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Many distributors rely on sales reps to generate and manage demand. It’s not unusual for top account managers at those companies to make a million dollars or more in some years. In my experience, such distributors tend to have these characteristics:
- Account managers are paid pure commission based on gross margin dollars. This ranges from 12 percent to 18 percent, with outliers in either direction
- Account managers have so much control over their customer relationships that they can move from one distributor to the next and take their accounts with them
- Distributors battle to hire each other’s best sales reps, driving up costs
- Commodities often make up a large portion of sales
- There are few barriers in place to prevent customers from leaving with account managers. For example:
- No centralized customer database or CRM
- No strong customer relationships with anyone but the sales rep
- Little differentiation in value proposition vs. competitors (e.g., exclusive product lines, delivery features, digital capabilities or important value-added services)
Sales force compensation is often a distributor’s largest single cost on the P&L. The dog-eat-dog competition for account managers creates structural costs for the industry and it’s been that way for decades. Will it change?
Growing Obstacles for Distributors Dependent on Account Managers
This account-manager-driven model creates mounting problems vs. digital distributors in the following ways:
Many distributors can’t afford to invest in digital capabilities. Leadership understands that the world is “going digital,” but they haven’t seen a return on their previous investments and don’t have the expertise to know what to do next. Not coincidentally, distributors with highly compensated reps often generate low net profit margins. That makes it difficult to fund the talent and technology to build digital capabilities. If you downsize your sales force to pay for digital investments, you lose profits in the short term, with no certainty you’ll grow sales from that technology anytime soon.
These companies are to some degree held hostage by their own account managers. This prevents distributors from investing in capabilities that would dilute the account managers’ influence because the reps get in the way. Million-dollar sales people aren’t stupid – many of them won’t participate in populating a CRM with customer data, for example, because they know it weakens their hold on those relationships. Similarly, some of them resist channel shift to online sales because it represents a loss of customer control. More importantly, a high percentage of these AM’s don’t have the digital fluency necessary to recommend and help build capabilities their customers would use.
These distributors are often dependent on long-standing relationships with important customer contacts who are now aging into retirement. Last year, millennials, who are digital natives, became the largest generation in the workforce. They simply don’t have the same need for strong interpersonal buy/sell relationships because they do their research and buying online.
These distributors will become less cost-competitive in the future. This is not because digital competitors will develop purchase-cost advantages but because they gain cost-of-sales efficiencies over time. Relying on account managers to drive results means your cost-of-sales growth will correspond with your revenue increase. Digital disruptors leverage technology to grow and their costs shrink as a percentage of sales over time.
These advantages are cumulative and complimentary. Digital distributors are positioned to take share by increasingly delivering the capabilities that are most valued by the generations moving into the workforce while simultaneously expanding their cost advantage.
The market dynamics will continue to move to the advantage of digital players:
- The post-millennials (“Generation Z”) are entering the workforce in increasing numbers and will have at least the same digital expectations as the preceding generation.
- Digital players will continue to have an advantage in understanding the ROI of their investments because all of their demand generation occurs online, meaning they have digital breadcrumbs to their shopping carts. Traditional distributors participate in every channel (branches, online, sales reps, inside sales, etc.) and will likely continue to lag in technological capabilities because they can’t measure the return on these investments.
- New technology-derived capabilities will result in more orders placed by voice, cameras and sensors (the Internet of Things). Applications like Amazon’s Part Finder will get better at identifying products, reducing the value of employees with specialized product knowledge and thus expanding the definition of “tail purchases.” This will not only take share from traditional competitors – these tools fundamentally and permanently weaken the value added by people, including sales reps.
How Should Distributors Respond?
Distributors must understand the value propositions of digital disruptors. Leaders must build teams with the right expertise to build competitive – not groundbreaking – digital capabilities in a reasonable timeframe. You need to put in place a set of “moats” (value-added services) and customer data that allows you to take more ownership over customer relationships and loyalty in order to create barriers to exit.
After you gather some of this information, the most important thing to do is to bring your team together, discuss these dynamics and begin formulating a plan. The digital disruptors are gaining strength and will take market share from weak competitors. If you don’t have a plan and aren’t updating your strategy, you will become more vulnerable over time.
Consider sending someone from your senior team to MDM’s first-ever forum, “How Distributors Should Respond to Amazon Business.” It kicks off at 7 p.m. on December 4 in Denver and continues until noon on December 6. We have an impressive line-up of industry experts on the agenda. More importantly, we have an incredible roster of attendees already signed up, including C-level leaders from leading distributors, manufacturers who sell into distribution and analysts from public markets and private equity groups. It’s truly a thought-leaders’ forum and you should be represented.
Visit www.mdm-forum.com for details and to register. There’s a good chance that the days of million-dollar sales reps are numbered. You need to know what to do next and how to get there.
I hope to see you in Denver.
As always, I’m interested in your feedback. You can reach me at email@example.com.