As a former manufacturer, the term “channel incentives” sends painful pulses down my spine.
Over recent years, in order to enhance their product’s visibility within a clogged or confused channel and drive sales, many manufacturers have sought to increase the incentives offered “up stream.”
Historically, the belief is that by enticing channel partners with tangible financial rewards, attention by those same partners will be refocused on a specific product or line.
And, while the notion of providing an inducement is rooted in a rational approach to human behavior, things in reality are far more complicated.
It reminds me of Yogi Berra’s dictum: “In theory, there is no difference between practice and theory. In practice, there is a difference.”
When we dig deeper into the effectiveness of channel incentives, we find a huge hole exists when it comes to billions of dollars that are simply unaccounted for.
Inefficiency, it seems, is the operative term.
To get a better sense of the numbers, I recently spoke with Chandran Sankaran, the founder and CEO of Zyme Solutions, a leading provider of channel data solutions for the high-tech sector.
Using Zyme’s analysis from the approximately $1 trillion of sales in the high-tech sector, around 20% is paid back through performance incentives to channel partners; which include rebates, discounts, SPIFs and the like to dealers, resellers, distributors, and other partners.
This totals close to $200 billion.
Sankaran’s research finds that a staggering 10% of that amount is either over-claimed or paid to the wrong entity. This is in the neighborhood of $20 billion!
In addition, there is somewhere around another $200 billion in current inventory that is being held at anytime within high-tech distribution channels.
Sankaran estimates that 30-40% is at risk of being written-off, discounted, or being deemed obsolete; and, of that number, 10-20% is simply not available due to channel inefficiency. This means another $6 - $16 billion has been misallocated.
Dishearteningly, little or no research on this problem is occurring within the $2.5 trillion industrial sector.
If we assume, for a moment, that the numbers from the high-tech sector are somewhat applicable to the industrial side, we are somewhere- conservatively- around $50 billion in the misallocation of channel incentives and loss in inventory value.