How to create a value proposition for intermediary customers

4th Feb 2011

Jack Springman explains why businesses should treat 'channels' as customers too.

We all have our pet hates. But when it comes to business and customer management, I believe nothing tops the expression ‘channel’ (or its first cousin ‘route-to-market’). For me they are the most insulting words in the marketing lexicon. 

Why should such seemingly innocent expressions invoke so much ire? Simply because they demean the businesses with whom a business transacts – they are just a pipe through which its goods or services must flow to reach the real customer, insufficiently important to be considered customers in themselves. Its use reveals innate egocentricity (‘this is what you are to me’) not the outside-in perspective that marketers should uphold and not just pay lip service to. 

No retail or distribution business would see itself in such terms, understandably preferring to focus on how it adds value in the industry value chain and considering itself to be a customer (of its suppliers). 

But more important than any perceived slight that the name brings is the very real implications of the thinking that underlies the use of these expressions for how these intermediary customers are addressed. 

Functional division of responsibilities

The first consequence is that there is less focus on creating value for intermediary customers than end customers.  In part this has its roots in functional division of responsibilities – marketers have responsibility for the relationship with end customers while sales have responsibility for managing intermediaries – distributors, dealers and retailers. 

Marketers create value propositions for consumers while sales teams focus on maximising the business’ share of shelf space and the available gross margin. This is the difference between the price the consumer pays and the total costs incurred in producing the product or service which must be shared between manufacturer, distributor and retailer. The focus of value propositions is on value creation, while the focus of negotiations about volume and pricing is value extraction. Value extraction is important, but the more value that is created for intermediary customers, the more can be extracted. 

Lack of intermediary customer value propositions

The true extent of this gap was brought home to me on a recent assignment for a consumer products company.  The client had asked for examples of analogous customer value propositions for the B2B element in its B2B2C model, primarily retailers and distributors. And while excellent examples of B2B value propositions could be found when the business was the end user (notably in Customer Value Propositions in Business Markets by Anderson, Narus and Van Rossum), examples focused on intermediary customers were so thin on the ground as to be almost non-existent.   

This is not to say that businesses are not seeking to create value for their intermediary customers beyond giving a greater share of the available gross margin. Consumer product companies develop category plans for their supermarket customers and share insights on how the category can be grown (though these tend to be self-serving and so are treated with a pinch of salt) and deploy hefty trade marketing budgets to support promotions (though these are costly as they encourage end customers to buy whatever product is being discounted, whether through a price reduction or buy-one-get-one-free offer). 

But experience reveals that these often lack the alignment that a disciplined value proposition-driven approach brings. And the sheer lack of examples of value propositions for intermediary customers in the marketing literature speaks volumes about the prevailing perspective on those relationships. 

Increasingly risky approach

Not focusing on value creation for intermediary customers is an increasingly risky strategy. The economics of distribution are less scale sensitive than the economics of manufacturing. As a result, consolidation in the latter has been much slower to happen than in the former. But economies of scale in distribution still exist, notably in volume purchasing and logistics. As a result, consolidation in the distribution elements of the value chain has markedly increased over the past twenty-five years. 

This has been most notable in the national then international expansion of supermarket groups such as Wal-Mart, Tesco and Carrefour over that period. Nobody is so foolish to call Wal-Mart or Tesco a channel. Any business that thought that way would find itself in trouble. At a suppliers conference a few years back, Tesco publicly berated a few named suppliers for failures in service provided. As a result of which Unilever – one of the shamed suppliers – changed its organisation structure to enable it to serve Tesco and Wal-Mart in a consistent, integrated way across all countries and component retail chains.

What consumer products companies selling to retailers have found, manufacturers in other sectors need to learn, as there is a Tesco-equivalent coming to every industry value chain, if it doesn’t exist already. 

Creating a value proposition for intermediary customers

Creating a value proposition for intermediary customers requires the same approach as developing one for end customers. The sources of value are the same. (See previous post for an explanation of these sources of value and how they can be used to boost the value in value propositions.) However, the balance may be different – what creates most value for the intermediary customer will be different to what creates value for the end-user.

In particular, how interactions are managed becomes increasingly important as the volume, scale and impact of interactions between a product manufacturer and its retailers or distributors are far greater than with an end customer.  Managing the customer experience across these interactions is far more complex as a consequence, and also provides far more opportunity to create value. 

Benefit of taking a more structured value proposition approach

A more structured approach to the process of creating value for intermediary customers that developing value propositions for them would bring has a number of benefits. Firstly, it broadens the scope of value creation, one consequence of which will be identification of quick wins – ways to create value for customers that cost very little to the business. 

Also, increasing the breadth and depth of value creation removes the excessive focus on price that frequently dogs discussions, particularly with retail customers.  Finally, because it is relatively rare, it provides a mechanism for differentiating from competitors. 

The starting point is the simple recognition that ‘channels’ are customers too.

Jack Springman is head of the corporate advisory group of consultancy Business & Decision

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