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“If only we could get distribution … we’d have it made.”

I hear this anxious declaration regularly. Particularly from manufacturers and software vendors. I’ve even heard it from a number of musicians!

Manufacturers want representation from agents or retailers. Software vendors want to establish relationships with resellers. And musicians want representation from a record label.

But in each case, this declaration can indicate a potentially dangerous misunderstanding of the dynamics of the distribution channel. And there’s an important lesson in this for all of us – even those who sell direct!

I usually have two comments for those who are having trouble getting distribution:

  1. An inability to get distribution is probably symptomatic of a bigger problem.
  2. And, if this is the case, it is better to avoid making a commitment to a reseller (I’ll use this as a generic term) – even if such an opportunity arises.

Before we examine this ‘bigger problem’, let’s take a look at the role that resellers play in the distribution process.

Why resellers typically don’t sell

Let’s imagine a typical retailer for a moment. The kind of retailer you’ll find in any shopping centre. Picture, say, a music retailer.

Now tell me this … what contribution does our music retailer make to the ‘value chain’ that stretches from an artist (with a guitar, a microphone and a bad attitude) through to the fan, (who willingly exchanges $29.95 for the artist’s compact disk – and for the rights to play it, only in the privacy of her home or car)?

It would be fair to say that the music retailer’s contribution to this value chain is the ‘sale’ of the artist’s compact disk, right?

Wrong!

The reality is that this music retailer doesn’t add value by ‘selling’, at least in the true sense of the word. The retailer’s most important contribution is the provision of a distribution point – or a ‘point of presence’.

If you’ve ever spent time in a music store, you’ll know that staff members spend most of their time simply operating the cash registers. Even those more progressive music stores, with listening stations and staff with specialities in particular music genres, still generate more revenues from Britney Spears CDs than they do from the sales of CDs from lessor-known artists.

Now this distinction applies to most resellers. They don’t actually sell: they provide a point of presence. The real selling is done higher up the value chain. Or, to put it another way, they don’t sell because they don’t have to. The customer has already been ‘sold’ when she sets foot in the store.

However, there are some resellers that do sell – and who are good at it. And these – believe it or not – are the resellers of which we should be very wary!

Why you should be glad that most resellers don’t sell

If we stick with retailers for a moment, an example of a reseller that does sell is a hairdresser.

Consider, for a moment … which brand of shampoo do you purchase when you visit your hairdresser?

The one he offers you, of course!

You don’t select your favourite brand from a crowded shelf (as you would in a supermarket), do you? Of course not. Your hairdresser makes that selection for you. And, odds are, he provides you with a ‘premium’ (hairdresser-only) brand, of which you’ve never heard.

So far, I’ve managed (at great length) to explain that some resellers sell – and that some don’t. You might be excused for thinking: so what!

Well, here’s the thing: whoever does the selling in a value chain, owns the customer relationship, and …

Whoever owns the relationship with the ultimate customer sets the terms!

That’s right, the participant in a value chain with the most power is generally the one who does the ‘selling’.

Our manufacturer gains distribution and locks-out his competitors

Now let’s return to our anxious manufacturer, software vendor and musician, and examine the real problem each faces — and the opportunity that this problem provides.

We’ll look at our manufacturer’s situation first.

Assume that our manufacturer has developed a technically superior product (a chainsaw, perhaps). He’s trying to convince hardware stores to stock this tool.

To his dismay, hardware stores appear to have little interest in his product’s technical attributes. Even though they seem to be at a loss for any logical argument as to why they shouldn’t represent his chainsaw, they simply fail to write a purchase order.

While this scenario makes no sense from our manufacturer’s perspective, it’s understandable when we consider what we’ve just learned about typical resellers.

Because a hardware store’s primary role in its value chain is to provide a point of presence, it doesn’t have a lot of sales infrastructure. Without the sales infrastructure required to ‘make a market’ for a new product, this new chainsaw isn’t an attractive proposition – regardless of its technical attributes. It’s far easier for our hardware store to simply promote the best-selling brand.

So what should our manufacturer do?

Well, he has two choices:

  1. He can look for a retailer with the ability and the desire to ‘make a market’ for his chainsaw.
  2. Or, he can accept responsibility for ‘making the market’ himself.

While the first option may appear initially to be attractive, he should approach it with caution.

You see, if he delegates responsibility for ‘making a market’ to a reseller, the contribution he makes to his value chain is limited to his product’s technical superiority. And more often than not, technical superiority is not a sustainable competitive advantage.

This fact is graphically illustrated in James Dyson’s brilliant autobiography, Against the Odds. James Dyson invented the enormously successful Dyson (bagless) vacuum cleaner. In spite of its groundbreaking technical superiority, Dyson struggled for years to get distribution for his vacuum cleaner. In the process, he was almost bankrupted by a long-running court case with Amway Corporation. He had been attracted to Amway by their market intimacy. However Amway backed-out of negotiations at the last minute, stole his trade secrets and designed a copycat product! (Fortunately, Dyson won his court case and was awarded significant damages – including an ongoing royalty stream.)

Our manufacturer’s second choice is to accept responsibility for ‘making a market’ for his chainsaw.

He would do this by running promotional campaigns designed to drive customers to hardware stores, asking for his brand of chainsaw.

If he can successfully accomplish this, he will enjoy the following benefits:

  1. If only one or two customers request his brand of chainsaw, retailers will fall over themselves to stock his product. We’ve already discovered that retailers find it easier to supply the brands that their customers request.
  2. Once hardware stores sense that this new product is hot, they will start making it easier for customers to purchase our manufacturer’s product than they do his competitors’. They’ll do this by giving our manufacturers’ product premium shelf (and catalogue) space. (Of course, this is the basis of retail ‘category management’.)
  3. If our manufacturer uses appropriate direct marketing techniques (e.g. couponing) to ‘make a market’ for his product, he will probably be able to build a database of existing and potential customers. He will then be able to use this database to drive demand (and distribution) for his future products.

So, by assuming responsibility for ‘making a market’, our manufacturer easily gains distribution and locks-out his competitors.

Software vendor discovers that resellers’ dependence is an asset

Our software vendor’s situation differs in only two subtle ways from that of our manufacturer:

  1. His resellers are service providers (rather than product vendors). Accordingly, they tend to have a more intimate relationship with their customers (remember our hairdresser example.)
  2. Because of software’s rapid development cycle, his product’s technological advantages are likely to be even more transient than those of our manufacturer.

Both of these factors make our software vendor’s contribution to his value chain more tenuous than our manufacturer’s.

Therefore, he should be even more wary of delegating the role of ‘market maker’ to his reseller network.

It would be tempting for our software vendor to consider bypassing this reseller network altogether and sell direct. However, this approach has three shortcomings:

  1. Speed and expense. It will take a lot of time and money for our software vendor to replicate the reseller network’s infrastructure (their points of presence).
  2. Market access. Existing relationships between resellers and customers are likely to lock our software vendor out of some segments of the market.
  3. It’s not his thing. Our software vendor’s stakeholders are likely to take a dim view of his investing their capital in non-core infrastructure. (For an innovator, research and development and market making are core activities. Logistics isn’t!)

Our software vendor’s distribution strategy should be similar to that of our manufacturer.

As well as working hard to maintain his technology leadership, he should take responsibility for ‘making a market’ for his software. He should do this by building the marketing infrastructure required to provide his reseller network with a steady stream of sales opportunities (qualified leads). (You can review our article on Relationship-centric Marketing for an outline of how to go about building such infrastructure.)

Obviously, if our software vendor is in a position where he can provide a steady stream of sales opportunities, he will have no trouble gaining an audience with resellers.

The reality is that resellers are generally strong when it comes to maintaining existing customer relationships — but weak when it comes to establishing new relationships.

If our software vendor can provide resellers with new relationships (in the form of sales opportunities) he will win the (current and future) business from these relationships, but he will also unlock the value resident in his reseller network’s existing client base.

Unfortunately, this thinking is counter-intuitive for many software vendors — and for many other organisations that utilise a distribution channel comprising service providers.

Just recently, I had a conversation with a software vendor who advised me that he was looking for ‘resellers who could generate their own sales opportunities’.

I advised this vendor that, if I were him, I would be encouraging my reseller network to become dependent upon me for sales opportunities. Long-term, this dependence is an asset, not a liability!

Musician must learn to be a ‘market maker’

Whilst it may seem strange to group musicians with manufacturers and software vendors, there are some important parallels.

Typically, musicians (and authors) are keen to delegate the role of ‘market maker’ to record companies (or publishers).

Of course, this is not necessarily in the best interests of the musician’s bargaining position.

Interestingly, both record companies and publishers give preference to talent with existing followings. While this may weaken their bargaining position, they view it as a risk management tactic.

Unfortunately, musicians fail to recognise the opportunity that this provides for them. They complain that it is ‘impossible to gain a following without a record company — and impossible to get “signed” without such a following’.

This is simply not true.

INXS, which, at one time, was one of the world’s biggest selling rock bands, amassed an enormous following prior to being signed to Polygram. In fact, in the year preceding their signing, they played an incredible 300 live performances!

Do you think they came to the negotiating table with bargaining power? I suspect so.

The same is true of many best selling musicians (and authors).

You sell direct?

Organisations that sell direct can also learn from these examples. Too often, we come across organisations where the responsibility for ‘making a market’ has been delegated, in its entirety, to the sales team.

In such a situation, we typically find the following problems:

  • Salespeople are difficult to recruit, almost impossible to manage, and difficult to retain.
  • Salespeople own client relationships — meaning that, if salespeople leave, clients often follow.

While salespeople should obviously be responsible for negotiating sales, they shouldn’t be responsible for the generation of sales opportunities.

The moral in all of these stories is that you delegate total responsibility for selling (or, as we like to say ‘making a market’) at your expense.

If you’ve been bemoaning the ability of your distribution channel (or perhaps even your salespeople) to sell, stop and be thankful.

Therein lies an opportunity for you to strengthen your strategic position.

Home Forums Why resellers don’t sell, and why you should be glad they don’t!

This topic contains 4 replies, has 3 voices, and was last updated by  Jw 1 year, 7 months ago.

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  • #26183 Reply

    Robin Slater

    Justin,
    This is a very different take on resellers. I have always held the position that resellers provide a value however articulating that value has remained elusive. You have very eloquently defined the reason as to the why and how they can be useful. More interesting to me is what I have felt for many years regarding manufactures if they are not creating leads for the distribution channel they provide less value for the distributor. Distributors who have a robust marketing arm who drive leads are really the market makers and manufactures play less of a role.

    #26186 Reply

    Robin. True. And with geographic proximity becoming less and less important to customers, it’s worth periodically reevaluating whether or not distributors are actually necessary.

    #26599 Reply

    Peter Caputa

    Your argument is spot on and eloquently stated. I’ve never seen anyone spell it out this clearly. Nice work.

    If you’re looking for an example, I believe that we did this at HubSpot effectively. I started the reseller program as a nights in weekends project a few years after we started the company. But, our CEO reluctantly allowed me to start it as he and our CMO both had grown up in orgs where they felt too reliant on channel partners, just like you explain. (You can read the story in this Inc Article that was published when we first made the Inc 500.) The board and the management team felt strongly that we should stay focused on our direct channel.

    That focus has – somewhat counter-intuitively – allowed us to grow the channel. Why? Just like you say above, we have always been in a position to refer business to our channel partners because we have a massive funnel of direct leads, opportunities and customers that we can direct their way. In addition to having a superior product to our competitors (especially for agencies offering a full range of digital marketing services to mid-market companies), this flow of referrals keeps them dedicated to our platform. Very few of our 2900 (last reported 2/10/16) partners represent or bother learning anything about our competitor’s products.

    In order to funnel opportunities to partners efficiently and fairly, we actually created a system that rewards our top partners with these referrals via co-marketing activities. They must earn these privileges through our tier program by achieving and maintaining certain success metrics. The success metrics primarily measure the success of the customers they are helping – which we can measure via our software since it’s SaaS. There is also a small annual resell quota they must maintain, but it’s a fraction of the retention quotas they must maintain. This keeps their focus on providing quality services, but also maintaining some sales velocity.

    As a result, we produce approximately 40% of our net new revenue (last reported 2/10/16) from our channel partners. We don’t report how many of our direct customers work with partners, but it is a relatively big number too.

    In short, having a strong marketing presence and direct sales channel creates deal flow for our partners, which we in turn leverage to motivate the right behaviors among our channel partners: retention and net new adds.

    Let me know if I can ever help you drive this point home with any non believers, Justin.

    #26631 Reply

    Jw

    Peter, slightly off subject I know. But how important in your view is it to maintain a view of the end user that your dealer is doing business with. I mean for each order they place involving our goods.

    I accept that if the dealer is selling from stock then this is unrealistic. I am wondering mainly for referrals and orders that they are delivering direct to the end user.

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