Distributing and Selling High-Tech Products

Distributing and Selling
High-Tech Products
The greatest technology is useless if it cannot be sold. Indeed a
smart distribution strategy has been one of the key success fac
-
tors for many of the high-tech firms that managed to survive
and even thrive during the recent economic downturn. In that
matter the success of Dell [1], Logitech, eBay, and Cisco Sys
-
tems—among others—illustrates the fact that only when cus
-
tomers are purchasing a product does it ultimately succeed,
indicating that the product meets those customers’ needs or
wants.
Decisions about marketing channels are among the most
crucial decisions facing marketers [2]. The first decision is
to choose how to balance push and pull marketing. A push
strategy means that the different channels will promote and
sell the product to the customers. A pull strategy relies on
advertising and promotion directly to the customers motivating
them to come and ask channels for the product. Usually, a
push strategy makes sense when brand loyalty is low, when
the choice of the product is made in the store. A pull strategy is
best when customers choose the brand before going to the
store, because of a strong brand loyalty or a high involvement
for the product.
The push/pull decisions have a significant impact on the
other elements of the marketing mix, as well. The communica
-
tion strategy will be different if a company decides to go
directly to the consumers, as opposed to going through various

intermediaries. Similarly, the pricing strategy will be affected
by the selection of distribution channel. One may estimate that
the distribution channels account for 25% to 40% of the retail
price of goods and services in high-technology businesses,
while the sales channel represents between 15% to 35% of
the final sales price for industrial products. Consequently,
distribution channels managed efficiently can have a signifi
-
cant impact not only on sales but also on profit margins.
189
7
Contents
7.1 Selecting distribution
channels for high-tech
products
7.2 Managing distributors of
high-tech products
7.3 Selling high-tech
products
7.4 Summary
CHAPTER
Channels may also have an impact on product design, because some large
distributors have enough power to impose their own requirements on
their suppliers. Finally, a channel strategy requires a long-term commit
-
ment vis-à-vis other partners. Once a contract has been signed with a
national or international distributor, for instance, a company cannot back
off within 1 day and switch to another channel. Conversely, it takes a long
time and experience to build an effective Internet channel or an efficient
sales force.

As we shall see in this chapter, if the essence of high technology is con
-
sidered in the process of creating a strong distribution strategy, its character
-
istics will impose certain priorities and choices in the selection of the various
channels [3], as well as in the effective management of those different chan
-
nels [4]. In addition, we dedicate a specific section to the management of a
proprietary sales force, which is a very common characteristic of B2B high-
tech firms.
7.1 Selecting distribution channels for high-tech
products
Selling a good or a service requires the combination of three distinct chan-
nels: a sales channel, a delivery channel, and a service channel. Those chan-
nels can be joined together or can be discrete from one another. For
instance, successful direct marketing firms employ the Internet, the phone,
and mail as sales channels, express mail services as the delivery channel,
and regional maintenance people as the service channel. Those firms inte-
grate all the information about customers obtained through those different
channels thanks to sophisticated customer relationship management soft
-
ware programs (previously introduced in Section 3.3), in order to develop a
complete overview of customers’ needs, wants, and requests.
For each of those three channels, the strategic decision always will be
between using a direct (in-house) channel, belonging to the firm, or a third
party indirect (outside) channel, or a hybrid solution combining the use of
direct and indirect channels. This comes at a time when new channels like
the Internet and on-line services continue to emerge [5], and new manage
-
ment tools, like data networks tracking in real time the inventories of all dis

-
tributors in a market, have combined to speed up the evolution of more
traditional channels.
As a matter of fact, the majority of the high-technology companies use
their own sales forces to sell products directly to customers. However, the
most successful organizations also count on other distribution channels
in order to reach all the customers of a targeted market segment in the
most efficient way [6]. Today, for instance, value-added resellers, system
integrators, and distributors are becoming more prominent in the distribu
-
tion of electronic and telecommunication solutions. For instance, Cisco Sys
-
tems depends on its 35,000 partner channels for more than 90% of its
revenues [7].
190 Distributing and Selling High-Tech Products
Selecting a distribution channel is very important because it can make or
break a product, since distributors are part of the reinforcing loop leading to
increasing returns, as seen in Chapter 2. Inasmuch as their revenues depend
on the size of the market they can serve, marketers tend to concentrate on
the solution that appears to produce the most potential buyers. For instance,
in addition to the application developers, distributors have been a major force
behind the success of Microsoft Windows and the decline of Apple Computer.
Companies must continuously reevaluate their distribution choices to
maintain the most efficient networks. Take the case of Logitech. Today retail
outlets account for 85% of Logitech’s sales, while just 15% stem from Origi
-
nal Equipment Manufacturer (OEM) partnerships. However, until the late
1980s, it was the opposite: The OEM business outpaced retail and the com
-
pany believed that its retail business would soon die, because every PC

would be sold with a mouse. In contrast, OEMs figured out that PC prices
were key for consumers, thus they kept up distributing PCs with standard
keyboards and mice. Consequently, Logitech stuck with its retail business
providing them with products slightly ahead of those sold by its OEM part
-
ners, such as optical wireless keyboards and mice.
Five selection criteria can assist a marketing manager in his or her
channel-design decisions: the size of the market, the cost of the distribution
network, the type of product to be marketed, the degree of control on the
distribution channels, and the channel’s flexibility.
7.1.1 Channel-design decisions according to the size of the
market
The size of the market and the variety in customer profiles often justify the
use of indirect distribution channels so as to eliminate gaps in market cover
-
age. This is even more important for high-tech products, especially when
they are entering the growth phase at full speed, meaning that they try to
reach the majority of mainstreams customers, which make up the bulk of
the market. At that time, it is necessary to add channels and even sometimes
to switch from one category to another [8].
The computer market, which unquestionably follows this pattern, has
gone through four characteristic phases. During the first phase (the 1950s),
the systems were sophisticated and potential customers were few; this cor
-
responded to direct sales through contact between sales engineers and cus
-
tomers. From the 1970s on, the arrival of minicomputers and the increased
number of users led to the development of external distribution channels,
usually in the form of OEM, which added specific applications to computers
before the actual sale.

The development of microcomputers during the 1980s led to a greater
use of distributors, who became the key success factors for Apple and Com
-
paq. Similarly, the popularity of microcomputers brought about the devel
-
opment of direct marketing. Dell was the first company to sell its computers
directly by mail order without any physical intermediary and has since been
imitated by a score of other firms.
7.1 Selecting distribution channels for high-tech products 191
Since the onset of the 1990s, large computer firms that want to reach a
greater variety of market segments have to manage different marketing
structures. These companies sell some of their smaller products, such as serv
-
ers or PCs, through authorized dealers, establish marketing agreements with
distribution chain, such as Comp USA, Computown, or U.K.-based Tiny
Computers, and are in contact with dealers in the used computer market.
For consumer goods such as MP3 players, digital cameras, or PDAs, vendors
such as HP, Samsung, and Sony also use electronics retailers. Major electron
-
ics retailers in the United States are Best Buy (500 stores), Radio Shack
(5,300 stores), Musicland (1,100 stores), Tweeter, and Ultimate Electronics.
Sales can also be made directly from computer to computer using elec
-
tronic data interchange (EDI) or the Internet, which both are experiencing
strong growth.
Though worldwide market estimates vary significantly from one insti
-
tute to another as shown in Table 7.1, clearly on-line B2B is bigger than
B2C. Today it can be estimated that e-commerce represents 12% of reve
-

nues for telecom and technology companies. For instance, the Cisco Sys
-
tems and the HP Internet sites allow prospective business customers to
search for products and services, review the specifications of Cisco or HP
machines, and contact sales representatives to place orders or even order
directly through the Internet. Similarly, Oracle Corporation, the leading
database software vendor, now distributes a new product over the Internet,
as well as through physical channels. In the consumer business, Dell has
implemented a direct order system through the Internet, a practice imitated
by Apple Computer.
The rise of e-marketplaces has spurred the growth of on-line B2B,
because this is where buyers and sellers could meet to procure products
through on-line catalogs, auctions, or direct exchanges. At the outset most
of the e-marketplaces were public or driven by consortia, such as Covisint or
Supply On in the automotive industry, Aeroxchange or Exostar in the avia
-
tion industry, or consortium-led E2open and Converge for the high-tech
industry.
However, e-marketplaces are now more frequently private, functioning
by invitation only and focusing more on process than price. In fact, because
partners on a private exchange already know each other they can share cru
-
cial aspects of their business more efficiently: information, production
192 Distributing and Selling High-Tech Products
Table 7.1 Estimates about the Worldwide B2B
E-Commerce Volume in 2003 (Millions of Dollars)
B2B
Dollars in
Millions B2C
Dollars in

Millions
e-marketer,
February 2002
1,409 e-marketer,
February 2002
250
Jupiter Research 2,940 Merrill Lynch 1,317
Computer
economics, June
2002
1,853 Goldman Sachs 1,392
planning, inventory management, and other supply chain processes, as well
as auctions. Firms like IBM or Sun Microsystems have bought a billion dol
-
lars of computer hardware components through private exchanges. More
than 30% of Fortune 2,000 companies had set up their own private
exchanges in 2003 and the trend is accelerating, according to AMR
Research.
In B2C, on-line markets provide better visibility of what consumers are
buying, when they are buying it, and from whom they are buying it; best of
all, they bring this information instantly to marketers. Some firms such as
Nedstat, NetIQ, SteelTorch, and Red Sheriff are providing marketers with
real-time information about what, when, and where customers are buying.
In a way, those firms are the Nielsens of the Internet. On-line businesses
also provide better margins since on-line commissions tend to range from
5% to 10% of sales according to the category of the goods [9].
On the other side, privacy concerns may impede this new customer visi
-
bility. In the United States, Microsoft was compelled to halt its automatic
downloading of information about user system configurations as part of the

process of registering from Microsoft Network. In France, getting electronic
information on consumers or businesses is severely restricted by law:
Anyone always has the right to see the content of the information stored
and may refuse to have this information used for business purposes, such as
being listed on a customer database.
Figure 7.1 illustrates and summarizes this development of channel-
design choices and its consequences in terms of the organization for a major
computer vendor. The increase in channels parallel the computer technol-
ogy life cycle as much as it is necessary to reach more mainstream customers
in the early or late majority. The problem with running so many distribu-
tion channels is that they overlap on customer reach and, as a consequence,
risk conflicting with each other. The solution for avoiding such a difficulty is
to differentiate products and tailor margins to distinct retail channels, like
Packard Bell NEC has done. In 2003, Packard Bell NEC introduced a distri
-
bution plan, dubbed “NEC Now Program,” allowing more than 250 qualified
resellers and Value Added Reseller (VARs) to deliver notebooks and other
products directly through direct access to NEC’s build-to-order manufactur
-
ing plants. The different channels are not competing because customers pay
the same price, whether they purchase direct or through resellers.
7.1.2 Channel-design decisions according to the cost of the
distribution network
Besides the size of the market and its related volume of sales, the second
selection criterion is obviously cost. Not only should the absolute value cost
be considered but also the cost per customer in order to evaluate the profit
-
ability of different choices. The estimated sales volume can indicate the most
appropriate channel (see Figure 7.2). Actually, the use of indirect distribu
-

tion means lower fixed costs than the use of direct distribution such as a
sales force or the Internet; however, variable costs will increase more
7.1 Selecting distribution channels for high-tech products 193
194 Distributing and Selling High-Tech Products
O.E.M.
Dealers
Agents
Brokers
Computer
superstores
Direct
marketing
On-line
services
Hyper-
markets
Producer
−
1950 1960
1970 1980 to present
Sales
force
Sales
volume
Figure 7.1 Evolution of distribution channels for a major computer vendor.
Distribution
cost ($)
Sales
($)
Distributor

Salesforce
Figure 7.2 Selling or distributing: profitability analysis.
quickly because a distributor’s payment represents a percentage of the total
sales revenue. An instructive example is the evolution of Dell and Gateway
distribution strategy, which successfully pioneered a direct “build to order”
model when the traditional PC vendors such as IBM, Compaq, and HP were
relying on an indirect “resellers” model.
In 1990, Dell decided to add “resellers” to its direct-sales channel in
order to boost growth. Dell PCs were distributed through retailers such as
BestBuy, SoftWarehouse Superstores, Wal-Mart, and Staples. In 1994, the
company decided to pull the plug from the indirect channel, after consider
-
ing its associated cost and the reduced gross margin. On the average, the
annual selling, general and administrative (SG&A) expenses for running
one retail store total about $2 million.
Gateway made a different move. In 1996, it decided to create its own
retail chain, Gateway Country Stores, with about 250 stores in addition to
its direct channels. The rational was to make customers more comfortable
with purchasing PCs while offering the best presales and postsales services.
Very quickly, the cost of its strategy had a direct impact on the total
SG&A expenses of Gateway, while the volume did not grow as fast as the
direct channel. Both sales and profits suffered, especially compared with
Dell, which was at the same level as Gateway in 1996 and had made a clear
difference in 2001 as shown in Table 7.2.
7.1.3 Channel-design decisions according to the product
characteristics
High-technology products can be divided into two categories: nonstandard-
ized products and standard products. Nonstandardized products require a
direct sales force. Because these products are manufactured on request for a
7.1 Selecting distribution channels for high-tech products 195

Table 7.2 Evolution of Dell Versus Gateway Revenues and Operating Income
1994 1995 1996 1997 1998 1999 2000 2001 2002
Dell Net sales (dollars
in millions)
2,873 3,475 5,296 7,759 12,327 18,243 25,265 31,900 31,200
SG&A
(percentage of
net sales)
14.7 12.2 11.3 10.6 9.8 9.8 9.4 9.8 9.6
Operating
income
(percentage of
net sales)
–1.3 7.1 7.1 9.3 10.7 11.2 9.1 8 7.2
Gateway Net sales (dollars
in millions)
2,701 3,676 5,035 6,294 7,468 8,965 9,252 5,937 4,171
SG&A
(percentage of
net sales)
8 9.7 11.5 12.5 14.1 13.8 16.7 34.1 25.8
Operating
income
(percentage of
net sales)
5.2 6.8 7.1 2.8 6.6 6.5 5.5 –19.9 –12.3
particular customer, personal contact with the users is necessary. The sales
force has to be very knowledgeable about the product and its application, to
help customers understand and employ the product.
Standard products justify the use of external distributors. These products

have well-defined characteristics; products such as a computer memory or
a standard microprocessor are sold in large quantities and at unit costs
much lower than those for nonstandardized products, justifying the use of
distributors.
For products that are neither entirely standard nor truly nonstandard
-
ized but rather in between these two categories, a marketing channel should
be selected depending upon the technical complexity of the product and the
need for customer service depending upon the distributor’s ability.
On one side, if a company does not have enough resources to provide
any customer service, it should depend upon its distributors. On the other
side, if the distributor is not able to perform customer service, the product’s
or the technology’s quality image can be seriously jeopardized, which in
turn can challenge an entire marketing strategy. It is said that Michael Dell
started Dell Computer to sell PCs directly by phone to consumers after he
strove to buy PCs from dealers who knew less about computers than he did.
A failure in the PC distribution channel gave birth to one of the most formi-
dable new entrants in the PC industry.
This is one of the reasons why Apple Computer changed its channel dis-
tribution strategy in Europe at the end of 2002. Apple changed the margins
that it was offering dealers. It reduced the basic margin of small, independ-
ent dealers from seven to 1% or 2%; at the same time, it significantly raised
the margins for large dealers providing customized solutions, demo facilities
and after-sale support with a well trained staff and third-party products
stocks. Apple’s goal was clearly to enhance “the development of the best
possible experience for our customers” according to Mark Rogers, Apple
U.K. director.
7.1.4 Channel-design decisions according to the degree of
control over a distribution network
Some channels decisions are dictated by the bargaining power of the com

-
pany. Actually some distributors are “open” and willingly share their cus
-
tomer and price lists as well as any other information about customer. But
others are so independent that they are unmanageable. They are secretive
about not sharing any information and carry out their sales policy as they
think best. This has been the case recently in China on the PC market [10].
Many western PC makers have found that most of the local distributors
were not able to provide technical support, customer service or mainte
-
nance services, contrary to what they claimed. The most capable distributors
have quickly been taken over by leading Chinese PC manufacturers, such as
Legend, which had cultural advantages. Furthermore, when a distributor is
successful, it has a financial interest in being secretive and in handling its
own marketing policy.
196 Distributing and Selling High-Tech Products
However, it is potentially dangerous for a manufacturer to see a growing
barrier between itself and its market because it would miss out on customer
feedback. Furthermore, its technology can be copied by or through the dis
-
tributor, which the manufacturer could fail to realize until the distributor
cancels an agreement. For instance, Legend, the leading PC maker in China,
started in 1994 as a distributor of foreign PCs. Six years later, it moved to
making and selling its own technology and quickly took control of the
booming Chinese market. By 2003 Legend had more than 27% market
share, $3 billion revenues, and more than 3,500 sales points.
Ultimately a strong distributor may become a direct competitor. For this
reason, in July 2002 HP and then Cisco in October 2002 ended their distri
-
bution agreement with Dell. Besides being a distributor for their digital pro

-
jectors and communication switches, Dell had developed its own line of low
end products in the two previous years. Some of those products were com
-
peting head to head with high end (and profitable) HP or Cisco equipment,
especially in the large business, corporate customers segment.
7.1.5 Channel-design decisions according to the flexibility of
the distribution network
A distribution contract is often specifically for a fairly long period of time. A
consumer electronics manufacturer could not easily change from a special-
ized sales force to direct sales through superstores.
However, recruiting and training a network of distributors takes time
and requires an investment since this network cannot be put into effect
immediately. In the high-technology-product world, product ranges follow
each other at a high rate and market segments are constantly changing,
which makes establishing a distributor network even more difficult.
In the telecom or the computer industry, distributors have replaced
a traditional sales force but are now threatened by direct marketing chan
-
nels, such as phone or the Internet. However the most successful market
-
ing companies do not throw out the baby with the bath water. They
know that it takes time and energy to set up, train, motivate and manage a
channel. Consequently they try to extract the maximum value of their dif
-
ferent channels instead of turning one off, as soon as it is seems to be less
effective.
For instance, in 2002, Cisco initiated some major changes in its distribu
-
tion strategy in Europe, as well as in Middle East and Africa. Among its dis

-
tributors, Cisco differentiated two different categories and created 7 Cisco
Distribution Partners (CDP) and 10 Cisco Authorized Distributors (CAD). In
that two-tier scheme, CDPs only have a direct purchasing relationship with
Cisco while CAPs procure Cisco products from a CDP and no longer directly
from Cisco. Except for procurement, CDP and CAD have a direct relation
-
ship with Cisco for information, service and expertise.
Such an organization actually means that CAD can focus more efficiently
on the selling of services and Cisco solutions while relying on CDP for the
logistic and supply side. It provide them with much more flexibility, faster
7.1 Selecting distribution channels for high-tech products 197
product lead time, no more inventory costs and risks, as well as freeing their
working capital for use in developing their business.
As for the CDPs, they get a better use and profitability from their fixed
cost infrastructure through larger shipments. They also get the opportunity
to generate new revenues on activities such as configurations, staging or pri
-
vate label; finally they increase their customer base to include CAD. By
offering win-win solutions and maximizing the synergies between the dif
-
ferent categories of distributors this program has been extremely successful.
It has allowed Cisco to increase its market share so far.
7.2 Managing distributors of high-tech products
The decision to sell products through a distributor is only one step in the
process. A distributor must be selected, directed, and evaluated. Again, the
characteristics of high technology impose slightly different criteria compared
to those of more traditional products.
Every company that is looking for a distributor judges that distributor on
its sales experience, financial situation, image toward customers of the tar-

get markets, the number and quality of its sales people, and the quantity
and brands of its current product portfolio. Moreover, since high-
technology products have a high degree of innovation, a distributor must
have unquestionable knowledge about a product to be able to respond to
customer questions. Due to the frequent and rapid changes of high-
technology products, a distributor must also be able to guarantee almost
immediate availability in order to respond to demand at the right time. A
distributor who sells technologically outdated products will see his custom-
ers go to competitors translating into lost sales. Usually, lost sales are largely
underestimated. One computer manufacturer approximated its lost sales at
5% to 10% of total sales, eventually to realize that they were actually
between 15% and 20%, almost two or three times its original estimate.
Furthermore, obsolescence is especially quick for some high-technology
solutions with high variable costs, like computers or consumer electronics.
Cellular phones or PDAs, for instance, may lose as much as 10% of their
value each month; so after 7 months, their value is more than halved. Thus,
today major cellular phones or PC distributors have negotiated the right to
return unsold products to the vendor at no cost.
Unquestionably, the best solution for restraining the impact of lost sales
and obsolescence is to gauge them by running periodic customer and dis
-
tributor surveys. Consequently, inventory and order management for
high-tech products is obviously more sophisticated than that for standard
products and is fairly similar to the management of fashion stores. For
example, one high-tech company received first-month orders for its latest
products surpassing its manufacturing capacity by more than 25%. It
decided to adapt by increasing both component stock and production. How
-
ever, 3 months later, orders plummeted, creating an enormous inventory.
The product ended up being a flop. What happened was that tight initial

198 Distributing and Selling High-Tech Products
capacities had actually boosted early demand for phony orders placed by
distributors concerned about short supplies. Then, products did not move
because the market was not buying, but the producer did not figure that out
and wrongly decided to expand production on the sole basis of first impres
-
sions. Such a situation explains why the most successful B2C high-tech
companies have adopted the “build to order” model. By doing so, they have
managed to cut their inventory cost dramatically and boost their cash flow
and profitability while improving the satisfaction of their customers.
Finally, the high-technological content of these products calls for techni
-
cal know-how and a professional organization. These two requirements are
often important in assuring the quality of customer service. Manufacturers
who are looking to engage distributors often stumble on this last criterion
because customer service entails different skills than sales.
However, customer service is a basic necessity for succeeding in high
technology because customers must be assured of quality products that con
-
firm their confidence in the manufacturing company. The best marketing
plan for a highly technical product can be instantaneously ruined by a dis
-
tributor whose customer service does not respond quickly and correctly to
the frantic telephone calls of a customer demanding the repair of his or her
DVD reader, digital camera, or 3G cell phone. Usually, the solution is to
train technicians to make them more competent, but if their compensation
is based on the quantity of services delivered rather than the quality, extra
training may backfire and create a negative feedback cycle, as illustrated in
Figure 7.3, because it erodes their working time and puts them under time
pressure. Accordingly, technicians will make a slapdash diagnostic, falling

short of detecting problems early and, hence, leaving customers more
unsatisfied than before. High-tech products require that distributors make
use of more and better marketing, financial, and human resources in order
to respond efficiently to these additional constraints of high technology.
Manufacturers, however, must also devote time to helping distributors
assume these additional responsibilities. Every company must keep in mind
that an intermediary is an independent company and more a customer rep
-
resentative than a manufacturer’s “puppet.” An intermediary is interested
7.2 Managing distributors of high-tech products 199
Failure to repair
at first try
Extra
training
Time pressure
Slapdash
diagnostic
Figure 7.3 A negative feedback loop in distributors’ training.