Calderon Building Products: direct sales versus 1,400 dealers
Calderon Building Products sells commercial water heaters through 1,400 independent dealers who account for 78% of its $410 million revenue; the top 50 dealers are 31% of revenue. Dealer gross margin runs about 34%. In March, Calderon launched a direct website with a national installation partner, priced 6% below dealer list, aimed at small contractors the dealer network does not serve.
By June, three of the top ten dealers had cut shelf space and a dealer council letter threatened to drop the line. Field sales compensation still pays on sell-in volume rather than sell-through. Returns have climbed to 6%, dealer satisfaction fell 12 points, and two regional managers admit to loading dealers at quarter end. Direct web sales are $4.1 million annualized with a 9% return rate.
The CEO wants the direct channel at $40 million within three years without losing dealer revenue.
1. Is this a strategy error or an execution error? Diagnose the conflict, including the price architecture and the economics at stake.
Read the worked answer
Execution error with a strategic tail. The channel itself is defensible; three design choices made it hostile.
The price architecture. Direct pricing 6% below dealer list means Calderon undercuts the partner that carries inventory, provides local technical support, and generates the demand that makes the phone ring. Dealers are correct to read that as a transfer of their margin to the manufacturer. Six percent is roughly a fifth of their 34% margin - enough to lose deals, not enough to look like a different product. The fix is parity on published price with dealer-only value added through installation support, extended warranty registration or stocking terms, not a discount war.
The scale of the risk. Direct is $4.1 million, about 1% of revenue, annualized; the top 50 dealers are $127 million. Even a modest share loss among them dwarfs any direct gain. The CEO's $40 million target is only reachable if dealers are not fighting it.
The compensation problem. Paying on sell-in explains both the 6% returns and the satisfaction drop. Reps are rewarded for pushing inventory into dealer warehouses, which books revenue that later reverses and leaves dealers holding stock they did not want - precisely the grievance behind the council letter. Channel conflict is often compensation conflict wearing a channel costume.
Segment definition is missing. The stated aim - contractors dealers do not serve - is plausible but untested. Without a clear rule for which accounts are direct-eligible, dealers will infer the worst.
2. Redesign the field compensation and the metrics. What should reps be paid on, and what has to be true for the change to be credible?
Read the worked answer
Move from sell-in to sell-through, with a transition, not a cliff.
Plan design:
- Primary measure: sell-through - dealer POS or shipped-to-contractor volume, whichever the data supports - at 60% of variable pay.
- Secondary: dealer health, 20% - dealer satisfaction score, 90-day return rate, and days-of-inventory outstanding. Cap days-of-inventory at a stated band; paying on sell-through alone invites a different distortion where reps refuse to stock anyone.
- Tertiary: new-account quality, 20% - new dealers or contractors activated with a first reorder, not merely signed.
- Windowing: 6–12 months of transition where the sell-in portion declines, plus a one-time bonus for clearing excess dealer inventory so reps are not punished for the loading they were told to do.
What has to be true:
- Data. Calderon must actually receive dealer sell-through data. If it does not, the plan is fiction. Make POS reporting a condition of the 2027 dealer agreement, with a modest incentive to comply.
- Executive cover. The first quarter on the new plan will show lower revenue because the loading stops. The CEO must pre-commit to that number, or the plan is reversed at the first bad month.
- Consistency. Regional managers who loaded dealers cannot be promoted in the same quarter the plan changes.
Metrics to watch: days-of-inventory outstanding (target: down 30% in two quarters), return rate (6% toward 3%), dealer satisfaction (recover the 12 points), and sell-through growth in the top 50 accounts.
3. What should Calderon do in the next 90 days, and how should the direct channel be positioned so the $40 million target is credible?
Read the worked answer
Ninety days of visible concession, then a rulebook.
Days 1–30: stop the bleeding. Suspend the 6% direct discount and move to price parity with dealer list, keeping the national installer as a fulfillment option rather than a price weapon. Write to every dealer explaining the change and what it means. Freeze direct marketing spend until the rules exist.
Days 15–60: negotiate with the top 50, individually. Offer them first right of refusal on direct-originated leads in their territory, with a referral fee or a split - dealers keep the relationship and the margin, Calderon keeps the customer data. Ask each for a concrete list of what would restore their commitment. This is also the moment to test the CEO's premise: ask dealers which contractor segments they genuinely do not want. The answer defines the direct mandate.
Days 30–90: publish the channel rulebook. Named account segmentation with an appeal process, a written price-parity policy, and the compensation change announced with an effective date. Launch a dealer advisory council with real agenda items, not a listening session.
Positioning the direct channel. Make it the segment-of-one channel: small contractors below a threshold, remote geographies, and emergency replacement where no dealer can respond in time. Direct also becomes the digital front door - leads routed to dealers, which grows the network rather than bypassing it.
Is $40 million credible? Only as a three-part number: $15 million truly direct, $15 million of dealer orders originated digitally, and $10 million from dealers newly recruited through the platform. Selling it as $40 million of website revenue will re-ignite the conflict the moment it starts to work.