Changing Channels

by Bob Andelman
Corporate Meetings & Incentives, Feb 1, 2001

E-commerce has manufacturers re-thinking their channel relationships with dealers and distributors - as well as their incentive strategies.

Not long ago, a generation of architects scoffed at the notion of shifting their entire industry from pencils and slide rules to CAD software. They were still standing on the tracks staring into the oncoming headlights when the e-railroad ran over them.

Today, the Internet threatens to do the same thing to the incentive business, as traditional distribution channels shift and morph and consumers of products ranging from annuities to automobiles bypass distributors - a.k.a. brokers and car dealers - to buy directly from the Web.

"This is a pseudo-hot potato," says Gartner Group analyst Karen Peterson (www.gartnergroup.com), who is based in Stamford, Conn. "It is raising the bar for distributors - not necessarily disintermediating them, but requiring them to re-think their current value propositions."

As manufacturers rewrite the rules when it comes to their relationships with dealers and distributors, one question is whether there will be implications for distributor incentives. With 72 percent of incentive programs tied to the distribution channel (according to research done by the Incentive Federation), the answer is, "How could there not be?"

An Old System, a New Economy Pre-technology distribution systems were manufacturing-oriented, dictated in many cases by long production runs. Building a car took five days; now, it takes five hours. Carrying inventory was not necessarily as costly or viewed as negatively as it is today. Transactions were performed locally.

The new economy is everybody's marketplace, so it no longer makes sense for a product to be bought and sold repeatedly before it gets to the final purchaser.

Today, online annuity brokers such as AnnuityScout.com (www.annuityscout.com) offer several companies' products to consumers directly, at a distribution cost that's about a tenth of what it would be using a broker. Ford Motor Co.'s ConsumerConnect e-initiative (www.ford.ca) has just started to allow Canadian consumers in two test markets to be the first in the world to complete a new car purchase online, right down to customizing features; then they can track the vehicle through the manufacturer's plant to the dealer's door. And in the travel industry, a mega-site known as T2, funded by a reported $100 million investment by the five major airlines and including participation by 200 hotel companies, 44 car rental companies, and all the major cruise lines, could redefine the way travel is purchased.

Which industries have the most potential for this "disintermediation" of distributors?

"Anything that can be digitized," says Peterson. "If I can digitize the interactions, if I am not adding service and information on top of that, then I think that is where you are going to have a huge challenge."

The Human Factor
Despite all this, many observers agree that the way that customers buy - for now - will continue to be driven by how they prefer to do business. "People still don't want to buy a million dollars' worth of something with a click of the mouse," says Bruce Bolger, president of Irvington, N.Y.-based Selling Communications and online publisher of the Sales Marketing Network and Info-Now.com (www.info-now.com).

At the end of the day, he believes that buyers will find an online source and then use old-fashioned technology - the telephone - to place an order.

In the insurance industry, which is another good example, Mark Trencher, vice president of insurance industry research at Conning Corp. in Hartford, Conn. (www.conning.com), reports "a relatively small percentage of consumers going out to the Internet to shop or to get price quotes before they buy. And an even smaller percentage go out there and buy online." That's because, once again, buying insurance products is more complicated than selecting a book at amazon.com, and most people want to deal with a real person who can answer questions.

New Goals for Incentives!
No one can say for sure how these changes will eventually filter down to manufacturers' dealer/distributor incentives, but observers like Farrell expect that they will. He uses the example of one of his clients in the computer peripherals industry that traditionally rewarded its channel based on sales accomplishments. The company has added a direct-sales component via the Internet, so end-users can now buy product without having to go through a dealer. The dealers still deliver the product, training, and service. But the company's incentive programs are now based on the timeliness of that delivery, the accuracy of the training, the efficiency of the service, and overall customer satisfaction.

Dealer/distributor incentives will have to change like this, he predicts, with "new measurements to reward the behaviors that are driving the new economy." The distributor will have to become more of an expert resource and less of an order taker. He or she will have to be more service-oriented, more consultative, and provide more product knowledge. The game in the future is going to be all about adding value - and incentive structures will reflect this.

It comes down to designing incentives that do what we need them to do. "Incentive programs work because they are a sound business investment," Farrell says. "The day they stop doing that is the day they will no longer be effective."

Arnold Light, president of The Light Group Inc., uses his Internet site, www.incentivesmotivate.com, as what he calls his "capabilities brochure," to which he refers clients in lieu of sending a print brochure. He also runs a secondary site, www.PromoLight.com, where clients can order imprinted merchandise such as T-shirts or baseball caps, and www.CyberCentives.net, where his clients put their entire incentive programs online.

"We do programs that are not online more often than not," Light says, "but I can see us really moving in this direction. ... We are now becoming e-tailers, so to speak. It opens up all kinds of doors for us. We have the know-how; we have the marketing expertise, the technology, and the fulfillment operations all under one roof."

Light says that incentive companies must think a little harder about where they fit into the whole supply chain. "We didn't wake up one morning and say, `Boy, I think we ought to offer this to our clients.' It has taken me about six years to get us to the point where we are now - and we're just starting to take off."