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Case: Distributor Incentives

Case studies from BioBM are fictionalized, although the situations are faced by leaders at real companies.

LabTherm, a small, US-based manufacturer of laboratory incubators and ovens, had developed a proprietary heating technology that allowed them to provide a very high degree of temperature accuracy and uniformity more inexpensively than other high-end manufacturers. While they had a price advantage compared to other manufacturers that competed on quality, they still competed at the high end of the marketplace. LabTherm had been founded by Calvin, an enterprising engineer, about 7 years prior. After an initial period of slow growth and very modest revenues, LabTherm seemed to be starting to take off and was growing rapidly. They had recently made their 20th hire and moved into a larger space to accommodate their growth, although they remained a very engineering-focused organization.

New Responsibilities Bring New Ideas

Maintaining revenue growth from your distribution network

John had been a sales associate within LabTherm but expressed an interest to do more, and was recently granted new responsibilities and a new title. He had previously dealt primarily with end users in the US as well as some independent US-based sales reps, but was recently promoted to business development manager, a position which expanded his responsibilities to managing distributors internationally, under the supervision of Janice, LabTherm’s VP of Marketing and Sales.

On the recommendation of Janice, LabTherm had recently undergone a big push into Asia, adding many distributors across East and Southeast Asia. One distributor in particular, MegaLab, which operated in Eastern China, was proving to be a star. MegaLab’s sales had rapidly eclipsed those of many dependable, long-time distributors in the US and Europe. Between the new distributors and a new marketing push, LabTherm was growing rapidly and had more than doubled in size over a two-year span.

John saw what MegaLab was doing and wondered how the other distributors could be influenced to do the same. While there were some distributors who did no more than address international leads that came in directly through LabTherm, many were competent, seemingly interested distributors who actively promoted LabTherm’s line, John thought they were not doing as much as they could. An analysis he performed and presented to Janice supported that belief; yes, China was a large research market that was surpassing that of many European countries, but compared to the respective market sizes MegaLab was still far outperforming LabTherm’s european distributors. Furthermore, MegaLab had done this without exclusivity in China (they were only very recently granted exclusivity), while many of the European distributors had exclusive rights to sell the LabTherm line in their territories.

LabTherm already knew they were leaving a lot on the table internationally. Although the number was much lower than it was a few years ago, about 75% of their sales still originated domestically from US customers and reps. MegaLab had grown to account for one-quarter of all sales that came in through LabTherm’s distribution partners.

While Janice was happy with the direction that LabTherm’s international sales were heading – international sales growth had slightly outpaced the very high rate of domestic sales growth – she recognized there was a problem. Janice and John went to Calvin, the founder and CEO of the company, to propose they rethink their distributors’ incentives. After John presenting his case, Calvin gave the project his blessing, provided they don’t do anything that would interfere with business from LabTherm.

Managing Incentives to Increase Distributor Performance

Being a small company, LabTherm didn’t find it necessary to formalize their distributor incentive plan, but they had an informal plan which was applied to all distributors. New distributors were given one-year non-exclusive agreements. After the first year they may be given exclusivity, dependent primarily on their sales. Discounts were provided based on order quantity within any particular order. LabTherm’s sales and customer service support to both the distributors and their customers were excellent, but they didn’t offer much marketing support beyond putting the distributor name and contact information on brochures and other marketing assets.

Maintaining revenue growth from your distribution networkJohn was confident that failing to provide more support in marketing was probably a hindrance to the success of a number of distributors, but he also didn’t believe there was much he could do about it. Calvin, who retained direct control over new spending, was very conservative with marketing spending. John and Janice had once lobbied him for a simple Google AdWords campaign, and Calvin didn’t like the idea of buying traffic – even traffic that was seemingly highly relevant. Calvin believed that organic search, word-of-mouth, and their relatively new email marketing efforts were enough. They walked away from that meeting without even a modest budget for search advertising.

Another non-starter was public pricing. LabTherm posted all their prices online and also had online ordering to make it as easy as possible for domestic customers to place orders directly. While this was a source of discontent from MegaLab and many of LabTherm’s distributors, Calvin, Janice, and John all believed that they would hurt themselves by removing pricing from their website. Not only would that be a significant blow to their e-commerce sales, if not render them implausible altogether, but it could also cost them their price advantage. After all, they thought, if the domestic customers can’t see that LabTherm had lower pricing, they wouldn’t be nearly as likely to buy LabTherm.

That didn’t leave them a lot of room to work with. John suggested that they change their order size-based discount incentives to discounts based on total order value over the past year. “What we want to do is encourage total sales, not just large orders,” John said to Janice. “Having discounts based on order volume doesn’t incentivize greater total sales, but rather fewer amounts of larger orders; it encourages stocking inventory. Plus, otherwise good distributors who don’t want to stock inventory may be turned off if we’re effectively trying to push inventory on them based on our discount scheme.”

“But we want those big orders,” Janice replied, “and we want distributors to keep inventory. Not only does it help reduce prices for end users by greatly reducing the effective per-unit shipping costs and also reduce order fulfillment times by having units locally available, but if distributors are sitting on inventory they’re going to want to get rid of it as soon as possible. That means they’ll be more motivated to promote and sell the LabTherm products.”

“What about a hybrid solution?” John asked. “It doesn’t have to be all one way or another.”

“True, but I don’t want to create a situation that’s so complex no one knows what any given distributors’ discount is at any point in time. Imagine poor Laurie having to keep track of all that,” Janice said, referring to LabTherm’s bookkeeper who also processed orders. “And it’s not going to be any better on the distributors’ side. A lot of our distributors are smaller companies than we are, including MegaLab. They’re not going to want something that complex either.”

They sat in silence and pondered for a while before Janice turned her chair around and looked out the window. “Perhaps we’re thinking about the problem too one-dimensionally. There has to be something other than discounts that we can use to create incentive for our distributors … and that Calvin would approve of.”

What do you think?

What should John and Janice do to incentivize LabTherm’s distributors and continue to fuel growth? Join the discussion on LinkedIn.

Marketing of Life Science Tools & Services

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