December 2001
 

BY SAMUEL SHAPIRO AND MICHAEL KELLY

New technologies, customers, and influencers mandate a shift in channel roles in the converging voice and data market. Today, suppliers in the industry are focused on determining the "right" distribution channels for the converged space by determining the behavior customers want and expect. Next, they ask the most capable channels to step up to these tasks. But how do suppliers motivate their chosen channel partners in an environment of conflict, competition, and convergence?

With the growth of IP telephony, traditional voice channels are challenged by the increasing influence of data buyers in voice decisions. Manufacturers must recognize this shift and recognize that both data and voice channels are attempting to add a whole new set of products and services. Suppliers are faced with two basic choices:

• Motivate traditional voice partners to deal with new buyers and technology.
• Work with new partners -- such as the data channel -- that are more familiar with a data buyer and IP technology, but unfamiliar with the voice customer's needs and requirements.

Frank Lynn & Associates recently worked with the Telecommunications Industry Association (TIA) to complete a channels benchmarking report, Profitable Convergence: Roots, Paths and Predictions for Evolving Channels, to articulate models for both traditional voice-centric and data-centric channel companies to transition their companies to handle convergence. Much of what channel partners need for these transitions to occur smoothly does rely, in part, on what the manufacturer is doing to accelerate the stages of channel evolution.

This transition of channels, customers, products, and services increases risk and adds not only new challenges for channel partners, but also for manufacturers. Manufacturers must develop strategies and programs to motivate new or evolving channels to provide value-added services and satisfy customers without misapplying sales, marketing, or other resources and without giving away excessive discounts, commissions, terms, or programs.

Suppliers must fully utilize the tools that are available to them to select appropriate channel partners and motivate their behavior. Before developing strategies, it is critical to understand underlying market dynamics that dictate channel relationships. These factors include the channel's "window," the product's role in the channel, brand power, and market competition.

THE CHANNEL'S "WINDOW"
The channel's "window" represents the type of customers that your partners tend to support. A sizeable amount of a supplier's business is based on the territories covered and markets reached through their channel partners. So, if your channel partner calls on business/institutional customers, and you need them to support consumers, you're not going to be able to reach the objectives you originally intended to meet through your channel program. As a supplier, you know that channels develop business models that support selling to certain customer segments far more efficiently than to others. Those that are most effective in one customer segment will most likely have difficulty being effective in another.

As the convergence of technology leads to more and more product overlap between voice and data products, a key factor in channel motivation will be whether your channel partners see and can support the new solution buyer. Results from the TIA benchmarking report referenced earlier suggest that a channel partner selling a new product or service to a new customer can incur costs up to 12 times the cost of selling an existing product or service to an existing customer. But, in the long run, the ROI from moving outside the traditional customer space can outweigh the costs incurred, if the transition is done correctly.

THE PRODUCT'S ROLE IN THE CHANNEL
Take a hard look at your product or service's role in the channel. Remember, dealers, distributors, and VARs do business with hundreds, if not thousands, of vendors. The lead product or category within the channel will attract mindshare. Other suppliers will face greater challenges. If your product dominates the channel, you'll have tremendous influence on behavior. However, if you are an ancillary, a secondary, or a tertiary product within the channel's business, your programs won't get as much attention, and it will be difficult to motivate channel partners to invest in technical training, sales training, and other types of support.

A traditional voice manufacturer may be viewed as a secondary or even a tertiary supplier to a large data VAR that historically hasn't focused on selling voice products. On the other hand, your product may be viewed as an important new way to differentiate the same VAR from the competition. One of the greatest challenges associated with transitioning to a converged channel business model is helping the channel partner see the differences in profit margins associated with both voice- and data-centric organizations, and suggesting ways for these channel partners to benefit from the emerging opportunities in their non-traditional space.

BRAND POWER AND MARKET COMPETITION
Manufacturers must recognize variations in brand power that exist from one channel to another. A solid brand reputation translates into pull-through with the end user; this strength puts suppliers in a position of relative power. If you "own" the marketplace like AT&T did in the early days and end-users are specifying your brand, you can offer less in order to influence desired behavior.

Dominant players in the market (ones that capture a 40 percent share or greater) can dictate the terms, conditions, programs, and structures for compensating channel partners. However, in a more fragmented marketplace, each suppler is relatively equal in the eyes of the channel. That is, until one of them tilts the scale by making its channel program less financially attractive or simply too cumbersome.

Competitive position has a major impact on the economics of channel motivation. For instance, if you're in a highly competitive industry, you can only differentiate channel pricing, rebates, or commission levels by small amounts. However, if you are the market leader with a highly dispersed channel, you can differentiate compensation by significantly more to really generate the desired behavior change.

THE "BALANCED EQUATION"
Effective motivation is dictated by balanced relationships between manufacturers, their channel partners and end users. Manufacturers cannot give away too much nor can channels work effectively if they are not realizing an adequate return. Frank Lynn & Associates characterizes an effective relationship between manufacturers and channels as a "balanced equation." In other words, do your channel offerings, including volume pull, support, and compensation align with what you expect your channels to provide in return? The equation must be balanced to ensure a strong working relationship.

Financial return is the most important part of the equation. Look at how you, as a supplier, economically compensate your channels. Analyze this in terms of revenues, margins, and costs. If your product or service drives a high portion of the channel's financial contribution, you can influence channel behavior through small changes to your compensation structure. On the other hand, a product or service that doesn't generate a significant financial return may have little impact on behavior. Consider the costs that you cause your channels to incur on your behalf. Suppliers chip away at their influence when their own business models drive up their channel's costs through inadequate fill rate, complex programming, order processing errors, or other factors.

On the "give" side of the equation, consider non-price elements such as technical training, support, co-op advertising, special private invitation functions (SPIFs), merchandising assistance, marketplace information, and credit terms. Findings from the TIA's channel benchmarking report demonstrate that channel partners need their suppliers to provide options to help them offset the costs of investing in convergence. The non-price elements cited above, for example, are important components in your offer that illustrate to the channel partner that you are committed to giving them ways to drive costs out of their relationship with you. Also consider freight terms, return policies, and any other advantages you provide the channel. Compare this to what you expect in return from your dealers, VARs, and distributors. Do your "gives" justify your anticipated "gets" from the channel in terms of inventory investment and order volume? What about market presence and value-added services? All of these factors must be considered in the overall relationship. Motivating channels requires a holistic approach that goes beyond pricing, commissions, and rebates.

When considering the equation, what differentiates you, as a supplier, from your competitors? It may be that you offer a larger commission to your channel partners. But it's more likely a combination of compensation and other benefits you provide, aligned with your overall strategy and market position. It is also useful to determine what differentiates high-performance channel players from their competitors. This will help you determine which partners to do business with, and provide a basis for differentiating your offerings among multiple channels.

SUMMARY
To compete in today's converging market, it is critical to select and motivate channel partners to effectively meet customer needs. First, however, you must assess the underlying factors that determine channel behavior. Understanding these factors -- the channel's window, product's role, brand power, and market competition -- will provide the context for the relationship that you require with your distribution channels. You can then develop the necessary balanced relationship on both sides. This groundwork will enable you to effectively select and efficiently motivate channels to work with you as a supplier and to satisfy the needs of the customer.

Samuel Shapiro leads the Pricing and Compensation practice for Chicago-based channel and market strategy consulting firm Frank Lynn & Associates, and he contributes to TIA's channel partner programming. Michael Kelly is a Principal specializing in high-technology markets. Frank Lynn & Associates is a TIA member company. For more information on the TIA/Frank Lynn channel benchmarking report referenced, please contact TIA at (703) 907-7472 or gemd@tia.eia.org. The company's Web site is www.tiaonline.org. 

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