subject: Giving Away Margin: Direct Vs Indirect [print this page] Giving Away Margin: Direct Vs Indirect Giving Away Margin: Direct Vs Indirect
There is a common perception in industry, especially amongst smaller customers that using distributors or other middle men amounts only to "giving away margin". The perception is completely understandable, but it derives from a lack of understanding of the channel partner model.
Take the example of a manufacturing company (substitute development costs for materials/labour for a software or hosted-services provider) that has a cost of goods sold and general and administrative costs to run the business. It only sells directly to end customers, so it also has direct sales costs. What's left when all of these are deducted from the end-sell price is gross profit*.
Now consider what happens when this company decides to sell its products through a distributor. This decision does not impact on the cost of manufacturing the goods or, for the most part, on the G&A costs of running the business. Neither does it impact the end-sell price - in general, the customer is not going to pay significantly more to buy it from your distributor, so the end-sell price remains the same.
In order for the supplier to maintain its actual margin, the distributor's margin has to be funded from the supplier's selling costs. This requires a fundamental change in the vendor's business model. The transfer of selling activities to the channel is accompanied by a transfer of selling costs.
If vendor selling activities and resources are not replaced by lower cost channel management activities and resources, the channel margin ends up being funded, not by transferred costs, but by vendor margin.
This is the classical mistake which is made by thousands of companies and it is repeated by some, over and over again. There are fundamental differences in the skill set and cost structure of the team required to support sales channel partners and the team responsible for executing direct sales.
Experience demonstrates a whole range of reasons why sales people make poor, ineffective and overly expensive sales channel managers.
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