What’s channel stuffing and why is it problematic?

You are browsing the archive for Strategy.

What’s channel stuffing and why is it problematic?

April 21, 2010 in Ethics & Values, Sales Management, Sales Planning, Strategy

How much do you actually sell? How profitable are your sales? How accurately can you forecast your sales results? How many ‘returns’ do you receive? How often do you need to discount? How often are you left with old stock? What are your sales cycles? Are your sales people rewarded on volume only or on margin, account growth, account retention, and customer satisfaction?

The answers to these and other key questions will tell you just how effective a sales force is functioning, how they measure their effectiveness, how they think about their business, their customers, their careers, and how likely they are to deliver profitable, sustainable sales results.

Through our observations quite a few companies still only measure their sales results by revenue not what they get back by way of product returns, faulty product recalls, lost business, margins, length of sales cycle, etc. This singular measurement approach doesn’t take into account the real cost of sale or the true sales results that the business is experiencing. This is a common mistake often made by start-ups and new businesses and if left unchecked can lead to unprofitable and unproductive behaviours and compromised relationships with business who take advantage of your situation.

When it really becomes really problematic is when it becomes Channel Stuffing. The following excerpt I found on Wikipedia under Ethically Disputed Business Practices gives a very good explanation of this issue:

“Channel stuffing” is the business practice where a company, or a sales within a company, inflates its sales figures by forcing more products through a distribution channel than the channel is capable of selling to the world at large. Also known as “trade loading”, this can be the result of a company attempting to inflate its sales figures. Alternatively, it can be a consequence of a poorly managed sales force attempting to meet short term objectives and quotas in a way that is detrimental to the company in the long term.

Channel stuffing has a number of long-term consequences for the company. Firstly, distributors will often return any unsold goods to the company, incurring a carrying cost and also developing a backlog of product inventory. Wildly fluctuating demand, combined with this excess inventory, leads to costly overtimes and factory shutdowns. Even mild channel stuffing can spiral out of control as sales works to make up for prior over-selling. Discounts used to drive trade loading can greatly affect profits, and even help establish gray market channels as salesmen no longer adequately qualify their prospects.

Occasionally, distribution channels such as large retailers have been known to identify the practice of channel stuffing in their suppliers, and use the phenomenon to their advantage. This is done by holding back on orders until the end of the suppliers’ quota period. The supplier’s sales force then panics, and sells a large amount of the product under more favorable terms than they would under ordinary circumstances. At the beginning of the next period, no new orders are placed, and, barring any action, the cycle is then repeated. This has an impact on customers, with gluts and shortages as buyers turn to competing products.

Corporations have been known to engage in channel stuffing and hide such activities from their investors. In the United States, the U.S. Securities and Exchange Commission has in some cases litigated against such corporations.”

Although not illegal, the challenges this business practice sets up can have catastrophic effects on business performance. How a business measures its sales results and how sales people are rewarded can have a dramatic impact on channel stuffing behaviours. For instance, if sales people are only rewarded on the volume of sales they send into the market, are tied to unrealistic sales quotas that do not match market expectations combined with no accountability for margins, returns, accurate forecasting, account maintenance and retention, then the ideal conditions for a channel stuffing are in play and we are in real trouble.

To avoid falling into this trap, you may like to analyse the following amongst other things:

True cost of sale
Margins and volume discounting arrangements
Returns policy
Product recall conditions
Trading terms and conditions
Sales incentive schemes
Sales performance expectations
Customer service policy
Length of sales cycle

With you and your sales people being very clear about what is expected and checking for any competing motivations which may create undesirable behaviors will help you from falling foul of the channel stuffing nightmare.

Remember everybody lives by selling something.

Author: Sue Barrett, www.barrett.com.au

No Comments »

Are you ready for the phenomenon of Social Sales?

April 15, 2010 in Communication, CRM, Social Media, Social Sales, Strategy

Social Sales was voted by you as the number 4 Sales Trend for 2010. Arguably, social media is contributing to the democratisation of information and, armed with this information, customers will demand different things from sales people and companies. Customers are tuning into online communities, blogs, forums, and social networks to gather information and make buying decisions.

For instance, the retail car market is undergoing significant changes with customers firmly in the driver’s seat. With the emergence of the information age consumers have far more knowledge about what to buy and where to buy it. On the whole, customers are doing their research, checking with their networks and peers groups, reading or viewing the latest comments online, and have potentially even made a buying decision before they step into a store. This is fast becoming the norm in car sales. No longer is the sales consultant one of the first to engage with the prospective buyer, today they may be near last when the customer walks through the door. Smart businesses will realise that engaging with the customer has changed and to speak with and meet viable prospective buyers they need to migrate to a new level.

In the B2B (business to business) space buyer behaviours are changing too. The buyer is either a purchasing agent or decision maker and they are armed with far better information well before they interact with a sales person. This will demand a different relationship.

If sales people see their role as only being ‘educational’ they will be unable to match the requirements and expectations of customers. People are getting tired of the old sales model of ‘shut up and listen’, especially if the information they are getting is patronising, know-it-all, we’re the best, readily available on the web and in some cases incorrect or outdated.

It is important that sales people recognise that customers are likely to be as informed about the product as they are (or at least believe they are). Customers are influenced beyond the boundaries of traditional businesses and long held relationships. We, the sales person, are unlikely to be the first person the customer will go to, even with established relationships. The long held tradition of key account management where every person of influence in a customer account is mapped on a ‘blue sheet’ and armies of account teams are marched to surround the customer are numbered. In many cases, they are now surrounded by social media.

Customers are using social media to build up independent knowledge, and compare and contrast information and opinions. This knowledge gives the customer power, and that power fundamentally changes the dynamics of the sales relationship. The web has also opened up communication channels which has changed the landscape forever. The old model is magnified; where in the past consumers used to tell 5 others if they were happy with an experience and 11 or more if they were unhappy, they can now communicate, positive or negative, in real-time with other consumers on a massive scale.

B2B customers are demanding a different relationship. They want to interact with a sales person that legitimately questions, challenges ideas and innovations, and can clearly articulate how they will work to bring value beyond the product.

Rather than go and talk to buyers alone, sales people and businesses need to go to the social networks to listen to, observe and interact with customers to help find a footing and take note of the consumer voice.
Social Sales will also demand that the sales team work in collaboration with the marketing group to help seed the right information about their offerings into their markets and networks where their customers look to for information and to exchange ideas. Customers want to see your work in action and get feedback from the sources they trust.

Entering into the Social Sales world also requires sales people to put aside their reluctance and adopt new technology. Social Sales is the dawn of the new salesperson that doesn’t shy away from using information and systems to their advantage. The Social Salesperson will make the most of CRM (Customer Relationship Management) systems interlinking CRM functionality to connect with social media, marketing, campaigns, networks, etc. to track the threads of customer conversations, opinions and ideas. CRM can no longer be ignored or treated as a telephone directory by sales people and businesses.

The responsibility for Social Sales doesn’t just reside with the sales team either, it needs to go all the way along the whole sales chain and beyond. At a recent leader’s conference, a speaker asked the 500 heads of business in the room whether they use social media including twitter, facebook and the like. Somewhat alarmingly, only 5 raised their hands. We need to use CRM and social media tools to make strategic calls – the CEO, CFO, COO, and CIO will be asking ‘Tell me what you see behind the numbers’. This request is referring to the patterns of information, customer comments, buying decisions, influences, customer experiences, emotions, and feedback that will influence what we make, how we interact with our markets and much more.

In 2010 and beyond, leaders, sales teams, and businesses will need to invest time, resources, and money to learn how to interact in these emerging social spaces. Why? Because the traditional channels to the customer such as email marketing, trade shows, and face-to-face meetings will be less effective. In some cases you may not even be interacting with the customer directly but with their ‘recommendation network’. The real challenge for sales will be to identify and engage with these new networks. Social Sales involves different skills, leadership, and a culture values a collaborative model of free knowledge exchange.

Social Sales is likely to change selling fundamentally – so are you and your business ready?

Thanks to Mark Parker and Charni Cargill for their collaboration on this piece.

Remember everybody lives by selling something.

Author: Sue Barrett, www.barrett.com.au

1 Comment »

2010 Sales Trend #3 – Getting back to basics

March 17, 2010 in Sales Leadership, Sales Skills, Strategy

‘Getting back to basics’ is our 2010 Sales Trend #3 as voted by you, our readers. Despite the positive start to 2010 in Australia, especially compared to other post GST economies, we cannot forget the fundamentals when it comes to creating a healthy, viable sales team, culture and business.

One of the real challenges of 2010 will be keeping sales momentum while understanding how changes in customers, competitors, markets, innovations, media, technology and all manner of things will impact on our businesses and our people. Getting our heads around all this to find the right ingredients for our plans and strategies will be demanding. We need to recognise the new ‘things’, in themselves, will not make things better, it is how they are integrated and applied in ours and our customers current situation and circumstances.

Often with new technologies, new trends, new ideas, and new innovations people become distracted thinking that these new things will promise to make life better, easier, faster, or more effective or efficient, all the while missing 2 key points:

In taking on the ‘new’ how does this support our real intentions and purpose as a business and leader?
How will these new innovations make our business and, more importantly, our customers lives better in action and deed?

Throwing away the ‘tried and true’ and rushing headlong into the ‘new and shiny’ without considered thought can pose great risks. If we look at this from the customer’s perspective we will see their wary cynicism of the new and shiny, and recognise their desire for transparency, continuity and familiarity as well as their need to be up with the latest. Many have long memories and know from lessons learned often the new and flashy is quickly dated.

Equally being closed off to the ‘new’ is just as bad because we could miss vital signals that may lead us to better places. Either way throwing out the basics or being closed off to the ‘new’ will leave us worse off.

In 2010, wise business/sales leaders and people will embrace the ‘new’ but not forget the basics.

The Back to Basics Checklist includes having:

1. A vision with clear intention, purpose, values and actions – what do we stand for and how do we act?

2. Clear sales strategy and tactical plan articulated at a business, state/regional, and sales person level. This would include:

Sales goals
Clear market message
Client segmentation including account management, new business development and service support
Competitor analysis – direct and emerging
Go-to-market sales tactics including how we make contact with prospects and customers
Clear Input and Output Measurements (role clarity, clear performance expectations, team unity, etc.)

3. Sound Sales Processes and Frameworks including:

Sales management knowledge, skills, and mindset (coaching, performance management, strategy, recruitment, leadership, etc.)
Sales Planning knowledge, skills, and mindset
Prospecting knowledge, skills, and mindset (Sourcing Leads, networking – new social media opportunities; Proactive prospecting activities like making telephone calls to new prospects, existing or lapsed clients; doing and monitoring your activities on a daily basis)
Selling knowledge, skills, and mindset (client meetings, pitching, presentations, negotiation, account management, customer service, conflict resolution, territory management, proposal development, etc.)
Self Management knowledge, skills, and mindset (monitoring self talk, analysing a situation accurately, taking care of personal health and well being, working with a sense of purpose and clarity)

Keeping our sales basics in tune will help us while we integrate and experiment with the ‘new’ such as social media and other new advances coming into our markets. It’s about finding out what is effective and then weaving in the ‘new’ and trialing it to see how it enhances or detracts from our sales efforts. Investing large amounts of money and effort into one sales approach leaves us vulnerable. It’s about having a blended sales approach and fine tuning it to meet our customers and our needs for being in business.

By knowing who and how to target customers and being well skilled in sales planning, prospecting, and client communication we will keep sales happening. By sticking to the basics and integrating the ‘new’ bit by bit we will work out how Twitter, Linkedin, Facebook, Sales 2.0, Social media and all the other innovations will work best for us and how we need to keep on selling. With change comes opportunity and challenges.

I suggest we repeat the mantra ‘hasten slowly’ and keep doing the basics while considering, trialing, evaluating, and integrating the new. In 2010 the focus will be on selective incorporation, based on customers, community, company, and self, while still remembering the basics that got us where we are today.

Remember everybody lives by selling something.

Author: Sue Barrett, www.barrett.com.au

No Comments »

Is a climate of perpetual discounting limiting choice and eroding our quality of life?

March 10, 2010 in Negotiation, Strategy, Value Creation

Gerry Harvey, (Harvey Norman) was recently bemoaning the culture of discounting in our retail sector. He was saying that retailers had lost the plot and didn’t know how to sell real value anymore. He said they had fallen foul of a culture of constant discounting as the only way to attract customers, which was tantamount to business disaster and a degradation of the retail sector. I happen to agree with Gerry in this instance.

He went further by saying that retailers were failing to find out what customers really wanted and what they really valued. He said retailers weren’t offering choice – a range of options of different value and therefore were not selling. He went on to say that while a ‘sale’ may attract customers to a store, you still needed to put the effort into selling. Selling doesn’t happen by itself.

I’m not a retail expert, however, discounting, sadly, appears to be main stream in Australian retail businesses. Rather than a ‘sale’ being a rare event, it now seems, everywhere you turn there is a ‘sale’ or discount war waging. In short, over the last 10-15 years the consumer has been habituated to look for cheap, cheap, and cheap. The real value to, we, the consumer, of having a range of products and services to choose from across a wide value scale, seems to be lost in a mentality of it must be ‘cheap’.

It begs the questions “How has this come about?” and “Who started this discounting avalanche?” It wasn’t always this way. I recently had the opportunity to visit the exhibition ‘til you drop – shopping, a Melbourne History’ at the Victorian State Library which is about retail shopping in Melbourne across the last 100+ years. I found it quite an enlightening and educational experience. For instance:

“In the 19th century, ‘retail therapy’ had a different meaning from how we understand it today. Shopping was often promoted as combining commerce with intellectual or aesthetic benefits. Influenced by British morals and values, the display and purchase of goods were expressions of taste and self-improvement.” This is certainly a far cry from ‘cheap, cheap, cheap’ we now hear.

It seemed that shopping in the 19th century had a higher purpose to it. Perpetual discounting sadly does not.

Constant ‘discount sales’ erode margins and low or no margins means a business is not profitable and therefore not sustainable. Gerry and other retail experts will tell you that there is a time and a place for discounting – moving old stock, stock liquidation, seasonal or special events for instance. Discounting should NOT be seen as a regular occurrence or constant ‘way of life’ as this will affect the buying patterns of consumers i.e. people will wait for the ‘sales’ instead of buying across the year. They will pick their way through the plethora of ‘sales’ on offer every day, meaning no one has to pay full price for anything across the year which in turn forces retailers to enter a never ending loop of discounting.

Discounting in any business sector, retail or business to business, may increase turnover initially, but as a constant strategy comes at a cost which, in the long term, may create more severe problems than we had intended. This may include poorer sector and business performance, less investment in new ideas and products, loss of jobs, business closure, decreased diversity, poorer quality products sourced in place of better quality offerings, which can lead to increased customer dissatisfaction, and less choice as a result.

Less choice means we end up only getting access to products that are of a lesser quality. This creates poorer product performance, a diminished product life, and increased and unnecessary consumption, resulting in greater costs than if one had invested in a better product or service in the first place.

Who wants to pay for more ‘crap’? In a world where more and more people are conscious of overconsumption, you can see that this journey down the ‘cheap’ road doesn’t lead to a very good place.

Maybe retail needs to return to its ‘higher purpose’ roots. Another excerpt from the ‘til you drop’ exhibition bears this out:

“While bargains are always popular, when standardised brands replace some specialty and locally produced items the quality of products can become less reliable. Today, many shoppers are returning to smaller stores selling organic or locally-grown and made produce. Supermarkets are, in turn, following this trend and promoting gourmet sections and their own ranges of organic and specialty products. The fact that consumers are becoming more aware of the impact of goods and shopping trends on the environment can be seen in new approaches to packaging and transportation. People are increasingly recognising that more sustainable shopping practices can reduce their ‘shopping footprint’.”

This is why I propose that a climate of perpetual discounting may potentially lead to the erosion in our quality of life and may limit our ability to make the right and best choices for ourselves, our families, our businesses, our communities and the environment. Is our culture of ‘discounting’ potentially leading us to a false economy? If so, ultimately, this will ‘cost’ us a whole lot more.

Gerry, I suggest you and your retail mates take a collective look in the mirror and do a bit of reflecting on the potentially larger issues ‘constant discounting’ may be creating for us all. And while you are at it, why not pay a visit to the ‘til you drop’ exhibition which has some great pearls of wisdom about creating real value in retail.

Special thanks also go to Andy and Errol, my fellow tennis parents who work-shopped this article with me one Sunday morning as our sons played tennis.

Remember everybody lives by selling something.

Author: Sue Barrett, www.barrett.com.au

No Comments »

Why is ‘cheap’ a false economy?

March 3, 2010 in Attitudes & Behaviours, Culture, Ethics & Values, Negotiation, Procurement, Strategy

Understandably everyone wants to save money, especially in these times, however we need to be aware of falling victim to false economy. False Economy is an expression that refers to an action which saves money at the beginning but which, over a longer period of time, results in more money being wasted than being saved.

For instance, I have never understood why some people will drive half an hour across town to get their petrol two cents a litre cheaper, all the while using up what they may save by driving across town, notwithstanding the time it took to travel there and back in the first place. In almost all cases this action delivers a net loss.

The following excerpt from Wikipedia on a False Economy provides some good examples:

A notable practitioner of false economy was King Frederick William I of Prussia, who was said by Thomas Macaulay to have saved five or six dollars a year feeding his family unwholesome cabbages even though the poor diet sickened his children and the resulting medical care cost him many times what he saved.[1]

The concept of a false economy is similar to planned obsolescence, whereby the lower initial cost of a false economy attracts buyers mostly on the basis of low cost, who may later be at a disadvantage.

Motivating factors on the part of the party engaging in false economies may be linked to the long term involvement of this party. For example, a real estate developer who builds a condominium may turn the finished structure over to the ensuing condominium corporation which is run by its members once the last unit is sold and the building has passed a final inspection. Longevity of the components of the structure beyond the final turnover of the facility may not be a major motivating factor for the developer, meaning that the result of the application of false economies may be more detrimental to the end user, as opposed to the developer.

A false economy affects businesses and consumers on many levels. The quality of decision making is the factor here. The cause and effect of our decisions may be creating a false economy in our businesses or our personal lives. Anyone in the procurement profession (purchasing) who still holds onto ‘cheapest’ being their only option for purchasing from suppliers may be setting their companies up for failure or disaster.

For instance, many SME businesses may be tempted by the cheap telco service offering or cheaper equipment. On the surface, these cheaper offerings could appear to be great deals, but before one buys anything they should do some analysis beyond the obvious price on offer. Just because something is cheap does not mean it is good for you or your business. A cheap phone or communications system could mean unreliable phone or poor internet connection, poor equipment performance resulting in frustrated or lost customers who cannot communicate with you or your business, a poor reputation, or poor staff retention. The so called ‘cheaper’ service just cost you a whole lot more than you intended to pay.

The expression ‘buyer beware’ also springs to mind. It is not just the sales person’s job to convince us to buy it. Our job as the buyer is to do the math and to look at the genuine ROI (return on investment) of our purchase. Any self respecting sales person is well equipped to look at the consequences and ROI of each purchase, and would help you make a sound decision based on facts. We need to work together to ensure we do not enter into a false economy for all our sakes.

So what are we really purchasing? Thinking beyond the immediate outlay of money, we can view every purchase in our personal or business life as an investment. I have just had a salient lesson in false economy courtesy of my eldest son and his friend when they purchased some remote control products online. They found some great planes on a website whereby they could purchase them at a considerably cheaper price than elsewhere. Seeing as they were paying for them with their hard earned pocket money, the price looked great to them.

You can see what’s coming can’t you? 8+ hours of my time attempting to communicate with the US online company to get our order processed involving numerous attempts to get what we ordered fully shipped. This was a classic case of false economy. Even though my son and his friend went through feelings of devastation at the thought of losing their collective $740, feelings of disappointment when their order was not fully filled and the shipping costs were out of proportion, and resignation that not everyone fulfills their promises, the lessons for all of us were invaluable.

They learnt about checking out the reputation and credibility of a company first, the cause and effect of buying and selling ‘cheap’, that trying to fix problems can take a lot of time and cost money, and that plenty of people have lost a lot more than they did. So we were able to put it into perspective, albeit that $740 to an 11 and 13 year old is a lot of money. They also discovered the value of thinking before you act, the consequences of actions, and how to process a range of emotions that we feel when things go wrong. Perhaps most importantly, they learnt how to respond with patience and reasoned analysis to get what you want rectified, instead of threats.
All in all it was a great lesson, learnt early in life with limited consequences, and hopefully one they will carry with them into the future to help them on their way.

So if using a cheaper alternative costs you even one sale, is it worth it? While in some cases the answer may be yes, in many other cases the more expensive option may be the one that provides the greatest return for you. As you’ve just read, ‘costs’ can involve a lot more than just dollar value.

Special thanks go to my son Josh and his friend Nick for the inspiration for this article.

Remember everybody lives by selling something.

Author: Sue Barrett, www.barrett.com.au

1 Comment »

Barrett Sales Blog

You are browsing the archive for Strategy.