Why financial data is not enough

Past sales, past profitability and product mix are all important drivers that should be carefully considered in planning channel strategy.  But perhaps they are relied on far too often by suppliers.

At best, financial data can only give a rear-mirror view of the world. And, all too often, the rear mirror gives a pretty smeary view.  Normally, the financial data is incomplete.  For instance, Professor Malcolm McDonald at Cranfield Business School in the UK reckons that 85% of suppliers do not measure channel partners’ profitability at all, relying on sales and product mix instead. 

This is a major failing.  How can you improve your channel profitability without measuring profits?  Account managers often think they know the underlying profitability, but Pat Bailey, finance director at the sales division of Electrolux Europe, found that their hunch was right only half the time.
Setting aside the issue of whether you are measuring channel profitability, exclusive use of financial data to plan channel strategy has three critical failings.

Firstly, low-volume sales channels may be of critical importance in engaging with early adopters or boosting your brand image.  Sherazee explains: "If you simply look at sales volumes, you may well conclude that a particular channel is of low importance to the business.  It is easy to fail to invest in the small specialist who is the demand creator but who is, apparently, not making money for the business."

This doesn’t simply militate against the small partners.  The fact that a retailer has profound customer insight, whilst its competitors have no interest at all in their customers, does not appear on a balance sheet.

Secondly, an approach based on past sales levels does not encourage real engagement with the account.  You end up starting the conversation along the lines of "We want the same again, with a 15% uplift, please".  The almost exclusive use of financial data in future channel planning also leads to obsession with short-term goals, such as quarterly sales numbers.

If you plan on the back of past sales volumes you are unlikely to innovate or seek out new ways of engaging with the channel and, ultimately, the end users. 

Thirdly, at a deeper level, all suppliers ultimately live or die on the experience of their end customers.  As Olson puts it:  "Sooner or later, senior management in most companies become interested in the total customer experience.  They simply can’t measure that or see it by simply looking at the financial data.  It can tell you stock turn, product mix, sales and profitability, but it can’t tell you about the customer experience or create a deep level of account engagement."