Do You Have the Right Sales Channels for a Downturn?

Executive Summary

Manufactures that sell their products through channels (such as retailers or value added resellers) must rethink strategy as the recession continues. They may need to rethink the mix of revenues they seek from different channels, the partners they use in each channel, and the incentives and commissions used to drive sales in a particular channel. Ask these questions proactively, instead of simply hoping things return to normal.

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Major economic downturns hit most companies. And manufacturers who sell to their customers through channel partners, such as retailers or value-added resellers, face additional challenges. Under-capitalized partners may be unable to get products to customers — or worse, could go bust.  With the current pandemic, the situation appears dire, with even more bankruptcies predicted than occurred during the global financial crisis of 2008-2009.

For manufacturers, success when emerging from a major downturn requires rethinking channel strategy. Manufacturers who simply plot a “return to the way it was” may not fare well.

Across industries, hard-hit channel partners have scrambled to respond to the pandemic. They’ve cut costs through furloughs, layoffs, reduced inventory levels, and delayed capital investments. Government programs (such as the CARES Act in the U.S.) have provided temporary relief for many. And better-capitalized manufacturers have stepped in to help struggling channel partners. More than half of technology manufacturers extended payment terms. Cisco offered partners $2.5 billion in additional financing. Dell and others followed suit. But even with manufacturers stepping up to help, many channel partners will not survive.

Manufacturers should ask three questions as they rethink channel strategies and programs to drive both short-term and long-term success through the recovery.

#1: Is it time to change channel mix and responsibilities?

Following a downturn, it’s tempting for manufacturers to attempt to revert to their past channel strategies. Yet evolving customer needs make this an opportune time to rethink channel mix and responsibilities. Some situations call for more direct selling to customers, while others call for an increased role for channel partners.

More direct selling. To address changes in consumer behavior during the pandemic, PepsiCo launched a direct-to-consumer channel allowing customers to buy their favorite brands online. Channel preferences are also changing in B2B sectors, as customers seek to reduce pandemic-induced supply chain disruptions by cutting out the middleman. Manufacturers can respond by expanding direct selling to their larger indirect customers. Manufacturers can also create hybrid models in which they take back some channel responsibilities such as product promotion or logistics.

More selling through channel partners. While some manufacturers expand their direct sales footprint, others will find it’s time to do the opposite. L.L. Bean recently announced it will begin selling indirectly for the first time —partnerships with Nordstrom, Scheels, and Staples will enable it to expand its market coverage and reach underserved customer segments.  Manufacturers serving businesses also have an opportunity to leverage new indirect channels. As business customers, like consumers, boost online purchasing, digital marketplaces such as and Amazon Business become more attractive.

Selecting the optimal channel strategy requires understanding what customers value, assessing manufacturer and partner capabilities, and analyzing channel economics.

#2:  Are you investing in the right channel partners?

Emerging from the downturn, manufacturers will be tempted to prioritize partners who were successful in the past. Their perspective reflects singer Shania Twain’s refrain, “You gotta dance with the one that brought you.” However, yesterday’s winners could be tomorrow’s stragglers. To remain viable, some previously successful partners delayed investments in hiring, training, and IT, and do not have access to capital to expand operations quickly. There is a risk that these under-resourced partners will become overly-reliant on manufacturer support, thereby driving up manufacturer channel costs.

To win over the long-term, manufacturers must invest in partners who provide what customers value. Partners, no doubt, are also looking for manufacturers with winning offerings, incentives and support programs. Some situations call for manufacturers to double down on the largest partners, while others necessitate shifting investment to smaller, up-and-coming partners.

Investing in the largest, strongest partners. Relying on a fragmented network of small, undercapitalized partners could slow the rebound. Now could be the time to focus on partners best positioned for future success. Nearly 20 years ago, farm equipment manufacturer John Deere launched its “Dealer of Tomorrow” program to reward dealers who invested in the capabilities that larger farms demanded, while de-emphasizing dealers who did not fit this desired profile. The program significantly improved customer service and dramatically reduced the number of dealers.

Helping smaller, up-and-coming partners.  Some manufacturers will find that coming out of a downturn, better-capitalized partners gain too much power. Larger partners may drive smaller partners out of business, creating coverage gaps and unstable customer relationships. Large partners also gain leverage in price negotiations with manufacturers, leading to margin compression. In 2001, building materials manufacturer Cemex mitigated such risks by launching Construrama to support small, independent hardware retailers in Mexico and Central America. Cemex helped these retailers compete against increasingly powerful big box stores by providing training, sales and marketing support, and IT systems. In exchange, Construrama retailers agreed to meet service standards and promote Cemex products. Today, Cemex has a massive building materials distribution network, with 2,300+ Construrama stores.

#3:  Should you change channel compensation and incentives?

As demand returns, manufacturers will be tempted to ramp up sales by offering partners lower prices if they commit to increased order volumes. This strategy can be risky, however. Volume-based discounts can inadvertently motivate partners to overbuy, creating working capital challenges. Such partners will then request payment-term extensions, thus increasing channel costs. Volume-based incentives also give larger partners an unfair advantage, thereby fostering price erosion and accelerating undesired channel consolidation.

Now is the time to consider overdue changes to channel partner compensation programs by re-examining partner pay levels and the behaviors and outcomes tied to compensation.

Changing pay levels to reflect changing roles. Some manufacturers have not significantly changed channel pricing and incentives for years, despite changing partner responsibilities. Increases or reductions in channel responsibilities must be reflected in the compensation structure. In the consumer products industry, with sales through digital retailers skyrocketing, more manufacturers are holding inventory and shipping products directly to customers and reducing channel compensation accordingly. On the other hand, in the enterprise software industry, manufacturers offer channel partners additional deal registration incentives for independently acquiring new customers without manufacturer support.

Investing to drive the right behaviors. Manufacturer incentives, such as functional discounts and co-funding, can motivate specific partner behaviors. For example, in some industries, partners have resisted manufacturer requests for point-of-sale data. By rewarding partners for data sharing, manufacturers improve visibility into customer needs. Other manufacturers use incentives to motivate investment in new capabilities. Technology leaders such as Microsoft, Cisco, and HP, have reengineered partner programs to reward reseller expertise and coverage in high-potential sectors (e.g. healthcare) and in-demand technologies (e.g. advanced analytics, cybersecurity).

Stanford economist Paul Romer once said, “a crisis is a terrible thing to waste.” Serious economic downturns provide opportunity for manufacturers to rethink channel strategies for a changing world.

1 in 3 Employees Believe Their Company’s Cybersecurity is a Moderate or Major Problem

With 1 in 3 employees believing the cybersecurity of their company is a moderate or major problem, decision-makers must do more to reassure them. Especially since remote work is now a big part of the workplace. And as more people work from home, digital security will become even more important for employees.

According to a recent survey and report from Nulab, 76% of employees say there is some degree of a problem. And only 24% say there is no problem at all. This means more than 3 in 4 have an issue with the cybersecurity protocol the company they work for has in place. And it affects companies of all sizes.

Employee Worries About Cyber Security

The cybersecurity issue is difficult enough for large enterprises, but the problem becomes even more challenging for small businesses. So, how are small businesses with fewer resources managing the problem? The question is a timely one for the current environment. However, it is important to point out small businesses have always been a favorite target for cybercriminals.

The Verizon 2020 Data Breach Investigations Report (DBIR) says 28% of cyber-attacks target small businesses. And because it does not make the news like the security breaches of large companies, people, including business owners, wrongly assume they are not under a major threat. But this could not be further from the truth. And when you consider small businesses make up 99% of all firms in the U.S., the problem is that much more distressing.

The Survey

The Nulab survey spoke to more than 1,000 full-time employees about their perceptions of workplace cybersecurity. These are people who spend at least four hours each day using a computer. They were then asked about the cybersecurity conditions of their company. The respondents were made up of 53% male and 46% female participants.


In addition to the above data points, 42% of employees confronted their employees about poor workplace cybersecurity habits. Furthermore, employees also believe the digital information of their employer is not secure. In companies with 1-50 employees, 23% believe this to be the case. It goes slightly down to 19% for companies with 51-100 employees and down even further to 10% for those with 101-500 employees.

Overall, 15% of employees believe the digital information of their employer is not secure. But for small businesses, it goes up to 23%.

Another key takeaway from the survey is the lack of responsiveness by employers when it comes to employee cybersecurity concerns. The number is particularly high from small business employers. In companies with 1-50 workers, 44% of the employees say their employer is slightly or not at all responsive to the issue. For the next tier with 51-100 employees goes down to 33% and 25% for those with 101-500 employees. But it remains almost the same for companies with 501-1,000 and 1,001+ employees reporting 29% and 27% respectively.

Awareness and Reporting

Business owners must establish a culture in which employees can freely report any perceived threat to the company. If they are chastised or ignored, the likelihood of them reporting a threat next time goes down dramatically.

The report says 58% kept perceived cybersecurity risks to themselves instead of confronting their employer. This the report says is because few employees were listened to when they brought up their concerns.

Considering the threat, this should be a very frightening data point for any business owner. This is because the cost of a security breach is getting more expensive by the year. The 2017 Better Business Bureau says small businesses lose $80K on average to cybercrime annually.

The key to fully addressing cybersecurity is changing company culture and behavior.

Changing Behavior and Putting Cybersecurity First

The fact of the matter is data breaches are a very real threat to everyone. Whether you are an individual or a small or large organization, everyone faces this threat. For employers addressing the issue starts by changing the culture and behavior in the company regarding cybersecurity.

If you put cybersecurity first and establish a culture in which your employees are heard, you can catch a security breach or an attempt much earlier. After all, it takes an average of 191 days for companies to realize there has been a breach. And these slow responses are especially harmful to small businesses.

Regular cybersecurity training goes a long way in making everyone in the company more aware and reducing their exposure to cyberattacks. The training also stops decision-makers from disregarding a concern an employee brings up.


How a Baseball Player Comes Back from Failure

We all deal with disappointments in our lives especially during this pandemic. But how does a baseball player come back from a devastating off the field injury to become one of the most powerful sports agents in the country?

On the Small Business Radio Show this week, Nez Balelo fell down a four-story elevator shaft under construction. He came back to play the game again and is now a Major League Baseball agent representing such players as Japanese phenom Shohei Ohtani of the Los Angeles Angels and Ryan Braun of the Milwaukee Brewers. He is on Forbes’ “Most Powerful Sports Agents in the World” list.

Interview with Sports Agent Nez Balelo

Nez’s family immigrated from Portugal and he grew up in the fishing industry in southern California. Baseball came easy to him but when he had the accident, Nez says that he hit rock bottom when he thought his career was over. He was able to get back to not only walking but playing baseball again. When he deals with adversity today, Nez says it is nothing to compare what he went through back then.

When Nez was injured, he thought about what he could do next. He decided to get into the development of young kids in baseball; through is work, Nez met future superstars like Ryan Braun when he was 14. He adds that “a lot of the players that I educated along the way came to me for direction and then they asked me to become their agent when they had their success”.

He talks about how this season is a challenging time for Major League Baseball and the players are just trying to make the most of a difficult situation. The players are doing the best they can by prioritizing health, their family and safety first.

For small business owners, he stresses that every team member has a role to play. He believes that not every person is going to be superstar but even “role players” have a big effect on the company’s overall success.

Listen to the entire interview on the Small Business Radio Show.



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