Treating Channel Partners Strategically

Channel partners can be either barriers or enablers for you interacting with end customers.

Channel partners are a type of intermediary which assist with one or many of the commercial operations of a supplier: sales, marketing, logistics, etc.

What is the purpose of a channel partner?

The core tasks of customer engagement can be broken into five categories:

• Inform: the market must be aware that an offering exists. Branding, advertising, and communication are all key tasks under inform.
• Interact: someone must physically or digitally interface with your customers. That includes explaining the value proposition, developing sales materials, and engaging the customer, for example
• Transact: getting the deal done. This may include price negotiation, completing a contract, and processing payment information.
• Deliver: the process of getting the product from the supplier to the customer. Especially for physical goods, someone must hold inventory in advance, breaking bulk amounts into the proper transaction size, and the actual logistics behind final delivery.
• Service: includes all support that occurs after the completion of a given order. Customer service and technical support are both aspects of this category, as are customer success and account management.

These tasks may be done by the supplier or by a third party. Those third parties are channel partners.

Common examples of channel partners include wholesalers, distributors, and retailers. All of these activities are necessary tasks for a functioning commercial organization. If the supplier doesn’t do one of these tasks, a channel partner must. Conversely, if a channel partner doesn’t, the supplier must.

Who should do what? That comes down to who can do each function most efficiently. If a channel partner can provide a service more efficiently than your organization, it is a better use of resources for it to do so. A startup selling an advanced new product may find it useful to outsource many of its channel functions, such as payment processing and logistics. However, it may choose to keep customer service in-house if the company is uniquely positioned to help customers with its own product.

Channel partners, of course, must be compensated for the value they provide. Each of the five channel functions comes at a cost. Critically, the reward channel partners receive should be commensurate to the value provided. That may seem obvious, but I regularly come across companies who cannot articulate why exactly they are ceding large amounts of margin to channel partners.

Not infrequently, when I ask clients what tasks their distributors are performing, what value they’re adding to the market, I’m met with blank stares. I get variations on “we have to use them”, “that’s just how the industry works”, “we’ve always used them”.

But if distributors are adding little value while capturing a large percentage of product margin, your company may be able to do better without them.

If channel partners are not providing value, your company should look for ways to remove them from your commercial operations. Just as good channel partners can make your job easier, bad ones can make it much harder.

In my upcoming book, The New Invisible Hand, I will explore this issue in depth. For now, let’s look at a prominent example of a company that has eschewed its industry’s conventional wisdom for channel partners and carved out its own path.

Case Study: Tesla

“It’s OK to have your eggs in one basket as long as you control what happens to that basket.” – Elon Musk

Tesla is revolutionary not only for being the first all-electric car company, having the first US automotive IPO since Ford‘s in 1956, and creating fantastic vehicles, but also for overturning the traditional manufacturer-dealership distribution model.

Starting from scratch gave Tesla the opportunity to assess aspects of the automotive industry which were taken for granted or seen as impossible to change. Tesla looked at the dealership model and decided it could perform those channel partner functions better on its own.

One stumbling block: by law, car manufacturers must sell through dealerships. This is only one of many legal protections given to dealerships by every state in the US. While the details may vary from state to state, the baseline is manufacturers cannot sell direct to customers. Channel partners are mandatory.

Tesla is a company of the digital age and therefore thinks in terms of digital-first. So, it takes a unique approach to the functions traditionally done by dealerships. Let’s look at how Tesla handles each of the five activities:

Inform: Tesla utilizes online presence, word of mouth, heavy press coverage, and showrooms in major cities to inform customers about its value proposition. An electric car is most useful in heavily populated areas that can provide the charging infrastructure needed to keep the car moving, Tesla has already decided that its target customers aren’t in hard to reach areas that could benefit from a branded dealership every twenty miles. Additionally, traditional dealerships built around the sale and service of gas engine cars probably aren’t the most natural evangelists for electric vehicles.

Interact: Again, Tesla is largely comfortable utilizing digital resources for customer interaction. Its product innovation draws the type of customer they want to attract in the first place. Tesla is a select brand, so it counts on customers self-selecting for those who are willing to come to it on its own terms. In major cities, again, there are showrooms to view and test drive cars, because there is no substitution for in-person when it comes to a large purchase like a vehicle. Whereas dealerships tend to be in the outskirts of urban areas and have large car lots, these showrooms are centrally located and utilize a small store footprint, saving on cost and contributing to the urban and elite brand perception.

Transact: In most states, Tesla is not allowed to sell its cars from its showrooms. Interested customers purchase their car through Tesla’s website. Tesla recognizes that in today’s economy, customers are more and more comfortable making such large purchases online. Some states do allow Tesla to sell a limited number of vehicles directly, and more are reevaluating their existing laws, so expect to see some change here in the next few years. Regardless, Tesla will continue to transact with its own customers through its own website and its own showrooms.

Deliver: One of the big benefits of a dealership is the car you purchase is sitting right there. In most cases, when you buy a Tesla, you’re not going to see the car soon, let alone drive it off the lot. “Ordering your Tesla is just like any buying experience on the Internet,” according to the Tesla page dedicated to answering what must be a common question. When your car is ready, it will either be shipped to your home or to the nearest Tesla service center. This is a very big break from how people are used to buying vehicles, but not a change from how many people order most other items. It also saves on the cost of holding inventory which may or may not sell.

Service: One of the major channel roles dealerships play is in servicing vehicles. Usually, most or nearly all profits come from the service departments, not car sales. If your Ford or Toyota has an issue, odds are that wherever you live in the US, there is a Ford or Toyota dealership nearby who can help.

If your Tesla needs a repair, where do you go? An average mechanic isn’t going to have the familiarity, let alone the extra parts, to service the car adequately. As mentioned above, Tesla does has service centers.

(Existing Tesla service centers as of November 2018)

In large swaths of the country, you have a long way to drive to find a repair. As of November 2018, there are 79 Tesla service centers in the US. By comparison, Ford has over 3,000. While Tesla plans to open more as it moves into more mass-market vehicles, it would have a long way to go to reach that kind of footprint. But if its corporate and customer acquisition strategies don’t require it, why bother?

Takeaway

In total, we can see how Tesla decided its goals wouldn’t be served by a dealership model. Instead of taking the industry’s organization around dealerships as table stakes, it figured out how to cut dealers out completely and save the channel margin for itself.

What about your industry’s channel structure are you taking as given?