Optimizing Channel Compensation

Overview

Distributors and their manufacturer partners are being asked to bring new value to the supply chain. Customers require new services and innovative products to move to the next level of competitiveness. For manufacturers, these innovative products are experiencing a shorter lifecycle. To be efficient, they must create new offerings and get them up the growth curve faster than the competition so that economies of scale can be captured before the product drops to commodity status.

For the distributor, the challenge is more complex. They must assist the supplier in new product development through more advanced and targeted market intelligence and spearhead an advanced rapid deployment to get the product to market. This requires an ever stronger sales and marketing capability directed at supporting the supplier. Distributors have traditionally spread their sales efforts across many, often competing manufacturers to hold down costs. A focused effort requires new skills and more resources.

Customers, meanwhile, are showing less interest in this process and even pushing back on the distributor’s outside sales efforts. To combat this disturbing trend, distributors are seeking closer customer relationships where the distributor’s customer contact personnel are viewed as adding value to the customer (consultative selling). The customer, however, continues to put pressure on the distributor’s margins demonstrating a poor appreciation of the value these new services are providing. The result has been an increased need for distributors to seek compensation from suppliers and find new ways to be compensated directly by customers (fee for service). The transition is causing channel disruptions.