A question that often arises when my consulting practice engages with early stage companies is “How should we sell our product? Should we build a sales force, or sell through distributors, dealers or OEM partners?”

The answer, like most topics discussed in this forum, is rarely as simple or straightforward as the question itself. It depends—on a lot of different factors. First of all, if direct, does that mean building an expensive direct sales force, or a marketing driven model with direct sales from a website? If indirect, does it mean distribution through 11,000 mass retailers, or a select few, highly specialized, technical Systems Integrators? There are so many different options within the direct vs. indirect argument.

I will tell you upfront that I have a bias toward using multiple channels—direct and indirect—if at all possible. It’s always been my opinion that this is usually the best way of achieving the highest total return, from the high product development investments that are typical in the technology industry. But that’s a general rule, and one that won’t always hold up in individual cases.

Let’s take a look at some of the things a company should consider in formulating a direct vs. indirect sales and marketing strategy.

How Complex is the Product?

It’s always important to start with the product in considering any aspect of your sales and marketing strategy. Is the product complex to sell? Is it complex to install? If a typical installation is highly complex and customized for the client, there may be a high level of services required that can only be delivered by experts within the company. If this is the case, a direct model usually work best.

If there is what I would term a “medium” complexity to the product, this often lends itself to the utilization of VAR and System Integration partners. This class of partners is attracted to products that allow them to bill configuration and service hours, which is really how they make their money. This key here is that the product isn’t so complex that the partners can’t be reasonably trained on the product, to deliver these services somewhat independently in the field, with a minimum of hand-holding by the vendor.

The last case is a product which is very simple and standard, or has minimum customization that can be performed by the end user. This level of product complexity usually lends itself to multiple distribution channels, including direct and mass market channels, which provide great distribution breadth, but minimal support. VARs and Integrators may also sell products of this nature, but they won’t put much focus on them, since they don’t drive service revenue. VARs will essentially “take orders” for this type of product as a convenience to their clients. They won’t be a “strategic” channel for this type of product, but since they are a large channel, the sales can still add up to a substantial total—so you shouldn’t ignore them if they are appropriate.

How High is the Product Price?

A high price can lead you in two different directions: Direct-only, or to a VAR/Systems Integration distribution strategy. If you’re selling an Enterprise Software Product into a narrow niche, with an average deal size of $2M, you’re probably going to end up selling the product direct.

If, however, you selling a $50-100K average sized deal, and the addressable market is a bit larger and more well-defined, it’s very possible that the VAR/Integrator channel may provide real leverage.

For products that fit into the $9.95-$995.00 range, a multi-channel marketing and distribution model may once again be your best bet. Products in this price range usually are very standard or have user-customizable features, and lend themselves to “sales-intensive” distribution channels, rather than support intensive. This could mean a focused direct marketing model with direct downloaded software sales from a website, or sales through computer retailers or mass market stores.

What does the Promotion Mix look like?

High priced, directly distributed products tend to have very simple promotion plans. The reason for this is that high priced products typically have small focused markets, so it’s pretty simple to get your marketing message to the customer. The simplest promotion strategy is what I call “Door to Door marketing.” Door to Door marketing means relying on the sales force exclusively to promote your product—with little or no investment in marketing programs. Or maybe due to limited resources, your promotional budget only allows a monthly Ad in a highly targeted trade journal. These aren’t strategies that I generally recommend, but for narrow markets, it is sometime appropriate. Bottom line, simple promotional strategies are generally only advisable for direct distribution approaches.

If on the other hand, you have available to you a large budget and a wide variety of promising promotional programs, that often is coupled with a broad distribution strategy. If you’re promoting in many different places, that may drive demand in a variety of different channels. In general, I say use them all. And I’m rarely a proponent of selling “indirect only”—you tend to lose valuable information without a direct link to the customer. You will also leave money on the table by giving up margin on customers that would prefer to buy direct. But occasionally companies are so dependent upon channels, that it doesn’t make sense to manage the channel conflict, and deflect the ill will that selling direct sometimes generates within a channel.

What Channels are available to you?

Oftentimes, the decision on how to sell is made for you. If your company is in a missionary situation where you are creating a new market, or you are in a very narrow niche, you usually don’t have any choice but to sell direct. If it’s a new market, channels might develop later. But in most cases, selling direct initially, either solely or in conjunction with channels, is highly advisable. There is no channel in the world that will be able to figure out how to sell a product—that the company itself hasn’t figure out how to sell itself. It’s always good to conduct trial and error marketing/sales campaigns directly, and then transfer that knowledge to your channels.

If you have a product that is broadly attractive to a variety of channels, and you have the resources to promote and sell effectively through all of them, I say go for it. As I stated early on in this article, it’s my belief that this is the best way to optimize your return on assets. The only caution is to make certain that you have the necessary resources, and are in a position to support all channels. If not, it’s better to “go slow” and add channels one at time—if you alienate a channel, they have a very long memory, and it will be hard to get back in their good graces.

One type of partner we haven’t discussed yet is the OEM. In some cases, there may be a large, dominant player in your business that you are tempted to pursue as an OEM channel partner. While occasionally this leads to making the principals of a small company quite rich, I’ve found in most cases its fools gold. No one sells your product like you do. Most OEM deals that I see end up with revenue levels in the range of 5-10% of the small company’s initial expectations. This can still be a substantial, important source of revenue. But the message I’ll leave you with is that I prefer early OEM deals to be non-exclusive, rather than exclusive. The exception is for a product that fits in a new market you don’t plan to participate in directly. Too many times I’ve seen clients “bet the farm” on a major OEM early in theie development, and the company was either killed or severely wounded by the experie
nce. Pursue OEMs, but it is usually best to do so as part of an overall, comprehensive distribution strategy.

How does the customer want to buy?

Finally, the most important question to consider is “how and where does the customer want to buy?” One of my most closely held beliefs is that you maximize revenue by offering the customer a product that is priced, packaged and sold via the channel he is most comfortable with. So if your prime prospect is a direct buyer, sell direct. If it’s a diverse audience that has a number of preferences on where to buy, strive to be in all of those channels. This may be the most important advice that I can provide.

That’s my review of the Direct vs. Indirect Sales & Marketing decision. I’m sure there are a lot of different experiences out there on this topic—what’s your experience been? Post a comment in my Blog, or drop me a note via email. I’d love to hear your thoughts.

Phil Morettini
PJM Consulting
http://www.pjmconsult.com/

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