Many B2B products are sold through distribution chains. Rather than buying directly from the original manufacturer, the end user buys from a value-added reseller (VAR), who sources the product through a distributor, who is partnered with the manufacturer. In some cases distribution systems are even more complex, running across as many five or more intermediate stages. Managing these distribution channels is a challenge for many companies: there is channel conflict and internal competition, prices can be distorted, and the end user can be confused by inconsistent or even incoherent messages.
Why is managing these channels so difficult? One reason is that the value created at each stage of the chain can be different and depends on different value drivers. An end user may not care if an offer reduces a distributor’s inventory costs, but the distributor cares a lot. End-user value drivers are relevant to the distributor only so far as they contribute to demand and support prices, and they don’t do this if the end user does not understand or appreciate them. And then there are cases where value drivers reinforce each other. The manufacturer can design its systems to be configurable, a VAR can add value by providing the configuration, and the end-user can benefit from a solution that more closely fits their needs. There is a lot of value being created, but it is much easier to realize that value if it is identified and communicated
Let’s take the example of a piece of communications equipment. The Economic Value Estimation ® (EVE) for the distributor (first image) looks quite different from that of the end user (second image). Both of these figures were created using LeveragePoint for Value Management. This example is simplified of course; only two stages in the distribution system are considered and the value drivers will differ across market segments.
The value drivers for the distributor include things such as having to deal with fewer SKUs (as the system can be configured dynamically it replaces several more specialized but less capable alternatives), and having to carry less inventory. Most importantly, the distributor or value added reseller can add value added services that increase the lifetime value of the customer. More than $5,000 in differentiated value is available over the competitive alternative value of $5,000.
For the end user the most important value drivers are reduced configuration and integration costs and reduced IT costs as well as faster product introductions. These are partly offset by higher base salaries for the people using this more sophisticated system. For this particular customer, this enhanced, dynamically configured system is worth more than twice as much as the competitive alternative. This does not mean that the end user would pay twice as much of course, the additional value gets shared between the manufacturer, the distributor and the end user.
The differences in the EVE are important because they function as much more than just a guide to pricing. The value drivers determine which value messages will resonate with the buyer and value messages need to be based on value drivers. The value drivers are at the heart of a messaging strategy.
This is a challenge for marketing and channel management. The value drivers for the distributor and the end user are different. The value messages for the distributor must be communicated to the distributor but this alone is not enough. The distributor must also be able to understand and convey the value drivers for the end user to the end user. The keys to effective channel management are simple.
- Develop compelling value drivers for each stage of the channel, making sure that there are opportunities for value creation at each stage. When possible, have value drivers reinforce each other along each step of the distribution system.
- Communicate the relevant value messages throughout each stage of the channel, making sure that the messages get to the right person, helping distributors understand and communicate value messages to the end user.
- They are simple to state, but much more difficult to implement, especially if there isn’t a common framework and online platform for marketers to use in developing these value stories. For more information in how LeveragePoint is working with companies to address these issues, please contact us.