Here is a tricky question.  You have to sell one million widgets.  How much of your budget should you spend trying to reach end-users through your channel partners, and how much should you spend on addressing the end-customer directly on your own?

Very few companies are capable of giving any sort of coherent answer to that one, says Erin Anderson: "In most companies it is a case of last year’s budget plus 5%.  It is very hard for companies to come up with a coherent strategy to answer this one."

There are several very good reasons why suppliers find the question almost impossible to answer. Historically, the budget aimed at consumers and the budget aimed at channels have probably been spent by different people. End-user demand is the province of the marketing director/ad agency, whilst the channel manager handles marketing through partners. There may be little or no coherent attempt to measure the effectiveness of channel-marketing campaigns.

Yet there are some principles that can be followed, says Julian Dent, chief executive of VIA International.  He argues that, in general, suppliers with unique products need spend little or nothing on selling through channels.  "With Viagra, Pfizer needed to do little more than public relations and then rely on word of mouth.  Potential customers would then demand the product from pharmacists or doctors, who had no real alternative to offer."

Dent argues that the picture changes as the product becomes more like others already on the market.  "If there is little to differentiate your product from others, then you may want to spend a certain amount on ensuring that influencers and partners are getting at least as much reward from you as they are from your competitors."

The picture changes again with what Dent calls "an inferior product".  He says: "At this stage there is no point trying to create end-user demand at all.  You should focus entirely on rewarding partners for switch-selling customers to your product!  Anything can sell if the commission is right!"

It is a useful model.  And note that the power of the channel is in inverse proportion to the power of the product.  If you are selling an inferior product, you have to get the channel on your side!

“Anything can sell if the commission is right!"

Anderson argues that this switch has happened with fast-moving consumer goods over the last five years.  "The power of advertising to build brands has really declined and point of access in a few large supermarket chains has become essential.  So FMCG companies have switched their budget away from creating demand with potential customers to paying superstores for location and in-store promotion."

So perhaps suppliers should look at where they are on this road map before allocating budgets.  Dent says there is a tendency, for instance, for companies with very powerful brands to still feel that they have to match the co-op marketing funds of B and C brands.  His model suggests that this would be a waste of money.

Of course, how much to spend with an individual partner depends very much on the profitability of the account.  And, in practice, very few suppliers are actually capable of accurately measuring this (see Improving Channel Profits, Page 3, Summer 2003).

Pat Bailey, finance director at Electrolux Europe, sales and marketing division, found that Electrolux account managers were only right half the time when asked which accounts made Electrolux money and which actually led to losses.  A new system means that Electrolux can now measure profitability account-by-account. 

"In most companies it is a case of last year’s budget plus 5%.”

But when Bailey asked half a dozen blue-chip household names how they measured account profitability he found that they all still relied on the gut instinct of their account managers!  (We tackled account profitability in more detail in our Summer 2003 issue.)  All of which leaves our hypothetical widget manufacturer with an awkward question.  If it can’t measure account profitability, how can it possibly know what marketing strategy to adopt?

How an oil giant decides

How does a major oil company decide how much to allocate to marketing through its partners?  The worldwide head of distribution says: "With a retailer we look at overall potential in sales and profits and then at how much it will cost us to achieve that figure. We then top-slice a percentage for advertising to create consumer demand.  The account manager then sits down and agrees on how much to spend with the retailer in store or through retailer-driven promotions – it becomes a tactical decision driven by the relationship and the potential."

The picture is rather different with distributors.  Here, a percentage of sales is set aside for joint marketing and another percentage is set aside for training.  "Precisely how much we spend on joint marketing is again a decision made by the account manager and depends on the upside in the business plan.  We are investing more these days in training as the distributors become more professional."

But the oil company can’t measure the real return from joint marketing: "We aren’t generating leads that can be followed up.  It is more a question of whether or not we have achieved our joint objectives."

Oracle moves to a discretionary model

Like much of the computer industry, Oracle has moved away from giving all its partners a certain percentage of cooperative advertising in the last few years.  Tony Mulligan said: "We found that if it was a standard percentage people just built it into their business model; they didn’t value it."

Instead, Oracle partners have to apply on line for money on a project-by-project basis and at least match Oracle’s spend with their own. 

Mulligan says: "It takes about 15 minutes to fill in the application, which is about two screen pages.  They also have to say what they expect from the action in terms of response."

In the last few months Oracle has introduced effective closed-loop marketing and Mulligan says that he can now tell from precisely which marketing campaign each order has come.  He admits however that partners may be inclined to exaggerate the success of any joint marketing action by claiming that it generated extra orders, which in practice came from the existing client base!