RTM: OK, so what does "understanding your partner’s business model" really mean?

TS:  Right. Firstly, it means having a clear picture of how they make their money. Secondly, you need to appreciate why customers buy from them: in other words, how they create value. Thirdly, you need to know their goals – what is their business plan?

RTM: Let’s look at that first point in more detail. What do you mean, how they make their money?

TS:  In most intermediaries who are reselling products that means earn and turn. To earn money you have to be efficient – you have to have a low cost-to-serve. Turn means you have to optimise the working capital, which would include inventory, creditors and  debtors.

So at a basic level the account manager needs to know the intermediary’s gross margin and its cost-to-serve – which normally means its sales, general and administrative costs and how often it turns its inventory. Once you have these basic measurements in place and some data, you can start to ask questions like – so what happens to your profits if we can double your inventory turn?

RTM: So how does that translate into reality?

TS: Well, you need to be able to understand the different types of channel player in your industry. For example, that might mean mail order/e-tail, retail, corporate reseller, distributor, consultancy, etc. and how each type of business model works and adds value.

Understanding the business model of your partners will enable you to act on the right levers to improve performance for both parties.

RTM: How do you mean?

TS: Well it is only if you understand their businesses to this degree that you can start to discuss the impacts that products will have on the business model.

For distributors, the main levers are going to be around gross margins, efficiency costs and working capital, with a particular focus on inventory. If you can work with a distributor to dramatically improve his return on working capital by reducing inventory turns, you will make a friend!

For a business-to-business reseller it is often about helping the reseller to offer a complete solution to the end-user and assisting them with value-added services.  Suppliers can also be a big help in sales and marketing. Often they have amazing contacts with blue-chip end-users. They can really help resellers with networking.  The priority for a retailer is typically better inventory management and helping the retailer to create more foot traffic.

All this builds into a business proposition for the intermediary.

RTM: Can you give an example?

TS: OK. Take Harry Potter and The Order of the Phoenix. I went into a bookshop that was offering discounted copies, bought the book for £12.50 and then spent another £80 on other titles. I would guess that the underlying proposition from the publisher, Bloomsbury/Scholastic, goes like this: "We are going to generate huge demand for this book through a lot of marketing and PR. We will create an environment where everyone wants it – Harry Potter fever.  Promote it hard, possibly at a discount, and it will generate a lot of business for you, the retailer."