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Beware the pitfalls of bypassing the channel

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When business strategists talk about the benefits of circumventing traditional distributors by selling direct through the Web, they often point to the success of one company: IBM.

The technology giant sold $12 billion of goods through its IBM.com site in 2001, up 41% from the $8.6 billion it sold the year before. The site now accounts for 14% of IBM’s total sales, up from 10 percent in 2000.

Results like those are a strong temptation for manufacturers of all stripes.

But experts and businesses warn that manufacturers must tread carefully and devise Internet strategies that improve their business before selling direct through the Web, thereby radically altering historic relationships with distribution partners. They add that companies tempted to sell direct need to consider the difficulties of undertaking reseller-provided services that go beyond simple fulfillment, such as marketing and customer support.

Seductive notion

"The notion of selling direct is very seductive," said Manny Sodbinow, an analyst with Patricia Seybold Group, Boston, Mass. "There’s an intrinsic rationale to it that makes a lot of sense. But then you have to ask, ‘What are the ramifications of this?’"

"There’s an old saying in marketing that if you want to go around the distributor, you’d better learn the system," said Mike Drone, president of interactive marketing firm Drone & Mueller, St. Louis.

For instance, electric motor maker Fasco Motors, which consulted with Drone & Mueller before it began selling through the Internet six months ago, decided the Web would best serve its business model if it linked the company to distributors, rather than work around them.

Building contractors, the largest group of customers for Fasco products, turn to distributors for help with technical questions and other product-related assistance, said Todd Greenwell, Fasco’s marketing manager for distribution. He said resellers understand their regions’ product preferences and sales trends, and contractors, who typically use dozens of manufacturers’ products, prefer to buy from a distributor that aggregates these items.

For these reasons, Fasco uses the Web to stretch its product reach through distributors. Resellers access the Fasco site, called FAStore, using a password. The site carries Fasco’s full line of 1,200 products and stores individual distributors’ purchase history. It supplements Fasco’s phone and fax order-taking processes.

"Distributors know where the action is," Mueller said. "They’ve got guys on the street making calls. They also know trends. They can spot various trends much better [than manufacturers]." The company plans to publicize FAStore among distributors with a 500-piece direct mail campaign in the next six weeks.

IBM’s Web sales model

Why does IBM.com work so well? Rather than going to a purely direct distribution model, IBM uses its site to support a hybrid model: It sells some goods direct and pushes other transactions downstream to resellers. More than a third of the sales leads generated by IBM phone reps who support IBM.com are steered to reseller partners, said David Bradley, VP-marketing and strategy for IBM.com.

Moreover, the direct channel works best for IBM for transactions with large buyers making big purchases who don’t need a distributor’s integration services. Smaller buyers making smaller-volume purchases are more often transferred to IBM’s distribution partners.

Those sales leads help keep IBM business partners happy. Indeed, IBM plans to expand benefits to its distributors. In 2002, IBM.com will more frequently promote individual resellers with its products, Bradley said. And IBM is starting new affiliate programs that will compensate distributors when they drive transactions back to the IBM.com site.

Bradley admits IBM.com’s success can be attributed, in part, to the company’s previous experience in direct selling and a customer support infrastructure that already included thousands of phone representatives.

Analysts caution that most manufacturers have neither the expertise nor the desire to build out such infrastructure. "Whatever you save in no longer dealing with the distributor, you’re going to spend putting in the infrastructure to deal with many, many, many customers," said Seybold’s Sodbinow.

That doesn’t mean manufacturers can’t use the Web to forge novel relationships with resellers or improve their distribution networks.

Print Three, a Toronto-based business printing company, uses the Web to expedite transactions for its franchise distribution partners rather than circumvent them with a direct channel, said company President Bob Davis.

Franchise royalties represent Print Three’s main revenue stream, so the company last year launched ePower Online, a site designed to drive more business directly to those franchisees.

Print Three business clients link their own sites to ePower, which Print Three built with help from online marketing firm Eden Interactive, Toronto. Designated users at client companies can order business cards, stationery and other goods through the Print Three-hosted site, and Print Three in turn sends these orders to the franchisee closest to the client.

Promoting the channel

Print Three and others have adopted the following e-commerce strategy: They use their own Web sites to push sales to resellers rather than market goods directly.

Milwaukee Electric Power Tool Corp. operates two sites: one that displays product specs for the end
users of its circular saws, drills and other power tools, and a secure extranet its distributors use to order goods directly. IBM Global Services was the strategy consultant on the project; the sites were built with the help of Haverstick Consulting, Carmel, Ind.

Milwaukee Electric didn’t want to risk alienating its distributors, said company System Manager Cindy Thoenes. She added that the company doesn’t have the ability to pick, pack and ship small orders
as efficiently as its distribution partners.

"We had some concerns about disrupting our channels and distribution," Thoenes said. "But, also, when we look at our fulfillment and logistics, we’re not really set up to ship one tool to Joe Smith. I ship
20 or 30 or a hundred."

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