Don’t cancel the distribution too quickly
Sellers say the distribution of value brought to the go-to-market equation is shrinking, but the reality is much more nuanced.
By Larry Walsh
At a recent Channel Focus conference, a survey of attendees – mostly line managers and other professionals – revealed a perception that distribution is increasingly less effective in contributing to vendor distribution strategies and retailers. marketing operations.
They asked me what I was thinking.
The question of the value and effectiveness of the distribution is a good one – but only if this is the first time someone has asked it. Since I started working in the chain, I have heard this question countless times. It is often preceded or followed by a proclamation that the days of distribution are numbered – if they have not already expired.
The recent wave of consolidation at the distribution level is fueling the perception of the decline in distribution. Synnex bought Westcon. Avnet sold its distribution business to Tech Data, which was acquired by private equity firm Apollo Management. Chinese conglomerate HNA Group bought Ingram Micro and then sold it to another investment group, Platinum Equity. DCC Technology bought Stampede, creating what is now Exertis. And then, more recently, Apollo merged Tech Data with Synnex. There are many other M&A transactions beyond these notable ones.
Suffice it to say that a lot has happened in the past few years. All of this is evidence of decline because, as everyone knows and history proves, large companies in increasingly competitive but worthless market segments combine while going through the agony of death.
So when these chain managers asked me my opinion on why distribution is losing its value, I stopped and asked them: what makes you believe this?
The value of the distribution is always questioned because it is an additional cost in the go-to-market equation. Many in the canal often refer to the two-level structure. The first level is the reseller or the partner who interfaces with the customer. The second level is the distributor, who acts as a facilitator of various activities between the manufacturer, supplier, seller and partner.
In fact, however, to call this “two tier” marketing structure is a misnomer, because we’re talking about hops more than tiers. The real problem is the number of steps it takes to go from supplier to customer. With many cloud computing services, you don’t have any jumps at all: the customer can interface directly with the provider. With other models (managed services, for example), you have a lot of hops between source and customer, as Managed Service Providers often need to source technology from multiple vendors and distributors.
The complexity becomes even greater as more tech companies rely on independent software vendors to fill functionality and value gaps with complementary offerings.
The thinking of many vendors and channel leaders is simple: Take distribution out of the equation, because it’s less and less of a necessity in the cloud-based, service-centric world, and you’ll save money. .
If it was only true.
The reason distribution exists in the first place is that its absence costs sellers more to enter the market. In the old days, when Tyrannosaurus 386 walked the chain, distributors were essential in bringing PCs, servers, network hardware, and software on floppy disks and disks to market. Without their warehouses, processing centers and logistics, suppliers would have to invest in a sprawling fixed-cost infrastructure to bring their products to market.
By creating aggregation points, the cost of bringing products to market was shared among multiple companies. Thus, distribution reduced the cost of sales for sellers and preserved the margin.
The other thing that distributors did – and still do – was effectively manage the channel and take the edge off partner management. They took charge of partners without a direct relationship with suppliers and acted as the channel bank.
Distributors buy products from sellers. They resell products to partners. Through credit terms and financing vehicles, distributors make it easier for partners to buy and allow suppliers to recognize revenue even when the partner has not paid. This model also mitigates vendor risk against bad accounts and non-payment.
By managing the unmanaged channel, distribution allows smaller or lower volume partners who are not eligible for supplier partner programs to engage in product sales. Serving partners, distributors, in many cases, enable them to achieve higher levels of performance.
Are these functions disappearing now as more vendors move to the cloud and adopt digital service models? Not necessarily.
The distribution is contextual, especially when it comes to geography. Try to sell anything in Laos, Turkmenistan or Botswana without distributors. In small and remote markets they are an absolute necessity, as they are the only ones that can handle complex import / export requirements and support low volume partners where a supplier is unlikely to ever put boots in the field. .
While it’s easy to highlight all of the M&A activity in the two-tier marketplace, the ambitions and transformation of distributors often go unnoticed and underestimated. When I pointed out the professional service capabilities of many distributors who mimic global systems integrators, one channel manager was in disbelief. “Really!” he said. “I did not know that. I’ll have to check this out. “
By the way, if you want to see a dispenser turn red, tell them these words: “I didn’t know you did that.”
As distributors like to say, they are more than picking, packaging and shipping. They are the developers of market routes and whole new classes of problem solving solutions. Distributors have invested and continue to invest in professional services capabilities, cloud computing management systems, service infrastructure and delivery mechanisms, application distribution and management, and Internet of Things packages.
Distributors do not wait lazily for their demise. They evolve to meet current market expectations and the anticipated future technological needs of suppliers, partners and end customers.
Now, on the other hand, distributors bear some responsibility for this perception of declining value.
Despite investments in transformation, they still tend to lead the way with their legacy models and value propositions. They still offer many of the same basic and value-added services that they have offered in the past. And they tend to rely on the same incentive tools today that they did with their legacy models. Distributors can dispute these claims, but this is how they are viewed by suppliers – as shown by the Channel Focus poll.
At the same time, they are facing fierce competition, namely cloud, automation and markets. Even though companies in these regions do not offer the same things as distribution, suppliers need to look and compare.
Before devaluing or rejecting the distribution of their go-to-market equation, suppliers should answer some questions:
- Can you access the markets, partners and customers you want without distribution?
- What will you have to do differently when you don’t have a distribution?
- What investments will your business need to make to replace distribution?
- What is the total cost of ownership or the long term cost of these investments?
- Is the replacement cost of distribution higher or lower than the cost of working with distributors?
If the answer to these questions is in your favor, marketing without a distribution may be the way to go. Sellers should not engage in any avenue of market entry or activity that is not producing – or has the potential to produce – a positive return.
Here’s the bottom line: Distribution has a lot of value and can play a vital role in a vendor’s marketing strategy. So don’t be so quick to write off the cast until you have fully explored what it means to you and your business.
Larry walsh is the CEO, Chief Analyst and Founder of Channelnomics. He is an expert in developing and executing channel programs, disruptive sales models and growth strategies for companies around the world. Follow him on Twitter at @lmwalsh_CN.