How will your partners get paid? Can they sell competitors' products? If they are not able to sell some products, will they be able to return the unsold merchandise? These are some questions that channel policies or "terms and conditions" address. Channel policies establish a robust—complete enough, thorough enough, and flexible enough—operating framework to provide clear guidance on the range of circumstances in which partners may find themselves.
Therefore, the key design task with channel policies is to ensure that all the potentially relevant issues are being addressed and considered. Any policy should address issues in four key areas, namely:
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General Contractual Issues:
- What is the duration of the contract and what are the terms and conditions for its renewal (e.g., three-year, automatic renewal)?
- Are partners required to provide any information (e.g., on sales)? What information and how often?
- Are you going to audit your partners? What you will inspect (e.g., facilities, books, etc.)? How often?
- Sales and Commission-related Issues
- What are the markets (e.g., territory-based, product-based, or customer-based) in which a partner can sell?
- Can partners sell to anyone and everyone, or there are certain types of accounts (e.g., Fortune 500 companies) that they are not allowed to pursue?
- Can partners resell to other distributors (e.g., unauthorized, out-of-territory)?
- Can partners sell competitors' products?
- Is the partner required to commit to a certain level of sales (or service) resources?
- What is the formula for partner payment (e.g., 50 percent of the list price)? What is the schedule of payments?
- Are there any incentives apart from commission (e.g., training, marketing and promotional allowances, bonuses, etc.)?
- Are partners allowed to discount prices? How much and how often?
- Do partners get credit for all sales in their territories or only the ones that they initiate?
- Who is responsible for customer billing and debt collection?
- Inventory and Facility-related Issues
- Are partners required to maintain a certain level of inventory in stock? How much?
- Can partners return unsold inventories? Under what circumstances?
- Are partners required to use specific interior or exterior designs?
- What kind of merchandising is required from partners?
- Marketing and Promotion-related Issues
- Who is responsible for marketing/lead-generation?
- Do partners have to generate their own leads? If yes, what kind of promotional and marketing allowance will they get?
- Is there some restriction on how to use a brand name, logo, or other trademark?
- Will partners get any sales training and sales assistance?
This is a fairly comprehensive list of issues that should be considered while drafting the channel policy memorandum or contract. While creating the policy, a manufacturer should make sure that it is compelling for a partner. Stating that partners cannot work outside narrow territories, cannot reduce prices, cannot sell to key accounts and cannot return unsold inventories could be thorough but it is hardly compelling for a partner.
Therefore, channel policies should be developed with the goal of high channel acceptance. If partners are asked to build new markets by selling new, complex products, they must be allowed some pricing flexibility. Similarly, if partners are selling a product with a six-month sales cycle, they shouldn’t be asked to report their activities on weekly basis. Or if partners are selling a commodity product in tough competitive markets, they should be offered a liberal return policy.
Now that we know what kind of organizational capabilities are needed to successfully implement a partner (indirect) sales channel, let's move to second step in our framework i.e. channel enablement.