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Channel Access – Who Chooses Whom?
Aug. 24, 2015
Editor's Note:
Access to the right Channel partner is critical for success. New comers struggle most in finding the right fit, and often waste a lot of precious energy in the process. In this article, the author Mr. Guy Cooper will try to provide some insight into the channel selection process and help aspiring innovators improve their chances of success. Generic Companies may not need to go through the full process but must remember that being first to market is critical from a market share point of view (and is innovative in its own right). A simple me-too strategy, which does not aim at getting first to market, is bound to bring limited success.
Businesses are constantly looking for new ways to grow their revenues. This seemingly simple quest is probably the hardest to achieve as it depends on many factors, most of which are not under the control of the firm. In the world of agriculture, weather patterns, for example, play a major role in setting the demand curves, season after season. Despite this, there is still a lot a firm can do to influence its environment and gain market share. A clear strategy, differentiated product offering, and brand are some of the most important factors in winning commercial success, along with supporting operational and financial platforms.
A successful supplier is one that goes through a structured commercial development process and is able to answer several questions before approaching a distributor. The answers to most of these questions require market knowledge and experience. Such an approach shortens the time required to close a deal, optimizes profit margins in accordance with the real value being offered, and can dramatically increase the likelihood of success.
The structured process aims at answering a series of questions revolving around one central theme – Uniqueness. Uniqueness forms the basis of a competitive advantage and is very important in establishing the energy level of the commercialization process. Uniqueness also influences the division of margin along the distribution chain. Distributors have a “home court” advantage in answering these questions, as they are closest to the market. It would be very natural for them to take advantage of it. Suppliers need access to this information in order to “level the field” and improve their position during the negotiations. Failing to answer these questions as early as possible may very often result in lost investments, wrong positioning of products, lower sales, and loss of margin.
Uniqueness is present in many forms including product innovation (e.g. new mode of action; new Active Ingredient) proximity innovation (e.g. new delivery system of a known Active Ingredient; new combination of existing Active Ingredients) and process innovation (e.g first generic registration of existing Active Ingredient, improved production process yielding cheaper cost).Corresponding Intellectual Property (IP) will determine the duration and strength of the effective competitive advantage and the subsequent margin along the distribution channel.
We can divide the questions into TWO groups: (1) product specific (2) distribution specific. Successful suppliers use a checklist and go through these (and more) questions during the commercial development phase. Obtaining clear answers, is key to facilitating a mentality of collaboration and trust with the selected distribution partners, and will ensure long-term relationships.
An example of relevant questions, which are part of the commercial development process, is given below:
Product/Brand specific questions:
a.Which market segment (territory, crop group, use, and price) does my product fit into and how big is it?
b.What is the unique value proposition/ benefit of my brand/product?
c.What are the claims and prices of competing products?
d.Which kind of effort is required to create significant demand for my product?
e.What kind of support can I provide in educating the market on the value of my product?
f.What is the cost of producing one unit and the margin potential?
Distributor specific questions:
g.Who are the most successful distributors in the relevant markets for my product and why?
h.What are the typical distribution structures required to reach an end user and what are the typical channel margins in the relevant markets?
i. Who are the most successful distributors in the relevant markets for my product and why?
j. Which layer of distribution would I like to sell to (global, national, sub-national, direct to farm), and which infrastructure would I need in order to do so?
k. Does my product fill a portfolio gap? With whom?
l. Does the distributor have the ability to create demand for my product?
m. Which market share can they reach and at which price?
Answering these questions and others will enable an aspiring supplier to hold in-depth dialogues with several relevant partners and select the one with the best fit.
Examples:
1) A supplier of an innovative soft insecticide with NO distribution structure is looking for a distribution partner in the USA. The product is fully registered. Supplier has extensive field data from relevant climatic zones proving high efficacy at competitive dose rates and end user prices. The product has excellent control on key pests in high value crops, especially when used after synthetic chemicals towards the end of the spray program. The product uses a novel, scientifically proven mode of action and leaves no residues. As a result of this information supplier decides to focus on a narrow list of candidates with the following criteria:
● National level distributor
● Strong technical support team
● Portfolio gap in the end of crop cycle insecticides
● Excellent track record of building premium brands
● Primarily focused on horticultural crops.
● Supplier was able to hold discussions with three relevant distributors, and concluded a deal securing a high gross margin. Distributor closed a portfolio gap while obtaining an above average margin. Both parties are fully motivated to push the product forward.
2) Supplier Y is looking for a distribution partner in Brazil for a commodity herbicide they recently started producing. Supplier is eager to get into the market but does NOT have a better cost position than his peers do. Supplier recently invested hundreds of thousands of dollars in generating data, for the purpose of supporting a registration, but is currently not selling.
The product offered is already registered in Brazil by 15 distributors, and has five different supply sources beside the original manufacturer. As a result, prices have eroded by 80% since patent expiry 3 years ago, and margins are tight.
Distributor X is one of the 15 existing registrants, and holds a 1% market share in the product. He is contemplating adding a second source to his registration, and is looking for a new cheaper supplier. After looking at the data generated by Supplier, Distributor realizes he will need to invest one hundred thousand dollars in completing the submission, and is therefore demanding a very aggressive price from the Supplier, which leaves a 2% margin for the proposed transaction. After months of discussions, the transaction falls apart.
Summary:
A structured commercial development plan is a vital tool in the commercialization process and enables suppliers to “level the field” while discussing the commercial potential of their product with any distributor. Using this approach will increase the likelihood of a successful dialogue, and enable the selection of the most suitable distribution channel and access point in each individual market.
Suppliers who fail to do their “homework” may often find themselves sacrificing a lot of potential margin, wasting valuable time on futile negotiations or significantly decreasing the chances of a successful conclusion of a transaction.
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