Which of the following levels of market coverage utilizes only one dealer within a given area?

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  Inhaltsverzeichnis Show

  • Is the Product Right?
  • Selecting Distributors
  • Think market segments
  • Life cycle changes
  • Getting products specified
  • Producer-distributor policies
  • Assessing qualifications
  • Distributor training & support
  • Evaluating Performance
  • The Payoff
  • What is selective market coverage?
  • What is intensive market coverage?
  • What are the 4 types of distribution?
  • Which level of distribution intensity is most restrictive and entails establishing only one or few dealers within a given geographic area?

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Now that the average cost of a direct sales call exceeds $100, more producers are relying on industrial distributors to serve key markets. The distributors are independent firms, usually consisting of only a handful of sales and support people. Unlike manufacturers’ representatives, who take on the role of sales representatives and work on a commission basis, industrial distributors take possession of the products they sell and assume the role of partner with manufacturers.

Industrial giants such as 3M, Norton, Pfizer, and Mead Paper make a large portion of their sales through such distributors. To counter competition coming mainly from Japanese photocopy machine manufacturers, both IBM and Xerox recently named independent distributors to market their low-priced copiers and typewriters.

But marketing an industrial product through distributors is risky and complicated. Consider the situation confronting one well-known industrial producer that developed what it thought to be a promising product. After placing it with independent distributors, building up substantial inventory, and filling the distributor pipeline, the company finds one year later that the product is selling poorly. Not surprisingly, the general manager and other officials are distressed.

They wonder: “Is this a lousy product?… Is it priced too high?… Are we doing something wrong in sales?… Are the distributors letting us down?” But these could be the wrong questions. Perhaps the product is not suited to this type of sales arrangement. Or maybe the company chose the wrong distributors to market the item. Moreover, like many companies, the organization may have no one person to oversee the process of selling through distributors. In theory, the top marketing or sales executive bears this responsibility, but in practice it tends to be fragmented and neglected.

Many of the mistakes producers make in selecting and using distributors can be avoided or corrected. Companies that want to rely heavily on industrial distributors must first decide if the products are appropriate candidates for this selling approach. If they decide in the affirmative, they must then select the best distributor candidates. Finally, companies must be able to evaluate their distributors’ performances.

Is the Product Right?

Products that are suitable for independent distributors usually have the following characteristics:

1. A large potential customer base. A distributor is unlikely to do as good a job selling a product with appeal to only a handful of customers as the producer will do. Yet producers often allow custom-tailored products to become distributor items. For example, when distributors sold special metal and rubber gaskets designed to fit customers’ requirements, they created virtually no new accounts. After several years, it became clear that the distributors received only repeat orders from accounts originally obtained by the manufacturer’s sales people. The broader the customer base with standard requirements, the greater the need for a distributor network.

2. A stockable item. Most customer-designed parts, chemicals, or machinery are easily eliminated as possibilities for distributors. The product should be easily stocked and serviced locally, as is a catalog item that is manufactured in large quantities and sold a few at a time.

3. Small-quantity sales. Items sold in bulk are usually not sold through distributors. The small quantity sales rule applies especially to heavy equipment items like construction machinery and trucks. The customer buys one or a few at a time and is concerned about the subsequent availability of service and parts. Replacement parts selling for a few dollars each can be sold by distributors.

4. Low-level customers. The lower in the organization the responsibility for buying an item, the more likely it will be sold through a distributor. The flat organizational structure of an owner-operated business has little or no buying specialization and therefore buys often from a distributor. Some products, such as certain aircraft control mechanisms, are bought directly from the producer by high-level managers in the buying company. When designing and producing the mechanisms for a certain airplane, the supplier needs highly skilled engineers working with the customer’s design engineers and procurement people.

However, other products being sold to that same airplane builder, such as O-ring seals or fasteners, are standardized and can be sold through distributors to purchasing officials to whom off-the-shelf service is important. During the introductory stages of most industrial products, they are specified by and sold to design engineers. The selling effort often requires engineer-to-engineer type relations. As the product becomes more widely known, the purchasing department assumes the principal buying role.

5. Rapid delivery and service. If the product is needed immediately because of an equipment breakdown or an operating supply shortage, speedy replacement is essential. The cost of downtime for an oil drilling rig is more than $100 a minute and the downtime on an automotive engine assembly line is more than $100,000 per hour. Minutes can be a matter of life and death when a hospital operating room needs a small piece of surgical tubing or parts for a life-support machine. In all these situations, the longer the downtime, the more costly the situation and the greater the need for prompt delivery and possibly for technical service by a local distributor.

Selecting Distributors

If a product fails to meet any of the previous five qualifiers, it probably will not succeed as a distributor item. Yet merely meeting them all does not guarantee success. There are many pitfalls to avoid in the selection of distributors.

Think market segments

Many industrial producers think primarily in terms of geographic coverage before considering distinct market or customer segments. Such thinking leads to limited sales. For example, parts of the marine- and forest-product industries are located in the Pacific Northwest. But customers in these two markets frequently buy the same product from different distributors in the same region. The marine customer buys mostly from a marine supply distributor, which stocks special products for its customers’ needs. Among the needs is having products with U.S. Coast Guard approval for resistance to saltwater corrosion; the lumber and plywood markets don’t need that approval.

Also, customers prefer to deal with distributors who know their industry’s language. Thus, the wood products customers residing in the same geographic area and buying some of the same products as marine customers use a distributor who serves only the forest products industry. In many cases the customers and distributors in the two industries do not know of each other.

Deere employs different distributors to serve the agriculture and construction equipment market segments. Caterpillar uses different distributors to serve the construction equipment, lift truck, and diesel truck engine markets in the same geographic territories.

The wise producer thinks of different types of distributors to serve different or specialized market segments. If one manufacturer is already penetrating a market segment, the second or third entrant to that market segment should carefully consider the type of distributor the successful first entrant chose.

Finally, producers should be aware of total market potentials for each market segment and geographic territory. They can then compare the potentials with each distributor’s actual sales. This information should help them develop annual distribution quotas around the local market size and growth rates. Decisions about directing and adding distributors become easier.

Life cycle changes

Many companies fail to recognize that selling requirements for a product change over its life cycle. The industrial producer that has the wrong distributors for the stage the product is in may make the following observations of its distributors: “They don’t call on the right people… They don’t know how to sell the benefits of the product… The distributor is mostly filling repeat telephone orders, and delivery is too slow.”

A product unknown to the market requires a specialized distributor that can provide technical assistance as bugs are worked out and new uses developed with the customer’s engineers. To justify all the time spent educating prospects, the distributor will probably demand an exclusive territory. As more applications for the product develop, the technical know-how becomes more widely available in handbooks and manuals until finally it is common knowledge.

The journey for a given industrial product from innovation to obsolescence ranges from 10 to 50 years. This means that one type of industrial distributor could be successful with a product for a long period. As the product matures, becoming more standardized and better known, a diminishing amount of specialized knowledge is needed to sell it. At the point of maturity in the product’s life cycle, off-the-shelf delivery time and price become more important than the need for specialized knowledge. At this stage, producers should consider expanding the number of general distributors in nonexclusive territories.

Getting products specified

Don’t assume that your distributors will get your product specified. Only in unusual cases does an engineering type of distributor get the specifying job done, and then only if the specifier and user are in the same geographic area.

If required specification work is not done, the industrial distributor will not receive orders. For example, when building a plant in California, General Motors’s headquarters might sign a contract for an automated production line with a machine tool maker in Ohio. A company that wants to sell parts to that supplier must first meet GM’s specifications. Without approval from General Motors’s corporate headquarters, the distributor cannot serve the machine tool maker.

A solution for producers is to designate a person to do nothing but get the company’s products specified or qualified at original equipment manufacturers (OEMs), government agencies, automotive companies, railroads, or wherever. This person may be a product specialist who also knows the industry.

Producer-distributor policies

Because industrial distribution channels are outside the company, management policies governing them cannot be routinely developed and administered. Distributors are typically independent entrepreneurs who own 100% of the business; the industrial producer must very carefully develop distribution policies that do not conflict with those of its partners in profit.

Before selecting and franchising distributors for a product, producers should develop policies together with the distributor that address the following areas:

User information.

To formulate future marketing policies, industrial producers must know who their ultimate customers are. Some producers require distributors to report each sale by part number, customer, destination, and place of billing. This in turn helps the producer provide effective market analysis for distributors.

Such information is sometimes available from warranties for equipment that customers fill in and return to the producer. However, for components and consumable industrial or technical products like chemicals, bearings, and surgical supplies, there are no purchaser-warranty feedback information systems. The producer who has an unfavorable reputation for taking distributor-developed accounts away from distributors will understandably have difficulty obtaining such sales information from distributors. For such producers, distributor councils can be a valuable source of information about the marketplace. A meeting with distributors represents contacts with hundreds of ultimate customers.

Serving large accounts.

When a distributor has developed a large OEM or end-user account, a clear policy is needed to determine whether the account remains with the distributor or is handled directly by the producer. Some companies leave the distributor-developed OEM account alone as long as the account is living up to its potential.

Inventories and pricing.

Most of a distributor’s capital is committed to the producer’s inventories. The producer’s pricing practices can enhance, protect, or penalize the market value and profit margins on the inventories. One manufacturer whose own regional sales people call on distributors has a policy of paying the sales force based only on what the distributor sells and not on what it buys. This eliminates the temptation to overload the distributor with inventory.

Assessing qualifications

Producers tend to choose distributors who are already overloaded with products and to shy away from those who are underfinanced. Successful industrial distributors are usually courted by numerous producers and, as a consequence, are probably carrying as many product lines as they can effectively handle. But a technical product usually has to be demonstrated to customers; distributors with few product lines are often best able to provide that concentrated technical assistance.

Industrial companies often err by not choosing the underfinanced newer distributor because the corporate officials caution, “Beware of those who run slim and don’t have adequate financial means to carry our inventory or do business with us.” This creates a bias toward the more mature and better-financed distributor, which may not be the aggressive and specialized distributor the product requires. The credit rating on the new but aggressive distributor will rarely be something that excites the home office financial people.

The manufacturer may err further by not attempting to help finance or otherwise support the promising distributor. Some producers have allowed new distributors to start up and to eventually buy out the distributorship. A common arrangement is to have a producer’s sales person start a company-owned store, which the employee buys once it becomes profitable.

A single distributor can seldom give a producer the market coverage and penetration needed in large trading regions. Producers must avoid saturating any market with distributors to the extent that the profit potential becomes unattractive for everyone. Thus, industrial producers must continually analyze the market structure and assess the potential in each market segment.

Finally, distributors who are not aggressive enough or are overloaded should be disenfranchised. Industrial products that require much technical selling should be handled by a specialized distributor. Industrial products bought mainly on the basis of price and service should be placed with aggressive general-line distributors.

Distributor training & support

Often the distributor’s sales representatives are undertrained and undersupported—as some would say, “Franchise them and forget them.” Effectively training distributors’ sales people to sell a product takes many hours. The producer must demonstrate the product features and benefits for many different situations or applications. The more technical the product, the more time necessary for sales training. Sometimes the producer must train both the distributor and the initial customers.

Manufacturers should also provide distributors with technical field assistance for potential key accounts. Some producers have regional sales people who can accompany distributors on calls and provide technical backup. While the producer sales force may be viewed as a luxury, it can perform such valuable functions as analyzing accounts and getting specified. The payoff may come 6 to 12 months later.

Manufacturers can further support their distributors by supplementing product literature with heavy trade-magazine advertising to generate inquiries and sales leads. When it gets inquiries, the producer must turn them over promptly to the appropriate distributor.

Manuals and handbooks that help people use a product or solve technical problems have also proved to be excellent sales tools. Well-known examples exist in many industries. The “Merck Manual,” which first appeared in 1899, was written to help physicians select medications, noting that “memory is treacherous” and that “even the most thoroughly informed physician needs a reminder to enable him to prescribe exactly what is needed for the patient.”1 In 1983, the “Merck Manual” is in the 14th edition; it covers 2,500 pages of disorders and suggested therapies. The “O-Ring Handbook” by Parker Hannifin Corporation helps design engineers specify solutions to prevent leakage in oil systems or air systems. Ingersoll-Rand wrote the “Drill Doctor’s Book” to help drillers select the bit, speed, and set-up in various rock- and coal-mining situations.

Evaluating Performance

Once companies have entered an agreement with distributors, manufacturers should periodically review their distributors’ performances. Here is one possible assessment approach:

Stage 1: top-management assessment. Management reviews its figures on the sales growth the distributor achieves and compares the market share in the assigned territory with the national average. The district sales manager also ranks distributors as excellent, good, fair, or poor, taking account of attention given to the products, customer service, and the quality of coverage in the assigned area. Combining headquarters data and district managers’ judgments, managers can quickly identify the best distributors and mark the doubtful ones for further evaluation.2

This assessment can also incorporate the approach used in the Exhibit. Once the market potentials are known for a product-market segment in each territory, they can be compared with the actual market penetration or market share of the distributor in each territory. A distributor with a product in category 3 or 4 needs improvement—possibly another branch should be opened or maybe the product should be placed with another type of distributor. If a distributor carries multiple lines, the same analysis can be performed in aggregate for each distributor.

Approach to evaluating existing distributors

Stage 2: regional-territory evaluation. Armed with a detailed headquarters assessment of “problem” distributors, the person responsible for the field evaluation ranks each on ten criteria:

1. Adequacy of business experience, as reflected in quality of customer service.

2. Coverage of assigned area and time available to seek more business.

3. Competence in managing the business (sales management, financial control, record keeping, warehousing, and inventory control).

4. Historical trend of volume measured against performance requirements established by the company’s district sales manager.

5. Share of market in assigned area.

6. Demonstrated willingness to carry a full line of products and to service all customer needs.

7. Annual inventory turns.

8. Efficiency and condition of warehouse facilities and equipment.

9. Financial position (accounts receivable, cash position, outstanding obligations, inventories, fixed assets, and payment record).

10. Ability to grow in the assigned area.

The astute industrial manufacturer periodically faces the task of getting more effort out of certain distributors or of replacing those who consistently perform inadequately. The southeastern area sales manager for a large maker of commercial electrical equipment decided to take a hard look at his distribution network when, after three years, his region’s sales declined from third to fifth place among six sales regions. He talked with each of his 30 distributors, analyzed their sales performances over recent years, and sorted them into three categories: (1) distributors whose market shares stood at or above the national average, (2) distributors short of the national average but capable of reaching it, and (3) those for whom the national average seemed hopelessly out of reach.

Complete and periodic distribution evaluations require considerable time and diplomacy. But continual upgrading and strengthening of a distribution network are necessary to manage a distribution channel effectively.

The Payoff

A good distributor network is often the key to market leadership and overall business success. Because it takes many years of continuous attention to develop and maintain, a sound producer-distributor organization is often a high barrier to competitors. Without a solid network, even a manufacturer with a superior product can fail in the marketplace. A producer that recognizes the importance of distributors has a major competitive advantage that can reap attractive profits for itself and its distributors.

1. “The Merck Manual,” published by Merck, Sharp & Dohme Research Laboratories, Division of Merck & Co., Inc., Rahway, New Jersey, 1983.

2. A.L. McDonald, Jr., “Shaping Distributor Channels,” Business Horizons, Summer 1964, p. 24.

A version of this article appeared in the March 1983 issue of Harvard Business Review.

What is selective market coverage?

What is intensive market coverage?

What are the 4 types of distribution?

Which level of distribution intensity is most restrictive and entails establishing only one or few dealers within a given geographic area?