Thursday, December 2, 2010

An Example of How Business Operates

As part of general business knowledge and how business operates, here's an example of how companies sell through various sales "Channels" and their use of "tiering".
The term "Channels" is used frequently in reference to sales and marketing, but what does it have to do with contracts? The answer is simple. Every Company has their Sales Channels or the methods by which selling occurs on behalf of the company. For example the following is a list of some examples a supplier may:

Sell direct to: 
  • Original Equipment Manufacturer, Where the Product will become part of the OEM's product
  • Value Added Reseller. There the Product will be added to reseller's product to create solution
  • Distribution
Sales may be by:
  • Direct sales by the Suppliers own sales force.
  • Direct Sales by a Supplier owned or controlled Subsidiary.
  • Sales by a Manufacturer's representative, Broker of Agent that is authorized by the Supplier
  • Sales by Supplier via the Internet
Distributors can:
  • Resell to retailers or end customers
  • Sell in conjunction with value added services they provide
Most companies have a variety of different sales “channels” involving both direct and third party sales of their products. The Supplier or its Subsidiaries make direct sales to the customer. Companies may have direct sales to major customers (referred to as dedicated or named accounts). For example, a company may have customer accounts where there are teams focused on selling Products on an OEM basis. Direct sales by Supplier are usually made to large Original Equipment Manufacturers (OEM’s), large Value Added Resellers (VARS) and may be made direct to major customers. More recently direct sales are also being made through cost effective models such as Internet sales. 

In locations where the Supplier didn’t have sufficient business to warrant direct sales staff on their own, they may conduct a form of direct sales through manufacturer’s representatives who will sell on their behalf for a commission. If you are buying and a manufacturer’s rep is involved, they are adding cost to your purchases so if possible, its always better to deal direct. For any sales that the Supplier doesn’t want to focus it selling resources directly on they will use third party sales channels such as distributors or value added resellers.

Independent third parties who will sell to target markets are also called Channels. With the advent of outsourcing, some Suppliers may not sell any product direct and have all sales be managed through distributors who function as their logistics and order fulfillment arms. When a supplier sells through channels, the Supplier effectively controls what the channel does and what you will get for pricing and contract terms.

Many sales operations also do tiering of channels. Suppliers will look at your business volumes and importance to them as a Customer and will determine what channel is appropriate for sales to you. If they are willing to sell direct they will also determine what sales tier they will place you in.  For example if you are a tier 1 OEM customer, you will normally get their best pricing and terms. The tier the place you in impacts both the price you will pay and terms they will offer. If a proposed term will increase their cost or risk you may not get it. It a form of risk and reward. Unless they feel that the risk is manageable or the cost is something them can manage, they'll probably reject it. If you can't deal with them, it may drive you to Internet sales or distribution where you will get less.

In drafting and negotiating contracts it's important to understand what channel and tier you would be in. If you aren't a Tier 1 OEM, Trying to get Tier 1 OEM Pricing and terms is highly unlikely. No matter how good a negotiator you are, if the supplier doesn't see the need or value of your business, they simply won't make concessions.