Distributors are performing well this year with many posting strong revenues and profits. The post-COVID recovery with tight supply markets and strong demand has been good for distributors. But the economic environment is deteriorating as interest rates rise and demand across end markets declines. The current economic debate is not if the U.S. economy is or will be in a recession, but rather how bad a recession might be.
Against this backdrop, distributors are facing the rising risk of manufacturers selling direct to end customers. Manufacturers have been investing in e-commerce and digitally connected products and services, all with the goal of growing sales and getting closer to end customers. Many B2B customers gain from a direct relationship through lower prices and improved technical support. This trend is expected to grow. Forrester, a market research firm, forecasts that U.S. B2B e-commerce will reach $3 trillion and account for 24% of total B2B sales by 2027, up from $1.7 trillion and 16% in 2021, respectively. With an economic downturn, B2B customers will look to save on purchases and will be even more open to source directly from manufacturers, putting increasing pressure on distributors.
How can distributors counter this threat and drive profitable growth? Based on our research and experience, we recommend distributors take three critical steps to improve their strategic position.
Start with the Customer
Determining which customer segments to target, what problems to solve and how to deliver value and solutions beyond selling products is the right place to start. Distributors should be able to clearly articulate how these choices can help them strengthen customer relationships and defend against manufacturers who are trying to displace them as a customer’s primary partner.
Take the example of a national distributor serving the healthcare industry. It had become complacent using a one-size-fits-all sales approach and recent service issues had contributed to a poor customer experience. As a result, its manufacturing partners began selling direct to customers via both e-commerce and direct sales at a price point it could not match. Leadership realized the business needed to radically transform.
As a first step, it gathered customer and prospect financial and firmographic data to better understand both current and potential profitability that could be derived from them. Management uncovered that it was investing expensive sales resources in too many small accounts with little to no growth potential while at the same time missing opportunities with high priority customers and prospects.
Second, it undertook fresh research to understand customers’ biggest challenges and discovered that it had overestimated the value customers placed on having access to a broad portfolio of products while it had underestimated the value customers placed on speed, easy ordering, product availability and price.
Next, it analyzed sales activities and transaction data and found that its sales team was overly focused on product sales and was likely missing opportunities to sell broader solutions.
The distributor leveraged this information to identify target customers and adjust its investment of sales and marketing resources around these customers. It capitalized on its customer relationships and knowledge of their needs to deliver solutions that drew upon their product portfolio. With this approach, they were able to deliver more value to customers and keep manufacturers from taking over.
Align the Customer Experience
Providing end customers with a strong omni-channel experience is both good for customers and a deterrent to manufacturers seeking to cut in on the business. But distributors need to align the customer experience with their strategy and target customer segments.
Take the example of a national distributor of electronics and electrical products. The company provided an omni-channel experience with many branches, outside and inside sales teams, and e-commerce. However, the company failed to clearly define target customer segments beyond general end markets, and how they should be served.
It did not take long before outside sales reps started to bump into inside sales and local branches at the same customers and prospects, causing confusion and unhappy customers. Key manufacturer suppliers got word of this and began to go direct to several large end customers. Sales and margins began to slip.
The distributor took a new approach. It segmented each end market and identified customer types where it was most successful and what customers wanted. Based on this understanding, it defined solutions for targeted customer segments. It changed its go-to-market approach so that outsides sales reps provided key customers and prospects with a high touch, solutions-oriented approach. Inside sales and e-commerce then focused on mid-sized and small accounts. Branches shifted some sales effort and increased focus on order fulfillment and local customer service. Sales incentives plans were adjusted to reward the company’s people for success in serving their targeted customers. Additional changes were made to internal systems and customer data capture that promoted a single source of truth across the company.
Together, these efforts resulted in a more seamless experience across customer touchpoints. Sales grew in key accounts and margins improved in mid-sized and smaller accounts due to lower costs to serve. The manufacturers who started to encroach on the distributor’s end customers retrenched and focused on how they could work better with the distributor.
Organize Around Customers
Distributors should ensure the business is organized around customer-centric strategic choices and target customer segments. With the right commercial organizational approach, distributors can be more capable of selling and delivering their value proposition to targeted customers, while making it more difficult for manufacturers to displace them.
Revisiting the first example: after identifying which customer segments it would target, the distributor understood that the existing commercial organizational approach would no longer work. As an initial step, the company refocused its outside sellers on high potential target customers and built out its inside sales team to focus on customers with moderate potential. It transitioned the long tail of small, low potential accounts to a combination of a customer service team and self-service capabilities.
Next, it clarified roles and responsibilities. It formed a “hunting” sales team to focus on high priority prospects in targeted segments and shifted some customers to account managers to focus on cross-selling and up-selling. Sales activities and messaging were adjusted to fit these new responsibilities and what customers cared about. Sales training also increased to enable this organizational shift.
As a result, the distributor both acquired new customers and defended numerous key accounts. Sales and margins grew and the cost to sell improved with this new organization.
The risk of disintermediation is real, and distributors need to tackle this challenge head on. Distributors can take steps to improve their customer relationships, defend against disintermediation and more effectively manage commercial resources, all of which will become even more critical in a downturn.
Michael Connerty is the founder and managing partner of Groove Strategy Group LLC, a consulting firm focused on helping B2B companies grow their business profitably. Jennifer Kozak works with Groove Strategy as a lead consultant.