(by Frank Hurtte) Let’s talk about selling. More specifically, let’s discuss selling technical products – products that possess unique features differentiating them from the competition.
Further, let us define precisely what we mean by selling. There are several definitions of types of selling. This example illustrates the two most radically different types of selling:
Further comparing the two types of selling
Distributors specializing in transactional (only) selling generally carry multiple brands of the same product. This “one-stop shopping” is advertised as a customer convenience; however, this works similarly to Walmart’s approach to selling colas. When a customer walks into their local mega-center the company does not care if they buy Coke, Pepsi, RC, or some other brand. Further, this approach also leads to “house brands” like Wally Worlds Sam’s Choice Cola.
Amazon is another excellent example of transactional selling. There is no need to walk into a store when you can open your phone or laptop and be instantly connected to Amazon. Again, if the customer knows what they want, products can be purchased. And like Walmart, Amazon doesn’t much care which product is selected as long as the purchase comes from Amazon.
At both Walmart and Amazon, companies are offered opportunities to grow their sales for a fee. If you happen to sell a generic product, it might work. For example, at Walmart soft drink makers pay to have their product “featured” as you walk into the store and sometimes pay to offer deep discounts which are used to drive sales and sometimes to talk consumers into making an extra trip. Similarly, Amazon offers manufacturers/sellers the ability to upgrade their accounts to designate their products as “featured,” thus giving the seller more visibility.
The same rule applies to “commodity-like” products and distributors. If a customer wants a common product where the brand is not a consideration, they ask for it, sometimes using industry slang, and the customer service representative provides a price and delivery.
When distributors carry multiple brands of a commodity product, the smartest salespeople sell (using a generic form of the word) the brand/product which creates the greatest gross margin. It is possible for a manufacturer to temporarily increase unit volume by dropping these margins. The issue becomes, most manufacturers do not carefully calculate the increase necessary to offset the loss in margin. Further, in time other credible competitors adjust their price making gains difficult.
Who sells the product?
To answer this question, let’s further break down distributor selling. Virtually every selling component is described below. (If you have other points, send them along and we will add them!)
Mostly transaction activities
Advanced transactional activities
Active selling activities
Sales activities cost money for the distributor
Each of these activities costs money. If the distributor does not provide the activity, then the onus falls onto the manufacturer. Somebody pays – it’s just a matter of who ends up with the bill.
Sadly, most distributors have done a poor job of tracking the expenses tied to each of these activities. Based on observations within the study of distributor association profit benchmarking reports, the “active selling” tasks require a gross margin percentage that is approximately 30-32 percent higher than “transactional selling.”
Contrasting distributor types to see the need for higher margins
In the industrial sector, distributors operating in Electrical Distribution (members of the National Association of Electrical Distributors – NAED) and Automation Distribution (members of the Association for High Tech Distribution – AHTD) often sell to similar customer sets. The primary difference comes in the types of products sold, with NAED members selling a higher percentage of “commodity-like” products.
NAED members generally sell more replacement products to End Users in MRO environments. Many of the transactions involve replacing a component that arrived in their manufacturing facility on a piece of machinery. The customer usually knows the part number and description of the replacement part. Even if the product is not a commodity, the selling effort is still largely transactional.
AHTD distributors, who tend to focus on new OEM applications and more technologically complex end-user needs, engage in more active selling. While they do sell some replacement parts, the majority of their business is focused on active sales.
Profit Benchmarking Reports tell the story
Both AHTD and NAED participate in profit benchmarking. Data from these indicate the typical gross
margin for an AHTD member is approximately 26 percent while the typical NAED member reports a gross margin hovering around 20 percent.
Armed with this data, one could expect the bottom-line profitability of AHTD members to be substantially higher than that of NAED members. However, the reports indicate the profit margin percentages for the groups to be approximately equal, pointing to an increased cost of sales activities.
What this means for manufacturers
Manufacturers must understand the difference between transactional and active selling. While many manufacturers have created tiered distribution plans with terms like “market makers,” “market servers,” and other types of categorizations, the strategies appear to have failed.
In a special report generated after nearly 20 in-depth interviews with highly focused active selling distributors, we arrived at these conclusions:
The problem is many times the situation is not black and white – there are hundreds of shades of gray. Even the previously mentioned companies have salespeople probing into other types of business. This creates issues. Here are some problem points made by the distributors interviewed:
If this type of distributor can get an SPA this opens the doors for them to block out the market making distributor.
This is often influenced by field sales and reps who feel like they gain favor with the distributor by offering up the additional margins associated with being a market making distributor.
Large orders do not necessarily qualify a distributor for this role.
It is the role of a procurement department to drive unit price cost to the minimum level. Opening up the distributor landscape to other distributors typically drives the prices down.
Citing another recent report on small to midsized distributors in the market, we found many distributors who have become extremely specialized in specific technologies. These distributors have created a niche by selling a few very focused product groups, mostly to OEMs serving one or two categories.
These distributors state they must often switch their “active selling” direction because their manufacturing partners allow other distributors to apply margin pressure against them at their accounts. This is disturbing because this group of distributors is truly creating market expanding services to the manufacture in at least several categories.
Manufacturers with the broadest product lines often fail to realize the specialized activities of this breed of distributor. The result is extra energies are required of the manufacturer’s team to supplement the efforts of a more general distributor.
The time is ripe to better understand who is doing the work
This is complicated. First, product technologies shift. For example, years ago, variable frequency drives were considered cutting-edge technology, yet today many classes of this product approach “commodity” status. Second, some distributors fall into the middle ground – actively selling in some instances while transactionally selling in others.
Further complicating things, manufacturer field sales teams (rep-based, direct employees, and regional managers) are often asked to judge distributor performance without much objective input. Many bet on larger plays hoping they will ramp up their active selling activities.
In the case of manufacturers with multiple distributors in the market, the manufacturer’s team probably knows the transactional distributor better than the active seller. Why? The active sellers often know the products better or at least as well as the factory salesperson. And the nature of the sale precludes lots of day-to-day distributor/manufacturer interactions.
Manufacturers who understand the size and extent of the opportunity to expand market share in new products and technologies find ways to model and mold their channel sales efforts to match their distributor partners. Strangely, many manufacturers do not fully understand the value of market share on some of their products. Without this key piece of information, decisions surrounding the cost of sales activities are impossible. Sad but true…
Frank Hurtte is one of the leading proponents of Knowledge-based distribution. A business should surround the products they sell with their engineering and technical expertise. Even though he is a speaker and consultant, he is first and foremost a Sales Engineer. For more info, please visit: http://thedistributorchannel.blogspot.com/