Does Size Matter?

Posted by franklynn on

If you sold $10M, would you rather have a single $10M reseller or ten $1M resellers? No, it’s not a trick question. Rather, it’s an exercise to explore many of the key issues of channel strategy.

Consider the pros and cons of a concentrated versus a fragmented channel strategy. In the concentrated strategy, the 20:80 rule applies; 20% of your partners deliver 80% of your revenue. Probably 5% of your partners deliver as much as 50% to 60% of sales. The pros of these concentrated structures are:

  • Ease of communication-you don’t need to “herd cats.” Getting your message to, and agreement from, a small number of big partners is easier than communicating with hundreds or thousands of small partners
  • Efficiency-the cost per dollar to manage a small set of big partners, arguably, is less than in a fragmented partner environment
  • Sophistication-larger partners are typically better prepared to engage with you on complex technology/IT, sales and marketing initiatives

Power-big partners have significant clout, and frequently can make (unreasonable) demands of suppliers regarding compensation, support, functions performed, etc.On the proverbial other hand, having so much of your revenue in the hands of a small number of big partners raises several negative possibilities:

  • Risk-if relationships with just one or two key partners fall apart (they add a private label line, they start pushing competing brands, etc.) you can lose a significant chunk of revenue in a short period of time
  • Brand Premium-larger partners often actively sacrifice price to gain volume. Your street price (and premium brand position) can suffer as the elephants dance
  • Value-Add-large partners rarely provide the industry, application or geographic specialization often needed in the early to mid phase of a market life cycle

We could explore the pros and cons of a fragmented strategy, but really these are just the reverse of those discussed above.

Optimizing a channel strategy requires a channel-savvy management team and organization. Typically the company needs to pivot from a fragmented strategy early in a market life cycle to a more concentrated strategy later in the cycle. Many early market leaders are either unaware of this requirement or cannot manage the internal and external change/conflicts. In mature markets, where larger partners tend to dominate, manufacturers need to ramp up their “pull” market activities to build up countervailing power and directly maintain their premium brand messages.