The “carrot-and-stick” approach to get-
ting results from a sales channel — or
paying for performance — is about as old as the practice of paying sales channel partners to represent you in the market.
According to John Henderson, president
and CEO of Frank Lynn & Associates Inc.,
what often isn’t understood by channel partners (dealers, distributors) is that pay-for-performance is also about values — the values
of the supplier (to increase margins, to be
paid on time) and the expectations of the
customer (100 percent satisfaction or one-stop shopping). Channel partners need to
understand that they’re being compensated
to help you increase margins, grow sales and
satisfy end-user customers — not just to sell.
Smart Business talked to Henderson to
learn more about this value/performance
relationship.
Where should executive managers start in
evaluating their sales channel pricing strategy?
Your channel pricing strategy and the
individual elements of your channel pricing plan must first be weighed according
to the likelihood that they can help you
achieve your values and business goals,
as well as the expectations of end-user
customers.
If channel pricing is not aligned with values and business goals, chances are you’re
missing opportunities to use channel compensation to more effectively motivate
channel behavior and thereby achieve better financial results in the market.
Can and do all channel pricing programs
influence dealer/distributor behavior?
Yes, and be careful what you ask for.
When you use a channel compensation
plan to tell your channel partners what to
do, chances are they’ll do it. And that
includes changing their behavior — for
good or for bad — to achieve the results
you say you’re compensating them for.
For example, if you tell a channel partner
to train all of his sales people on your product lines in order to receive a certain level of
compensation, he’ll change his behavior and conduct the training. That’s because distributors are supportive of the concept of
investing in capabilities that differentiate
them from their competitors and thereby
earn them differentiated pricing. It creates a
win-win situation: you get more effective
sales representation and your channel partner gets the differentiated pricing he wants.
Conversely, if you tell a channel partner
he must achieve 15 percent growth in
order to receive a certain level of compensation, he’ll change his behavior to do just
that. But the change could be for the
worse. The sales that are achieved might
be at the expense of customer satisfaction,
quality orders, receivables and returns.
Often, the sales increase represents a shift
in volume from one of your other distributors, resulting in flat sales to you, at a lower
margin. In other words, the growth you pay
the channel partner to generate might be
completely contrary to your values and
end-user customer expectations.
Are there common ‘pay-for-performance’
practices that suppliers use to motivate
channel partner behavior?
Suppliers use a number of incentives or
penalties to encourage certain types of
channel partner behavior like co-op advertising allowances and specification discounts. Of course, not using incentives or
penalties can have the opposite effect by
encouraging the channel partner to exhibit
the opposite behavior.
Why do suppliers have trouble converting
their channel partner discount structures to a
‘pay-for-performance’ program?
First, unless specifically explained, channel partners often do not tie the discount
received from the supplier to the activities
the supplier has asked them to perform.
When channel partners do not see the value
in the activities, they focus on the costs of
the activities.
Second, many suppliers do not differentiate the desired activities and the relative discount amounts associated with those activ-
ities. Channel partners that do perform the
desired activities would like to be differentiated/rewarded for their support (versus
those that do not perform the activities).
Third, many suppliers do not enforce the
activity elements of their compensation systems by taking functional discounts away
when they’re not earned. As a result, they
pay for performance that is not earned and
forfeit the corresponding margin dollars.
Does fine-tuning sales channel compensation help sustain long-term profitability and
market share growth?
That’s correct. Carefully planned channel
compensation systems do more than
reward channel partners to sell. They also
consider the values of the supplier and the
expectations of the end-user, and they
reward channel partners for helping
achieve those goals.
In addition, channel compensation systems enforce the activities for which the
channels are being compensated by having
a mechanism in place to prevent margin
dollars from being paid to channel partners
that do not earn them.
JOHN HENDERSON is president and CEO of Frank Lynn &
Associates Inc. Reach him at [email protected] or
(312) 558-4828.