Latest / Scaling Up with Fexingo: How Small Businesses Become Mid-Market Companies / How a Niche Safety Equipment Maker Scaled Past 20 Million by Fixing Its Channel Conflict
Transcript
- Lucas: So there's a moment in almost every B2B company's life where they hit a revenue ceiling that has nothing to do with demand, and everything to do with how they sell. Today we're looking at a niche safety equipment maker that was stuck around twelve million for years, and the fix wasn't a better product or more marketing. It was untangling a channel conflict that was quietly strangling their growth. Luna: Channel conflict is one of those things that sounds abstract until you're living it. What was actually happening here? Lucas: So this company, they made high-end safety harnesses and fall protection gear for construction and industrial use. They had a strong product, a loyal customer base, and they were growing steadily through distributors. But then the founder, to chase a few big enterprise deals, started selling direct. And he didn't think through the consequences. Luna: I can already see where this is going. The distributors found out they were competing with the manufacturer for the same accounts. Lucas: Exactly. And it's not like they all quit overnight, but trust eroded. Distributors started pushing competitors' products, or they'd quote our guy's gear but at a discount to win the bid and then quietly substitute something else. The direct deals were actually losing money once you accounted for the sales time and the support required. Yet the founder kept chasing them because they were big names and felt good. Luna: And the revenue just flatlined, right? Because the direct sales were cannibalizing the distributor channel that was actually profitable. Lucas: Exactly. And this is where we should mention, since we're talking about a company that was trying to do the right thing for its customers and its channel, we keep this show completely ad-free so we can dig into exactly these kinds of operational details without interruption. If you want to support that, and honestly it's a big help, the link is buy me a coffee dot com slash fexingo. Luna: Yeah, we've had a few listeners mention that a feature on the show helped them solve a similar pricing or channel issue. That's the kind of thing that keeps us going. Lucas: And we'd love to keep doing it. So the founder, when he finally sat down and looked at the numbers, he saw that his top ten accounts were all direct, but the gross margin on those was actually twenty points lower than the distributor business, because he was giving volume discounts and absorbing freight. The distributor channel was subsidizing the direct channel. Luna: Ouch. So how did they dig out of that hole? I'm guessing they didn't just cut the direct channel overnight. Lucas: Right, that would've been a disaster. They had signed contracts with those enterprise customers, and they needed that revenue to keep the lights on. So they took a phased approach. First, they mapped every account by size and by whether it was already being served by a distributor. Then they made a rule: any account under a certain revenue threshold goes exclusively to distributors, full stop. Luna: And for the big accounts, they redesigned the direct motion so it wasn't just a discount fest. Lucas: Exactly. They created a premium tier. Those enterprise accounts got dedicated engineering support, custom configurations, and a faster warranty process. But they paid list price, no more volume discounts. The founder had to swallow his pride on a couple of those big logos, but the margins on that segment actually went from thirty percent to forty-five percent. Luna: That's a huge swing. But what about the distributors? How did they get them back on board after the trust was broken? Lucas: So this is the smart part. They introduced a distributor-only product line. Same core harness design, but with a different color scheme, a different part number, and a slightly different accessory bundle. That meant distributors could sell the product without having to compete with the manufacturer's catalog. And they set a minimum advertised price across the board, so no one could undercut the channel. Luna: So they created an exclusive product line for distributors. That's a clever way to rebuild trust without having to apologize a hundred times. Lucas: Exactly. And they did apologize, by the way, in a face to face meeting with their top ten distributors. But the product line did the real talking. Within six months, distributor revenue was back to where it had been, and within a year, it had grown by forty percent because the distributors were no longer worried about getting undercut. Luna: That's impressive. But I'm guessing they also had to change how they thought about their sales team. What happened to the direct sales reps? Lucas: So they kept the direct reps, but they retrained them to focus only on those enterprise accounts and to act as channel allies, not competitors. Their job now is to bring the distributor along on every deal if there's a distributor already in that account. And they changed the comp plan. Direct reps now get a bonus if they hand off a lead to a distributor and the distributor closes it. Luna: That's a big cultural shift. Did it work? I mean, did the sales team buy in? Lucas: It took about two quarters. The first quarter, the reps were still trying to sneak direct deals through. But once they saw that the enterprise accounts actually closed faster with the distributor involved, because the distributor had the local relationship and the service infrastructure, they got on board. And their paychecks grew, which sealed the deal. Luna: So the lesson here isn't just about channel conflict. It's about clarity. You have to decide who your customer is and who your channel partner is, and then build everything around that. Lucas: Yeah, and that's the hard part, because it means saying no to opportunities that look good on paper. The founder told me he turned down a two million dollar direct order from a national retailer because it would've required a special packaging run and a dedicated support line, and it would've wrecked his distributor pricing. A year later, that same retailer is a distributor customer, but on terms that actually work. Luna: That's discipline. So what's the revenue number now? You said they were stuck at twelve, what did they get to? Lucas: They hit twenty-one million last year, which was up from twelve and a half when they started the fix. And the operating profit margin went from like six percent to fourteen percent. So it's not just growth, it's profitable growth. Luna: Those are the kinds of numbers that make a founder sleep well at night. So for someone listening who's facing a similar situation, what's the first step? Should they just map their accounts like this company did? Lucas: Yeah, that's the first concrete thing. Sit down and categorize every account you have and every account you want. Who's already buying through a distributor? Who's buying direct? Are there any accounts that are being served by both? That's where the conflict is. Then make a rule about which segment you serve directly and which you serve through partners. Write it down. Share it with your team and your channel. Luna: And be prepared to lose a little revenue in the short term, right? Because you can't just flip a switch without some pain. Lucas: Right. They actually lost about a million dollars in revenue in the first six months because they deliberately cut off some direct business that was going to go to distributors. But the distributors filled that gap within a year, and they did it more profitably. So you have to have a little faith in your channel. Luna: It's also interesting that they didn't just fix the channel structure, they also fixed their pricing. The minimum advertised price thing seems like a really important piece. Lucas: That's the piece that makes the whole thing stick. If you're going to have distributors, you have to protect their margins. Otherwise they have no incentive to push your product. So they set a MAP policy, minimum advertised price, and they enforced it. They actually dropped two distributors who were chronically violating it, which sent a signal to the rest of the channel that they were serious. Luna: That's a gutsy move. Did it cost them any short-term sales? Lucas: It cost them about two hundred thousand dollars in annual revenue from those two distributors, but it actually increased overall revenue because the remaining distributors started promoting their products more aggressively. And they got new distributors who had been waiting for that kind of enforcement. Luna: So it's a bit of a paradox. By constraining the channel, you actually unlocked growth. It's like the opposite of the 'sell everywhere' mentality. Lucas: Yeah, and that's a tough message for a lot of founders, because they think any revenue is good revenue. But as they learned, not all revenue is created equal. The question isn't just 'can we sell this?' It's 'can we sell this profitably, and does it strengthen or weaken our channel?' Luna: And so now, as they're looking at the next phase, what's the bigger lesson for a company that's maybe at five or ten million in revenue? What should they be thinking about? Lucas: The bigger lesson is to design your go to market model before you need it. Too many small companies sell through whatever channel lands first, and they don't think about the inevitable conflicts. If you're at five million, it's not too early to write down your channel policy. What types of accounts are you going to sell direct? What types are you going to hand to partners? What pricing structure supports that? Luna: Because it's a lot easier to build the right structure from the start than to untangle it later. Lucas: Exactly. That company spent years and a lot of headaches untangling something that should've been settled in a day. And the cost wasn't just the revenue plateau. It was the stress, the churn, the near-loss of a couple of key distributors. That's not something you want to go through. Luna: So if there's one thing you'd want a listener to take away from this episode, what would it be? Lucas: I think it's that channel clarity is a growth strategy. You can't just be 'both direct and distributor' and hope it works out. You have to decide, and then build the systems to support that decision. It's a lot like pricing or hiring, the discipline is what unlocks the next stage. Luna: And maybe also that you have to be willing to say no to some revenue, even if it looks tempting. Lucas: Yeah, that's the hard one. But as this company shows, saying no to the wrong revenue is the only way to say yes to the right revenue.