Vendors Seek to Regulate Distribution Through Programs, Standards

Vendors are looking to create distribution programs similar to their partner programs to bring order to their two-tier relationships; programs, though, may not always be the best answer.

By Larry Walsh

Vendors are increasingly rethinking and exploring new ways of engaging with distribution. Many vendors are under the impression that they need a distribution program that’s akin to their reseller and partner programs. The idea is that they can better define their distribution needs and strategies, improve the effectiveness of their distribution management, and yield better results.

The key question is why vendors are feeling the need to create more structure around their distribution relationships. The answer lies in their struggle to quantify the value distributors bring to the go-to-market relationship. This challenge is exacerbated by vendors’ over-reliance on distribution coverage.

Many vendors are grappling with the issue of an excessively large distribution network. This isn’t a minor concern. In 2021, Channelnomics assessed a vendor’s distribution network and coverage globally. The sheer magnitude of the task was evident from the fact that it took six months to compile the data required to understand how the company’s distribution partners were evolving with the dynamic market. The project’s duration and complexity were primarily due to the staggering number of distributors involved. This single vendor, which generates more than $60 billion in sales annually, had a global network of over 460 distributors.

Another, more modest-sized vendor — with only $4 billion in annual sales — has more than 250 distributors worldwide. And a $200 million software company that Channelnomics supports has more than 260 global distributors — and more than a half-dozen in some countries.

Vendors often fall into the habit of layering on distributors. This practice, while expedient in the short term, can have long-term consequences. For instance, a sales rep might uncover an opportunity with a new partner that works through an unsigned distributor. The immediate solution is to sign up the distributor, secure the partner, and initiate the sale. However, this approach can lead to a bloated distribution network and a lack of control over the sales process.

Sometimes, vendors sign up distributors simply on the promise of expanding coverage and sales. If you have three distributors covering a region, why not add a fourth to increase the odds of engaging with new partners and growing sales?

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Then there’s the tactic of adding distributors at the regional and country levels to balance go-to-market models. By having multiple distributors competing, vendors decrease their ability to build leverage through dependencies and moderate street prices to partners and customers — or, at least, that’s the theory.

A challenge facing all vendors is whether distribution is producing the desired outcomes. The challenge is particularly hard for vendors that sell exclusively through distribution and channel partners. If all deals go through partners, and partners source from distributors, what role did the distributor play in driving the sale?

Cost is another issue that comes up frequently. Amazingly, most vendors and their channel leadership teams don’t know their distribution cost to serve. Without that foundational data, demonstrating distribution lift and value is exceedingly difficult. At best, any resulting data is a guesstimate.

By creating distribution initiatives that resemble partner programs — with participation requirements, training requirements, sales thresholds that unlock benefits, and earned compensation — vendors seek to better regulate the relationships and manage the contributions of their distributors.

Through the programs, vendors seek to create conditions under which they can tell distributors why they can and can’t sell their products. Surprisingly, some vendors, particularly large ones, feel the need to explain to a distributor why they’re not allowed to participate in certain markets or product categories.

In addition, programs justify the imposition of internal requirements for distribution participation. Programs — essentially business rules and requirements — are perceived as a means of keeping field teams from randomly signing up distributors in pursuit of one-off relationships.

Channelnomics has mixed opinions on the need for and benefits of creating formal distribution programs. The value distribution can bring to a vendor’s go-to-market model is clear. Distributors provide scale, augment sales and technical resources, drive through-partner sales activities, absorb costs, and insulate against risk through credit and financing.

Getting to the “Goldilocks Zone” of distribution coverage (not too many and not too few) is difficult. Most vendors will need more than one distributor in any region to give partners choices in product sourcing and to maintain competitive balance. However, too many distributors increase the cost to serve, decrease engagement benefits, and dilute the ability to measure outcomes.

An alternative to distribution programs? Standards. Many vendors Channelnomics engages with can tell you what role distribution plays in their go-to-market strategy. Still, they have a harder time explaining why they work with a particular distributor. Establishing distribution standards is more of an internal control that ensures a channel team can define why it chose to work with a distributor and what it thinks the relationship will yield.

Through standards, vendors can set internal controls that govern the selection of distribution partners while allowing them to create bespoke business plans, expectations, and key performance indicators (KPIs) in individual relationships. Standards provide a universal means of internally measuring and evaluating distribution effectiveness. And they act as a governor that mitigates distribution sprawl.

Distributors are powerful and effective go-to-market partners. They provide resources, support, and market access that vendors often can’t achieve on their own. However, that doesn’t negate doubts about distribution’s value and contributions. Distribution programs and standards are a means of bringing order and understanding to these two-tier relationships. But vendors should weigh their options carefully before racing headlong into program creation, define the problem they’re seeking to solve, and craft strategies that will deliver the desired results.

Larry Walsh is the CEO, chief analyst, and founder of Channelnomics. He’s an expert on the development and execution of channel programs, disruptive sales models, and growth strategies for companies worldwide.

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