer satisfaction, quality orders, receivables and returns. Often, the sales increase represents a shift in volume from one of your other distributors, resulting in flat sales to you, at a lower margin. In other words, the growth you pay the channel partner to generate might be completely contrary to your values and end-user customer expectations.
Are there common “pay-for-performance” practices that suppliers use to motivate channel partner behavior?
Suppliers use a number of incentives or penalties to encourage certain types of channel partner behavior like co-op advertising allowances and specification discounts. Of course, not using incentives or penalties can have the opposite effect by encouraging the channel partner to exhibit the opposite behavior.
Why do suppliers have trouble converting their channel partner discount structures to a “pay-for-performance” program?
First, unless specifically explained, channel partners often do not tie the discount received from the supplier to the activities the supplier has asked them to perform. When channel partners do not see the value in the activities, they focus on the costs of the activities.
Second, many suppliers do not differentiate the desired activities and the relative discount amounts associated with those activities. Channel partners that do perform the desired activities would like to be differentiated/rewarded for their support (versus those that do not perform the activities).
Third, many suppliers do not enforce the activity elements of their compensation systems by taking functional discounts away when they’re not earned. As a result, they pay for performance that is not earned and forfeit the corresponding margin dollars.
Does fine-tuning sales channel compensation help sustain long-term profitability and market share growth?
That’s correct. Carefully planned channel compensation systems do more than reward channel partners to sell. They also consider the values of the supplier and the expectations of the end-user, and they reward channel partners for helping achieve those goals.
In addition, channel compensation systems enforce the activities for which the channels are being compensated by having a mechanism in place to prevent margin dollars from being paid to channel partners that do not earn them.
HARGROVE
May
12
Growing your Business When your Existing Resellers Won’t Cooperate
Filed Under Marketing | Comments Off
John Henderson asked:
One of the most common sales challenges that companies face is how to overcome the reluctance or inability of some resellers to grow and the resultant “drag” they create on the company’s plan to increase revenues.
John Henderson, President/CEO of Frank Lynn & Associates, Inc., has encountered numerous companies facing the following quandary: how to grow sales by adding new sales channels without alienating existing resellers and risking the current revenue they generate. Many companies take the easy way out–they avoid a confrontation and attempt to fix the existing resellers.
Smart Business asked Henderson to discuss how manufacturers and service providers should address this problem.
What is wrong with trying to “fix” existing resellers to drive new growth?
Trying to fix existing resellers is an option. But if you look at your market dynamics, you will likely find that your end customers’ needs and their buying behaviors have changed, and new channel players have emerged to meet their needs. Sticking with a reseller that no longer satisfies your customers is not a recipe for growth. It is very hard for a reseller to recognize this shift in customer requirements until it is too late.
Can managers take action to help their resellers recognize that changes are occurring?
Yes, but only with a subset of your resellers. Many are independently owned and represent either a first-generation owner who believes he or she is too old to invest and take risks, or a second-generation owner who doesn’t understand the business and/or is reluctant to change. But most companies have a mix of resellers and some can deliver the desired growth. We have a process to classify resellers based on their ability to grow. The categories are:
Self-growing
Growable
Non-growable
What are key characteristics of self-growing and growable resellers?
Self-growing resellers have a business plan that defines how to grow their business. These resellers often are run by entrepreneurs with growth goals that align with the supplier’s goals.
Growable resellers have the desire to grow and are willing to invest, but may need assistance from the supplier to succeed.
If you ask the right questions, you can effectively and accurately categorize your resellers. We use a diagnostic tool for that purpose.
How should a company’s sales force work with these three types of resellers?
While members of the sales team may believe they need to spend time with nongrowables due to poor performance, by definition, it is highly unlikely they will change to help you achieve your growth goals.
The sales force also should limit its time with the self-growing resellers–they will continue to make their contribution and you will go along for the ride.
The best return on your sales efforts will come from focusing on the growable dealers.
If a company does decide to replace a poor performer, how does it minimize the risk?
Several critical steps need to be taken including an assessment of your legal risks in terminating existing relationships. But the most important place to start is by assessing customer needs. This will help define the reseller characteristics.
The risk can be measured as well. Ask the customer this question: “If your existing reseller no longer provided you with our product, would you buy the product the reseller offers, or would you switch resellers to have access to our product?” The answer provides great insight to the risk exposure.
TURMAN
One of the most common sales challenges that companies face is how to overcome the reluctance or inability of some resellers to grow and the resultant “drag” they create on the company’s plan to increase revenues.
John Henderson, President/CEO of Frank Lynn & Associates, Inc., has encountered numerous companies facing the following quandary: how to grow sales by adding new sales channels without alienating existing resellers and risking the current revenue they generate. Many companies take the easy way out–they avoid a confrontation and attempt to fix the existing resellers.
Smart Business asked Henderson to discuss how manufacturers and service providers should address this problem.
What is wrong with trying to “fix” existing resellers to drive new growth?
Trying to fix existing resellers is an option. But if you look at your market dynamics, you will likely find that your end customers’ needs and their buying behaviors have changed, and new channel players have emerged to meet their needs. Sticking with a reseller that no longer satisfies your customers is not a recipe for growth. It is very hard for a reseller to recognize this shift in customer requirements until it is too late.
Can managers take action to help their resellers recognize that changes are occurring?
Yes, but only with a subset of your resellers. Many are independently owned and represent either a first-generation owner who believes he or she is too old to invest and take risks, or a second-generation owner who doesn’t understand the business and/or is reluctant to change. But most companies have a mix of resellers and some can deliver the desired growth. We have a process to classify resellers based on their ability to grow. The categories are:
Self-growing
Growable
Non-growable
What are key characteristics of self-growing and growable resellers?
Self-growing resellers have a business plan that defines how to grow their business. These resellers often are run by entrepreneurs with growth goals that align with the supplier’s goals.
Growable resellers have the desire to grow and are willing to invest, but may need assistance from the supplier to succeed.
If you ask the right questions, you can effectively and accurately categorize your resellers. We use a diagnostic tool for that purpose.
How should a company’s sales force work with these three types of resellers?
While members of the sales team may believe they need to spend time with nongrowables due to poor performance, by definition, it is highly unlikely they will change to help you achieve your growth goals.
The sales force also should limit its time with the self-growing resellers–they will continue to make their contribution and you will go along for the ride.
The best return on your sales efforts will come from focusing on the growable dealers.
If a company does decide to replace a poor performer, how does it minimize the risk?
Several critical steps need to be taken including an assessment of your legal risks in terminating existing relationships. But the most important place to start is by assessing customer needs. This will help define the reseller characteristics.
The risk can be measured as well. Ask the customer this question: “If your existing reseller no longer provided you with our product, would you buy the product the reseller offers, or would you switch resellers to have access to our product?” The answer provides great insight to the risk exposure.
TURMAN
Jan
25
Chicago-based Consulting Firm Shows How Distribution Strategy Leads to Market Share and Revenue Growth
Filed Under Marketing | Comments Off
John Henderson asked:
John Henderson, President/CEO of Frank Lynn & Associates Inc., a Chicago-based consulting firm, agrees that new products and technologies are a definite plus. However, he points out that many seemingly viable new products fail because manufacturers don’t understand the complexities of distribution channels. Henderson also points out that even without a compelling new product, companies can use channel strategies alone to find profitable sources of revenue growth.
Unfortunately, many executives from engineering or sales backgrounds don’t have experience in “channel strategy,” and it’s costing their companies a fortune.
Recently, a large industrial components manufacturer recognized this dilemma. It engaged Frank Lynn & Associates with one major objective presented in the form of a question:
How can we develop an aggressive growth strategy in a mature market to jump start revenue and market share growth?
This client was in the revenue doldrums. They faced new, low-cost competitors, no new whiz-bang products, and relied on stale management solutions that were safe but failed to deliver the needed results. In this environment, management’s revenue growth goals of 11 percent per year seemed unlikely, and maybe even unachievable.
To determine if the growth target was possible, the Frank Lynn & Associates team conducted an evaluation of the company’s product portfolio, competitive situation and its go-to-market strategy. The questions the team asked were:
> Where could the 11 percent per year growth come from? Product tweaks? Geographic expansion? New customer segments? New brands or targeting of new competitors? New channels?
> Where does the company have coverage gaps?
> What are unmet customer needs?
> Where are competitors weakest?
Based on the analysis, the Frank Lynn & Associates team determined that the company had overlooked a few incremental, specialized channels selling to niche markets. Furthermore, many resellers in the core channel cherry-picked the product line, selling competing accessories lines and avoiding slow moving SKUs. Using the framework shown on the next page, the team worked with management to find a consensus approach. The resulting “Change” strategy, if successful, would easily hit the 11 percent target.
While closing the key “Change” gaps became the strategy, the Frank Lynn & Associates team pointed out that the real trick was in the implementation, the so-called “boots on the ground” phase.
Specialized channel partners were not equally dispersed around the country. The same was true of cherry-pickers. According to Henderson, “What our client didn’t fully understand was that yes, they needed a national go-to-market strategy, but achieving their growth target could only be accomplished at the local level.”
The national strategy included a recruitment pitch and incentives for specialized resellers. It also included a redesigned channel compensation program that put more emphasis on full-line sales than sheer volume. However, the strategy lacked specific direction needed for each territory manager and failed to account for local market differences. The client’s salespeople needed to know where to find the specialized channels and cherrypickers.
This need led Henderson and the Frank Lynn & Associates team to the next step in the engagement. “We used our proprietary Territory Share Assessment (TSA) tool to build a bridge between the national strategy and the client’s local market characteristics,” Henderson says.
The TSA tool is designed to help companies get detailed data for revenue, market share, and market coverage by channel type and by customer segment. The TSA involves:
> Interviews with key resellers (your own and competitors’) in selected local markets
> Interviews with a sample of target end-user customers in the same local markets
> Identification of new (specialized) resellers to fill gaps, or existing resellers to target with new programs (e.g., anti-cherrypicking programs)
> The development of local market models to predict conditions in other geographic regions (for example, the ratio of a certain type of customer to a certain type of reseller)
One of the key “aha” experiences for management occurred when they discovered that many of predicted gaps existed in some of the largest markets and among the largest distributors. On its face, this was bad news. However, when you’re trying to grow 11 percent in a mature market, the bigger the gap, the bigger the opportunity for growth.
Faced with the actual data, management found the conviction to green-light a complete reallocation of marketing and distribution resources.
Staffing and budget were applied in some sales channels and geographic markets that previously had received little attention. At the same time, some regions that were previously considered over-funded got even more funding if the data supported the case. Sales territories, compensation and goals were adjusted to focus on the specialization and cherrypicking behavior. Similar programs were instituted at the channel level.
The local market data created a strong internal focus. Programs were carefully coordinated throughout the product, market and sales organizations–teams that had previously worked on their own agendas.
What were the results?
In the client’s first major geographic target market, the market research and analysis identified two new sales channel partners that should be pursued. “We worked with management to successfully establish a new relationship with these distributors, and the client realized immediate sales and market share growth that would not have occurred otherwise,” says Henderson.
Management forecast incremental revenues in the first local market of $750,000 in the first year. However, they hit that target in nine months from the date Frank Lynn & Associates first delivered its “Change” recommendations.
The team led the client through the local market process in two separate territories. During that time, they formalized the process steps, defined the internal and external information requirements and trained key client personnel to lead the implementation program in all remaining important territories.
Henderson concludes that the key to success is first designing the big-picture, national go-to-market strategy and then designing a program that can translate the strategy into local market tactics–where the actual growth occurs.
Who is Frank Lynn & Associates?
Frank Lynn & Associates is the leading consulting firm in field of channel or go-to-market strategy according to clients who simply refer to the company as “The Channels People.” The company is based in Chicago, but operates internationally with offices and affiliates in London, Sao Paulo, Brazil, and Beijing. The firm focuses on helping manufacturers achieve sustainable, profitable growth through a wide variety of channel and end-user programs.
With proprietary tools like its TSA approach, and over 30 years of focused sales channel experience, the firm brings a data and market-driven emphasis to decisions that many companies typically make on the fly.
What are the next steps?
One of the things that many clients appreciate about Frank Lynn & Associates, beyond its marketing “technology,” is its willingness to try before you buy. The company offers a limited number of free, half-day consulting sessions to potential clients who are willing to come to Chicago. According to Henderson, “You buy from people you trust, from people that seem like they speak your language. The half-day session not only helps us understand the client’s problem and explain our approach, but allows both of us the see if the right chemistry exists.”
GAILES
John Henderson, President/CEO of Frank Lynn & Associates Inc., a Chicago-based consulting firm, agrees that new products and technologies are a definite plus. However, he points out that many seemingly viable new products fail because manufacturers don’t understand the complexities of distribution channels. Henderson also points out that even without a compelling new product, companies can use channel strategies alone to find profitable sources of revenue growth.
Unfortunately, many executives from engineering or sales backgrounds don’t have experience in “channel strategy,” and it’s costing their companies a fortune.
Recently, a large industrial components manufacturer recognized this dilemma. It engaged Frank Lynn & Associates with one major objective presented in the form of a question:
How can we develop an aggressive growth strategy in a mature market to jump start revenue and market share growth?
This client was in the revenue doldrums. They faced new, low-cost competitors, no new whiz-bang products, and relied on stale management solutions that were safe but failed to deliver the needed results. In this environment, management’s revenue growth goals of 11 percent per year seemed unlikely, and maybe even unachievable.
To determine if the growth target was possible, the Frank Lynn & Associates team conducted an evaluation of the company’s product portfolio, competitive situation and its go-to-market strategy. The questions the team asked were:
> Where could the 11 percent per year growth come from? Product tweaks? Geographic expansion? New customer segments? New brands or targeting of new competitors? New channels?
> Where does the company have coverage gaps?
> What are unmet customer needs?
> Where are competitors weakest?
Based on the analysis, the Frank Lynn & Associates team determined that the company had overlooked a few incremental, specialized channels selling to niche markets. Furthermore, many resellers in the core channel cherry-picked the product line, selling competing accessories lines and avoiding slow moving SKUs. Using the framework shown on the next page, the team worked with management to find a consensus approach. The resulting “Change” strategy, if successful, would easily hit the 11 percent target.
While closing the key “Change” gaps became the strategy, the Frank Lynn & Associates team pointed out that the real trick was in the implementation, the so-called “boots on the ground” phase.
Specialized channel partners were not equally dispersed around the country. The same was true of cherry-pickers. According to Henderson, “What our client didn’t fully understand was that yes, they needed a national go-to-market strategy, but achieving their growth target could only be accomplished at the local level.”
The national strategy included a recruitment pitch and incentives for specialized resellers. It also included a redesigned channel compensation program that put more emphasis on full-line sales than sheer volume. However, the strategy lacked specific direction needed for each territory manager and failed to account for local market differences. The client’s salespeople needed to know where to find the specialized channels and cherrypickers.
This need led Henderson and the Frank Lynn & Associates team to the next step in the engagement. “We used our proprietary Territory Share Assessment (TSA) tool to build a bridge between the national strategy and the client’s local market characteristics,” Henderson says.
The TSA tool is designed to help companies get detailed data for revenue, market share, and market coverage by channel type and by customer segment. The TSA involves:
> Interviews with key resellers (your own and competitors’) in selected local markets
> Interviews with a sample of target end-user customers in the same local markets
> Identification of new (specialized) resellers to fill gaps, or existing resellers to target with new programs (e.g., anti-cherrypicking programs)
> The development of local market models to predict conditions in other geographic regions (for example, the ratio of a certain type of customer to a certain type of reseller)
One of the key “aha” experiences for management occurred when they discovered that many of predicted gaps existed in some of the largest markets and among the largest distributors. On its face, this was bad news. However, when you’re trying to grow 11 percent in a mature market, the bigger the gap, the bigger the opportunity for growth.
Faced with the actual data, management found the conviction to green-light a complete reallocation of marketing and distribution resources.
Staffing and budget were applied in some sales channels and geographic markets that previously had received little attention. At the same time, some regions that were previously considered over-funded got even more funding if the data supported the case. Sales territories, compensation and goals were adjusted to focus on the specialization and cherrypicking behavior. Similar programs were instituted at the channel level.
The local market data created a strong internal focus. Programs were carefully coordinated throughout the product, market and sales organizations–teams that had previously worked on their own agendas.
What were the results?
In the client’s first major geographic target market, the market research and analysis identified two new sales channel partners that should be pursued. “We worked with management to successfully establish a new relationship with these distributors, and the client realized immediate sales and market share growth that would not have occurred otherwise,” says Henderson.
Management forecast incremental revenues in the first local market of $750,000 in the first year. However, they hit that target in nine months from the date Frank Lynn & Associates first delivered its “Change” recommendations.
The team led the client through the local market process in two separate territories. During that time, they formalized the process steps, defined the internal and external information requirements and trained key client personnel to lead the implementation program in all remaining important territories.
Henderson concludes that the key to success is first designing the big-picture, national go-to-market strategy and then designing a program that can translate the strategy into local market tactics–where the actual growth occurs.
Who is Frank Lynn & Associates?
Frank Lynn & Associates is the leading consulting firm in field of channel or go-to-market strategy according to clients who simply refer to the company as “The Channels People.” The company is based in Chicago, but operates internationally with offices and affiliates in London, Sao Paulo, Brazil, and Beijing. The firm focuses on helping manufacturers achieve sustainable, profitable growth through a wide variety of channel and end-user programs.
With proprietary tools like its TSA approach, and over 30 years of focused sales channel experience, the firm brings a data and market-driven emphasis to decisions that many companies typically make on the fly.
What are the next steps?
One of the things that many clients appreciate about Frank Lynn & Associates, beyond its marketing “technology,” is its willingness to try before you buy. The company offers a limited number of free, half-day consulting sessions to potential clients who are willing to come to Chicago. According to Henderson, “You buy from people you trust, from people that seem like they speak your language. The half-day session not only helps us understand the client’s problem and explain our approach, but allows both of us the see if the right chemistry exists.”
GAILES