No Room For Stuffing

Last month’s Incentive newsletter featured the first installment in a two-part interview with Carlson Marketing Group’s Petro Tsarehradsky on how corporate channel stuffing undermines sales incentive programs. Click here to view part one.

Faced with the challenge of dealing with the unfortunate consequences of channel stuffing, Tsarehradsky contrasts the response of company A, which keeps on doing the same thing but hoping for different results, with that of company B, which takes a more strategic, long-term approach to its product mix.

“Company B says: You know what, there are ways around this,” he explains. “Nobody yet has been successful going in cold turkey and trying to shut down inappropriate channels. So instead Company B gets smart and says: We can’t kill the gray market, but we can reduce it. They can redirect activity by only offering end-of-life products to the gray market and limiting their products with the greatest frequency of sale to the distributor. Company B still offers a discounted price, but they segment out who gets which products. In that sense the company manages its average sale price better. They still have to move product unit volume – that’s a fact of life – but they limit what they sell to the gray market by offering a heck of a deal, though only on end-of-life products. With this shift, they sell the higher margin products through the distributors and retain a higher margin than they might have using the company A model.”

The key, says Tsarehradsky, is to look at product mix as a vehicle for managing channel activity. This may take some fortitude, he cautions. “It’s important to take your most superior product – for the high tech world that might be the most successful high end processor – and sell that through the sales force and offer an accelerator or sales incentive,” he says. “That has to be the exclusive channel through which you offer that product. Then you have to grit your teeth and say: I’m going to stand firm on how I’m going to go to market. Typically, the economy and your channel adjust to what you offer because, ultimately, if you hold the cards on the best product in the marketplace and you offer it one way, they will buy it. If you allow yourself to panic and sell it through any means possible, then you get exactly what you deserve.”

So when company B adopts this new model, what happens to the sales incentive programs? Tsarehradsky says that within two to three quarters a positive affect should become apparent. “Imagine that company A finally decides, OK, this next quarter we’re going to turn into company B and change our approach. Typically they’re going to see in that first quarter of change a decrease in product unit volume – just how much will depend on the company and what it sells – because the channel doesn’t take the change seriously yet,” he explains. “If the company maintains its composure through one quarter, however, sales should approach the product unit volume sold before the change in the second quarter of the company B-approach – and margins should be substantially better. For example, if in the second quarter the company sells 90% of what it sold in the company A mode, the profit margin should probably at 110% of the company’s profit margin when it used the company A approach. And the channel is doing what it’s supposed to be doing – everyone is adjusting and they’re believing that the company means what it says and is doing.”

Tsarehradsky suggests that resellers and distributors typically take about six to nine months to believe that a manufacturer is genuinely changing behavior. For resellers and distributors with a good relationship with the manufacturer’s sales force, he says, it’s more like six months.

As a final note Tsarehradsky mentions another factor that is critical to the success of the Company B approach: a shift in thinking at the top. “There has to be a change at the executive level where they don’t over promise and under deliver to the street,” he says. “That’s probably the toughest challenge – channel stuffing is secondary. With the tough economic times I have seen large companies change their behavior because it got to the point where they have no more money to work with. But now they are not only surviving, they’re starting to prosper. The company B profile is demonstrating that companies can be more thoughtful about what they sell to whom, for how much and when.

“The solution requires being very thoughtful about the product mix you carry, identifying where you have real value and making it difficult for someone to buy the same product elsewhere. Then you leverage that through the right channels,” summarizes Tsarehradsky.