Schemes : Temptation of channels

Channel schemes have always been an important part of channel marketing activities. They are made not only to retain partners, but also encourage sales by exciting partners about products and creating a competitive sales environment. Channel schemes thus help in maintaining the business momentum, create excitement in channels, and boost channel partners margins and profitability.

The final objective of these channel schemes, programs, and promotions is to promote the end-product, and help partners sell more. Considering this objective, vendors, and distributors design and implement schemes based on products and geographies. These schemes involve cash incentives, freebies, or even foreign trips. As vendors and distributors continue to expand their front-end incentives and reward programs, industry pundits have raised concerns as to whether incentive schemes do help in boosting sales, growing revenues and profits, and building loyal channel partners.

Majority of channel partners do feel that schemes do act as a catalyst to push more sales in the market, but at the same time, they leave channel partners in quandary. In most instances, channel conflict boils down to a question of economics: retailer profits are pushed below acceptable levels as a result of direct or indirect competitive behavior. Channel conflict is increasingly common in real life as companies attempt to reach different customer segments by utilizing multiple distribution channels (including directly from the manufacturer).

More specifically, when multiple channels are employed and distribution intensity increases, three profit threats may confront a partner: sales cannibalization, margin dilution, and customer diversion.

WHY ARE FRONT-END SCHEMES IMPORTANT?

Today, there are hundreds of brands, each competing against the other for getting the mindshare of both the partners and the end-customers. The best way to get and retain the partner's mindshare is to have continuous schemes/promotions. Vendors have to be in the minds of the dealers so that they promote their products to the customer.

In a word, Suresh Reddy, director and GM, Global Commercial Channel, Dell India said, "Every vendor has a different priority on a product level, and frontend schemes for partners help focus the attention on the priority products. They work well for both the parties as vendors get a tool to equip partners with, and partners use it to increase sales". Pointing out the pros and cons of schemes for partners, Pankaj Jain, director, ESET India said, "I believe schemes have some psychological effect, which leads to gaining more margins. For vendors it helps push volumes in the market and generate more revenue".

However, schemes can be both good and harmful for the channel and vendors, as pushing more stock without demand but with the help of schemes only may lead to a choke in future. A well-planned scheme executed with intelligence at the right time will be beneficial for everyone."

Sunil Grewal, sales director, Gigabyte Technology, India said, "Frontend schemes have become essential for channel, because the margins in the IT hardware industry have been Channel schemes have always been an important part of channel marketing activities. They are made not only to retain partners, but also encourage sales by exciting partners about products and creating a competitive sales environment. Channel schemes thus help in maintaining the business momentum, create excitement in channels, and boost channel partners margins and profitability".

The final objective of these channel schemes, programs, and promotions is to promote the end-product, and help partners sell more. Considering this objective, vendors, and distributors design/implement schemes based on products and geographies. These schemes involve cash incentives, freebies, or even foreign trips. As vendors and distributors continue to expand their front-end incentives and reward programs, industry pundits have raised concerns as to whether incentive schemes do help in boosting sales, growing revenues and profits, and building loyal channel partners.

Majority of channel partners do feel that schemes do act as a catalyst to push more sales in the market, but at the Vendors are devising various schemes to enhance their channel sales.

Partners are demanding upfront margins from these schemes, which will create a healthy marketplace consistently shrinking in recent times. Attractive front-end schemes can not only ensure profitability for channel partners, but also improve Return on Investment (RoI) for the commodities purchased by them.

Vishal Parekh, marketing director, Kingston Technology said, "Generally, we prefer to announce special offers during festive seasons like Diwali or Holi since they add to the spirit of goodwill and merriment. We have seen a heartening response from our partners every time we roll out these promotional offers and that spurs us to develop more schemes that will keep them happy".

Sanjoy Bhattacharya, product group marketing head, IT, LG Electronics India said, "We believe right price point and margin strategy are more important than schemes. Scheme is nothing but a rebate or discount. It is better to identify the vertical's need and make pricing markup strategy accordingly. Absence of this leads to unfair price war and many unhealthy practices as these schemes are short-term and tactic-oriented. Proper scheme closure is also important to ensure that each of the participants gets his dues on time without follow ups"."

PARTNERS DEMAND TRANSPARENCY IN SCHEMES

Schemes are good as they allow partners to grow in competition. There is a mixed bag of opinions from partners on this issue. According to Chandigarh based Dinesh Sharma of OST Electronics, "Schemes are important for partners, but we argue on the scheme transparency.
We want that vendors should provide transparency at the time of defining and communicating the schemes in play. The terms and conditions of the scheme in play should be very clearly articulated with all possibilities accounted for, so that further communication with partners is clear. Channel community in India is very professional, experienced and last but very importantly, smart."

Deepak Sharda, secretary, Rajasthan Computer Traders Association (RCTA) feels that promotional schemes have always been an inherent part of IT distribution. However, channel schemes are effective only if they are planned and properly executed by vendors keeping channel benefits in mind. "To meet the targets, many times dealers indulge in price undercutting and create unhealthy market competition. So schemes only benefit exclusive channel partners of vendors and not resellers and small retailers", he said.

But partners like Gaurav Goel of Eastern Logical Infoway, Kolkata, feels the other way round. "Schemes are very important, both for channels and vendors. The key objective of channel schemes and promotions is to get a better market share in this widely competitive market. It also enhances our stocking capabilities and pushes us to earn more", he said.

Besides its frills and thrills, another critical aspect of schemes is ignoring smaller partners from the race and focusing more on large volume partners.

Delhi based Shyam Modi of Modi Infosol said, "At the time of launching schemes, our major vendors stay in a regular touch with us. We engage with them on multiple touch points and give them multiple suggestions. Many times the suggestions are not just related to schemes, but to some program, issue, or process that better benefits them".

In contrast, Agra based Anand Prakash of Dayal Forms said, "We do not get direct scheme communication from vendors, rather all the schemes are routed to us through sub-distributors or volume partners, which creates lot of confusion and frustration. Many times, we found that sub-distributors do not convey the benefits and gifts to its resellers. In my view, before rolling out any scheme vendors should consult partners from every region so that they could come out with a unique and common scheme that excites all strata of partners."

The perspective of Surat based Paresh Babaria of Jupiter Automation is different. "We disagree from the point that sub-distributors do not pass on the benefits. Being the sub-distributors, we jointly float schemes with our vendors for resellers so that more and more sales happen in deeper pockets", he said.

Most vendors do claim to follow high levels of transparency and feedback from their partners while rolling out any schemes in the systems. Grewal puts in, "We get feedbacks from partners on a regular basis. Our sales personnel stay in constant touch with partners, almost on a daily basis, and discussion on schemes is always on the agenda. We conduct around 25 system integrator (SI) meets every quarter, and this also is a platform for getting feedback. Based on partner's feedback we have fixed gold coins as main channel incentives for value partners. Our partners agree that gold is the best option as incentive".

Shibu Paul, country national sales manager, Array Networks commented, "No scheme will be successful if it is not relevant to the partners; in fact, they are the primary point of contact along with the vendors." For example, Array schemes are designed based on quality rather than quantity. The company has schemes for positioning solutions in the market. Product sale incentives are very nominal. In solutions, undercutting can never win the deal. The system integration, strength, and ability to execute will make the difference".

Govind Mardha, CEO, RS Computer added, "We plan a scheme keeping in account all dealers with whom we interact and to whom the scheme is being made. The slabs of the scheme are fixed in such a way that we cover the maximum number of partners with the scheme, and ensure that no dealer feels that he is not being considered. Hence, making the scheme transparent and promoting a sense of equality among all partners."

From the view of Ankesh Kumar, director, channel products and marketing, Emerson Network Power, "We are very clear and succinct with terms and conditions. There are no unnecessary riders, so the scheme is very straightforward and easy to understand. The processing of benefits and any communication on the same is transparent".

ISSUES RELATED TO SCHEMES

As the vendors and large partners boast of the benefits of schemes, they are also full of risks as a lot of discrepancies crop up during and after the period of schemes. The very nature of the schemes is to motivate partners to stock more material than the regular purchase.

Therefore, it is essential for a partner to read the terms and conditions before participating.
MOP crisis Over the years, dealers are crying for fixed sales targets from their vendors in such a way that they reflect the true market size and demand. This exercise should not result in dumping, price cuts, and cross-territory supplies. Vendors should review the market size of a particular town or district and accordingly place a limit to the number of dealers in order to make the operations of the dealers profitable. Even in large cities, multiple partners can coexist with the areas delimited for each partner.

In fact, schemes-related issues were also discussed at length during The DQ Week Tech Caravan multi-city roadshow in Ludhiana. Gurpreet Singh of Premier Computers highlighted that market operating price (MOP) is one of the major issues attached with schemes.

He said, "The focus of channel partner shifts towards the vendor offering the schemes. On one side, it boosts sales which are limited to a particular group of channel partners, but on the other side it disturbs comparatively smaller traders in the market. Hence we demand vendors to hire an agency that monitors and takes action against partners who violate MOP".

Rahan Vohra, August Marketing and Services, pointed out, "MOP issue will continue to grow until vendors do not take concrete steps to safeguard the benefits of upcountry market partners".

Rather than blaming partners for eroding MOP, partners need to be serious and fix up the cut-off for all types of partners."

Reacting to the MOP issue, Puducherry based PN Prasad of Microplus Computers commented, "Vendors have to offer a business model to their partners in such a way that it ensures profitability of partners in normal circumstances. The MOP issue has been existing in channel for many years in the past. But, in my view, this issue will continue until all the resellers become part of the local associations. At the association level, a reseller has to exist in the market under the purview of association disciple and common minimum terms. Today, vendors are taking benefits of this divide and rule, and manipulate the pricing".

However, there are partners who believe in cut throat competition. Babaria of Jupiter Automation asserted, "I disagree with the opinion that schemes create MOP violation. We are happy with the policies laid down by vendors for tier-1, 2, and 3 partners. It helps the partners to make more margins and it also maintains MOP. This will be good to counter competition and in the long term it will benefit everyone. We should not be bothered as to where we are buying from but we should be bothered about how much money we are making".

Meanwhile, IT associations like TAIT, Delhi CMDA, and Confederation of IT Associations (Confed-ITA) have also raised their voices against vendor polices. For example, Confed-ITA has framed a set of guidelines called Common Minimum Trade Terms (CMTT) for all players in the IT trade in the presence of the vendors at their annual GT2GT meet.

The association has been demanding that vendors should maintain pricing uniformly across all areas. All schemes should be communicated comprehensively to all the partners. No steep discounts should be given during month-end if it is not specified in the scheme in the first place. Partners should be compensated for flow of material from other areas on price differential by the principal as this problem is due to the principal's faulty pricing mechanism.

It is pointed out that the month-end discounts offered by distributors is a major cause for MOPs less than DTP, cross-territory flow of material due to price differential and others.

DELAY IN SETTLEMENT

The second big issue with respect to schemes is the delay in claim settlement. Many partners believe that the vendor reimbursement policy is a major issue, as they do not settle payments within the time frame. "At times, we have to wait for 3-6 months for payments. In many cases, vendors float schemes to compensate for the high value of the product without reducing the price, and any discount has to be passed on to the resellers to push products," added Arun Bhargavva from Kanpur.

Goel of Eastern Logical Infoway added, "In smaller cities, settlement takes a longer time. It is a very cumbersome process and it also pressurizes us to generate volumes. If vendors can improve and promptly settle process, it will help us a lot".

CROSS-TERRITORY ISSUE

Partners in tier-2 and tier-3 complain about vendor indifference besides delay in settlement. Dumping of goods from metros to smaller cities is very common, which is creating price war in the market. Sharing the ground realities, Sharada said, "In Jaipur, we have noticed that the local executive of the vendor dumps loads of materiel to meet his internal targets, and forces the partner to sell below the MOP. In case if a partner denies, the executive offers further discounting to the other partner and rotates the material. This way they are spoiling the market conditions".

Moreover, at the association level we are going to discuss this issue with all the vendors and distributors, so that we can control dumping of goods from cross territory", he added.

HOW VENDORS MANAGE UNHEALTHY COMPETITION?

Undercutting of prices happens when companies discreetly pass on back-end rebate. Partners then get into unethical ways as they are assured about monies coming at the end of a month or a period.

This is a common practice of IT trade; this factor must be considered before rolling out the scheme. As far as LG is concerned, it emphasizes on saleouts rather than stocking. "We design the program based on partners' true capacity. We follow two types of payouts for schemes. The first one is called "DFI"-discount from Invoice and the second one is AAI-accrual on invoice. Continuously, we are trying to increase DFI portion to be more transparent. Moreover, while formulating the scheme or program we keep the smallest partners at a remote place in mind. Before announcing any scheme/program we keep provision at the respective branch. After closure of any program, we give lot of reminders to our local team to close within 15 days," said Bhattacharya.

Parekh of Kingston said, "The price cutting does not really happen in the case of healthy, open, and transparent schemes. We believe that the brand should be able to create a pull rather than pushing it by enticing partners with back-end rebates."

Whereas Grewal of Gigabyte said, "We have very specific terms and conditions for participating in our schemes that act as deterrents to price undercutting and unhealthy market competition. Also, provision of gold coins as incentives also acts as a deterrent as this incentive can in no way be used as a tool for price undercutting."

Distributor like KC Computers feels that it is difficult to actually monitor these activities, and some of these activities do go on with some schemes.

Agreeing to the partners' issue, Ben Su, MD, MSI India said, "There is no denying that such malpractices do exist in the market place. However, to combat the same, the company claims to take special care not to indulge in many discounts-related promotional activities. The tour packages or gifts are a better way to help maintain such issues".

Siril Muthirakkal, sales manager for India channel, Foxconn feels, "Lowering price is like self-bleeding and will not help in the long run. Targets are to be achieved with good sale strategies and not only with the price. Otherwise it will be impossible to move forward once it reaches the bottom line. This is controlled by setting a fixed MOP so that there is no room for price undercutting. Also, it can be controlled by delivering attractive schemes on high slabs."

In the view of majors like Dell, channel programs need to be sustainable throughout the year and not just around the festive season which is one of the main reasons why unhealthy practices take place to meet targets.

"We believe that this impacts overall partner profitability. There are obviously different kinds of approaches taken for big and emerging cities because of the volumes expected from each. Targets and schemes are set accordingly. But having said that, rewards to schemes that are location agnostic are same across cities," Reddy said.

Kumar of Emerson said, "Our products are always made with a defined pricing strategy. Our schemes are very clear and valid only if the products are purchased at the dealer transfer price.

Talking about Logitech's policies, Subrotah Biswas, country manager, Logitech India and South-West Asia said, "At Logitech, we are well equipped with ERP systems, which help us monitor the results closely. At the planning stage, adequate confidentiality is maintained to ensure fair handling. We strongly object artificial business gains through push sales. We constantly monitor inventory levels at all levels (tier-1, 2, and 3) to make sure that overstocking is avoided. Price undercutting is a phenomenon which results out of excess supply, which is minimized by us through constant monitoring of stocks and scheme offers at critical times to impact sales momentum".

Saurav Grover, director, AOC Monitor Business said, "The idea of any channel scheme is to boost sales. Unhealthy competition among partners does not yield the right result. At AOC, we intentionally follow certain guidelines while executing any scheme to avoid such a situation. To begin with, we plan our scheme with realistic target slabs, assuming 15-20% growth, calculated keeping the past record of partner as well as the market size, market scenario, etc." He also added, "In today's time the market opportunities in C- and D class cities are huge and every vendor wants to grab as much as he can from these markets. This might be the reason partners in small cites think this way. There is a certain market opportunity which is not easy to pick and hence much more efforts are required."

Commenting on the unhealthy practices, Sushmita Das, country manager, Kobian added, "Yes, this has been a practice in the channel for years. But I believe in the last 2-3 years there has been a change in the mindset of the channel, especially those who are driven by bottomline. There are a few vendors who push the partners to discount the scheme and lower the MOP in the market."

UPFRONT OR BACK-END?

Partners have been demanding for upfront margins from vendors, which will create a healthy marketplace. Resellers will then be achieving targets on the merits of their sales strategies, and not on the basis of lower prices.

The role of CMDA Delhi has been very encouraging so far. The association has already taken a move by sending a letter to MAIT to end the practice of back-end rebates and incentives, which is certainly a bold initiative. Manoj Khanna, secretary, CMDA Delhi said, "We are against vendors who are artificially trying to create a push for a product in the market through unnecessary schemes."

While taking the opinion from vendors, there was a mixed response on upfront margins.

Bhattacharya of LG prompted, "I agree, discount is not a solution; it actually creates many unhealthy practices which in the long run do not prove good for individual or business community. It should be a fair play for everyone based on market demand and brand recall."

Kumar of Emerson is also in favour of the view of upfront margins; he opined, "Upfront margins certainly have some significant benefits over rebates. The most important benefit is that they are encouraged to move out of their comfort zones and sell products from other lines apart from UPS or PAC solutions. The reseller who is able to generate volumes on upfront margins obviously deserves better benefits."

Even Marda of RS Computer intents to have best of both worlds-upfront and back-end. He opined, "I feel that upfront margins are good for the dealer community, but it also brings with it the darker side of discounting the scheme on the prices of the product. So it essential to balance both as things can go out of hand if caution is not executed. The best way could be to give upfront margin to the small retailers and have a mix of upfront and back-end margins to the sub-distributors and distributors. This can provide some stability and also reap the benefits of the upfront margin."

Rajan Sharma, VP, sales, Digilite is also fine with the upfront margins for partners. He said, "Yes, I believe it is very important for channel partners and vendors to push healthy business practices to ensure long-term benefits for all the stakeholders in the supply chain. Most important is to ensure business on transaction margins to avoid losing on working capital and blocking funds for a long time with delayed back-ends, rebates etc."

However few partners do not feel comfortable while offering upfront margins to partners.

Grewal of Gigabyte said, "It really seems difficult to have or create a healthy market place by offering partners upfront margins in terms of cash. For this reason, we focus on offering gold as incentive, as gold is generally used as a saving by a majority of Indians.

Similarly, Reddy of Dell pointed out, "The end objective of having a healthy marketplace is something we are absolutely supportive of. But giving upfront margins would not solve the problem. There has to be a mix and balance of moves. We need to have both the pull and push levers in the market to drive the business."

Parekh of Kingston too, rejected the idea of upfront; he asserted, "It is very difficult to define a set margin when there are so many variable factors like additional taxes and octroi in some cities which leads to infiltration of products, fluctuating dollar prices, volatility in product pricing, and pre-dominant grey channel. Hence, it is also difficult to maintain the same level of margin as the buying behaviour differs from partner to partner, like the volume, reach, repeat orders, etc."

Su of MSI says a big "no" as according to him, it creates chaos in the market. "This would lead to chaos in the market place. While meeting their sales targets, partners anyway have a tendency to play with margins. Therefore, giving these margins upfront will lead to massive undercutting and price wars, which would cause price instability in the market place, directly harming the brand health."

In the view of Biswas of Logitech, "It is too early to standardize this. Our retail environment needs to get more organized, especially in the IT space. We need to ensure more transparency and data sharing among various levels of business to make better/more informed strategies. At this point, different markets and different channel tiers are working on different platforms. It will take some time to apply concepts like ‘upfront margins' universally."