Who would ever share customers?
By George F. Brown Jr. and Atlee Valentine Pope
Many organizations live in fear of the notion of sharing end customers. After all, a manufacturer might try to swoop in and sell directly, cutting out the distributor. And a distributor always can bring in new manufacturers to supply products. But if both parties learn which relationships are serviced best by which type of organization, the companies can leverage such collaboration into future success.
Many times, we’ve shared a story that emerged on a project several years ago when, during interviews, a manufacturer and its largest distributor each referred to the other as a “bloodsucking weasel.” Obviously, the relationship between these two organizations was strained, despite the fact that each was involved in a significant percentage of the business done by the other. One would have expected these organizations to establish a strong relationship because their destinies coincided, but how they characterized each other suggested that they had failed to do so.
Their multiple problems had compounded over time to generate a climate of distrust. As a result, the relationship had deteriorated to the point where it involved an ongoing competition for margin between the businesses. Rarely did they interact in a way that was positive or oriented toward shared successes.
One of their major problems involved “ownership of customers.” The distributor had an ongoing fear that the manufacturer would choose to go directly to end customers, cutting the distributor out of the chain. And the manufacturer feared that the distributor might someday bring on a competing brand, or even introduce its own private label, thereby cutting into the sales volume of the manufacturer’s brand. As a result, the companies could not even broach the topic of customer ownership without generating sparks. Both organizations had taken steps designed to protect their position with end customers, steps that the other viewed as threatening and anti-relationship.
While this example was an extreme one, issues around ownership of end customers often create a roadblock to good relationships between manufacturers and their most important distributors. In one high-technology industry, a company coined the phrase “Voicemail 666” to describe a call from an end customer that involved an integrator or distributor trying to capture the sales that were going directly from this firm to its enterprise accounts. The problem of competition for ownership of the end-customer relationship is quite common, and it requires attention to ensure it does not disrupt critical business relationships between manufacturers and distributors.
There is a framework that enables business partners to share ownership of end customers in a way that drives success, providing a basis for an answer of “We would” in response to the question, “Who would ever share customers?” The foundation for this framework builds upon an assessment of the services that create value for the end customers. When end customers are queried about the services that deliver value to them, they often describe them in two categories.
One view closely associates some services with specific products. The most significant example involves customization to the end user’s specifications. But other such services exist, including installing and commissioning the product, training the operators who will use the product or training the service technicians who will maintain it, troubleshooting by Web or 800-number support lines when problems arise, and others. Not all products carry the requirements for such services, but many do.
A manufacturer of electrical products had among its customers a number of original equipment manufacturers (OEMs), companies that made equipment that was used on factory floors around the world. Key electrical components were incorporated into that equipment, and this OEM relied on the electrical products manufacturer to collaborate with them on design, be responsive to the changes made from one generation to the next, help to address end-customer problems that involved power issues, and contribute in many other ways as a key ingredient supplier. This relationship was one in which the service contributions of the electrical products manufacturer were critical to its OEM customer.
Other services are more closely associated with the distributors or other channels through which the end customer makes purchases. The most significant example in this regard is often the ability to buy multiple products from multiple manufacturers through a single vendor and in a one-stop transaction. Other such services span a broad spectrum — instant availability through local inventory, fast delivery and other logistics capabilities, local support, credit, ease of returns and replacement. Again, not all end customers require and value such services, but many do.
The same electrical products manufacturer mentioned above also had many products that fell into this category. Among them were the exact same products that it sold and supported through the close-in relationship with the equipment OEM mentioned above, only in this case the products were being sold to end customers who needed repair parts over the lifecycle of equipment operations. The needs of these end customers were straightforward — immediate availability of a “like for like” replacement part to minimize downtime, not only of the electrical manufacturer’s products, but of all the products and components included in the equipment that they operated. In these cases, the end customers had no need for technical support from the equipment manufacturer, but they were reliant on an electrical distributor for quick-turnaround parts across a broad spectrum of products.
In addition, this electrical manufacturer and electrical distributor shared customers who highly valued both types of services. Contractors involved in construction projects that involved critical power applications — data centers, hospitals, etc. — had significant service demands. Because such projects always have unique characteristics, technical support from various manufacturers was required to identify the appropriate mix of products, design and integration issues across equipment categories. Items like uninterrupted power supplies, generators and switchgear required high-level technical support. And, like any major construction project, the spectrum of products required and the need to fill bills of materials quickly meant that strong distributor support was an essential element of keeping the project on schedule.
When you think about end customers, either individually or clustered within certain market segments, the valuation of these two categories of services can differ from one customer or segment to the next. As the examples above suggest, there are three major possibilities. First are customers that value product-specific services highly, but place little value on distributor-provided services. Second are customers that value distributorprovided services, but have little need for product-specific services. And third are customers that place a high value on service contributions from manufacturers and distributors.
The examples above are far from unique. In almost every manufacturer-distributor relationship in industry after industry, it is possible to identify customers or market segments in each of these three categories. And sometimes individual customers fall into one category on one occasion and in a different category on another occasion. This can happen when a customer transitions from initially purchasing equipment to buying maintenance, repair and operations supplies later. Recognizing that fact and working together to manage the end customer relationship optimally can allow manufacturers and distributors to get beyond battles over ownership and to the more important task of joint value creation and capture.
When end customers only value services that are linked closely to the manufacturer’s product, they want to build a strong relationship with the manufacturer. This is the environment where manufacturers often have direct sales relationships. Distributors that can add value to their manufacturing partners might gain a position on the customer chain, but they must recognize how critical it is for end customers to have direct relationships with the manufacturers. There are quite a few ways a distributor can deliver value to its manufacturers, but in this environment, getting between manufacturers and the end customers is not one of them.
In several instances, a manufacturer and distributor successfully collaborated when end customers had a serious need for product-specific technical support. One of the most creative examples involved a machinery supplier to the upstream oil and gas industry. This company always had sold directly to its customers. Over time, it had seen field service costs rising sharply, coinciding with growing dissatisfaction from customers because of the repair cycle. The manufacturer implemented an equipment design that created a modular structure for several high-failure systems, and the company established distributor relationships in the key geographic areas where their customers were concentrated. As a result, when a failure occurred, the end customer immediately could get a replacement module from the local distributor, swap out the failed one and swiftly continue operations. The involvement of distributors didn’t change the fundamental relationship between this manufacturer and its end customers, but it raised the bar in terms of customer support by taking advantage of traditional distributor contributions.
A frequent complication arises when end customers value productspecific services and distributor services for other products that they buy, perhaps enough to make the end customer one of the distributor’s strategic accounts. This creates a conflict because the distributor wants to manage the end-customer relationship. In reality, the distributor can’t succeed if a direct relationship with that product’s manufacturer is critical to the end customer. When the service valuation falls into this category, distributors must share the customer with manufacturers whose product-specific services are critical to the end customers.
In the second type of situation, end customers place primary value on distributor-provided services. Since the customers require little or no service support from the product’s maker, manufacturers must facilitate service delivery on the part of their distributors. They can do this through business systems and technical support competencies that let those distributors take service to higher levels.
Current examples include excellent new “e” business system capabilities provided by manufacturers that can be “plugged into” distributor business systems to reduce the end customers’ time and cost of doing business. In this instance, the manufacturer must recognize how important it is to support the distributors that will have primary ownership of customer relationships. In these relationships, manufacturers can best safeguard distributor and end-customer loyalty by providing high-quality support to the distributor, and the worst idea is to try direct sales to end customers.
One manufacturer of small-scale construction equipment used in utility and residential projects fully understood that the local dealers had critical relationships with the customers. The dealers provided all the services of value. To strengthen relationships with these dealers, the manufacturer did a systematic evaluation of the sales process from cradle to grave. The manufacturing executives learned that several interactions were required to qualify the customer and identify the specific equipment needed. This cost time and money, and sales were lost when this process didn’t happen smoothly.
The manufacturer developed a major outreach effort involving print and Internet marketing, developing a variety of tools to strengthen the information base available to the dealer when a lead was generated. The end result was a win for both organizations — more sales were made, and the cost to sell went down for the dealers. The local dealers recognized this contribution from the manufacturer, and their relationships were strengthened.
The third possibility, in which both organizations provide services of importance to end customers, is the most complex one to manage. Frequently, both business partners see the value they are providing to end customers, but they fail to recognize the equally important contributions associated with their partner’s service offerings. Whether just shortsighted or a deliberate blindness, this situation most frequently triggers the competition for ownership of end customers, and fears about their partner’s intentions become most intense. Moreover, end customers in this category often are those that are most valued because they require and are willing to pay for a broad spectrum of services.
The common sense solution involves developing a relationship plan for end customers within this category. There is no right answer to which organization should take primary ownership of the relationship because the relative valuation and complexity of service delivery can vary from case to case. But when manufacturers and distributors have worked together calmly to assess what it will take to succeed with each end customer or market segment, the answer almost always is obvious. In some instances, it is critical that the primary relationship be lodged with the manufacturer, who takes on responsibility for selling, pricing, coordination of support and the overall relationship. In other instances, the distributor must take on that role with customers buying from multiple manufacturers, providing overall relationship management and coordination of service delivery from all involved parties.
The experience of an automation product manufacturer and its distributors provides an example for others to follow when collaborating on customer management. When this manufacturer met with each of its regional distributors and did a systematic evaluation of service delivery, time after time its executives identified areas where the manufacturer and distributors duplicated services, along with other services where the offering was short of an acceptable level. As one executive involved in this effort commented: “By failing to collaborate, we were wasting money and not doing a very good job. Once we realized that, it was pretty easy to recognize that our focus had to be on the end customer and not on worrying about each other.”
Most organizations recognize that they must create value for their customers to capture value for shareholders. Talking with key sales channel partners with a focus on what contributions create value is the foundation for rational “win-win” decisions, as this automation product manufacturer and its distributors learned. Usually there are good reasons to involve both types of organizations, reasons rooted in the ability to provide the services that matter to the end customers. The executive quoted above summarized what had happened and the benefits that were realized: “As we looked back on this effort, we realized we had somehow gotten a bit away from a focus on our end customers and were spending far too much time dealing with relationship issues that just didn’t matter to our end customers, issues that at best were irrelevant and at worst got in the way of delivering the best possible service. Hopefully we’ve learned our lesson and are now focused on what we and our distributors, in combination, need to do to delight our customers and grow our businesses.”
Sharing customers can be a frightening prospect for many organizations, as far too many companies can cite instances where business partners have taken hostile actions in past years. But the success stories of the future will be written by those who recognize valid reasons for manufacturer-distributor relationships, reasons rooted in the value provided by both organizations delivering services to end customers. Acknowledging the value brought to the relationship by the other organization and collaborating on a relationship strategy that starts from a premise of shared customers will translate into future successes. At that point, past characterizations of partners as “blood-sucking weasels” can become a topic to laugh about during future celebrations.
George F. Brown Jr. is CEO and co-founder of Blue Canyon Partners. Prior to Blue Canyon, Brown held senior leadership roles in a number of organizations, including DRI/McGraw-Hill and ICF Kaiser International, and he served as the Theodore Roosevelt Professor of Economics at the U.S. Naval War College. He has published extensively in academic and business journals and testified before the U.S. Congress. He is co-author of CoDestiny: Overcome Your Growth Challenges by Helping Your Customers Overcome Theirs. Brown received his M.S. in industrial administration and his Ph.D. in economics from Carnegie Mellon University.
Atlee Valentine Pope is president and co-founder of Blue Canyon Partners. She has worked with clients around the world, co-authored more than 40 papers, and has been a guest speaker at numerous business events. Before building Blue Canyon Partners, Pope served in leadership roles in several startup ventures and was a vice president in global corporate finance with First Chicago. She is co-author of CoDestiny: Overcome Your Growth Challenges by Helping Your Customers Overcome Theirs. Pope earned a B.A. from the University of the South and an MBA from Northwestern University.