Morettini on Management

General Management and Marketing Advice for Software and Tech Companies

Category: Distribution Channels

Selling SaaS through the VAR Channel

The move toward Software-as-a-Service (SaaS) is the strongest trend in the software business in recent memory. It changes the software business model in a number of fundamental ways. For the purposes of this article, I’m assuming the reader has a basic understanding of the SaaS business model. I’m also going to assume a basic understand of what a Value Added Reseller (VAR) is and does. I’ll focus on the fit between SaaS and the VAR distribution channel.

 The VAR channel has been a major factor in the B2B software business for a long time. There are tens of thousands of VARs, most of them now focused on specific vertical markets. While it is still possible to find a horizontal VAR, in a market of any size you’ll likely find a nice number of VARs specializing on that segment of customers. As a result, anyone who is selling software (whether via traditional licensing or SaaS) would love to have this stable of key market influencers representing their product. Let’s take a look at the situation:

 Major SaaS strengths

  •  Simplicity of startup for the customer – For many SaaS apps, getting started is as simple as signing up, obtaining a user name and password. Contrast this with the lengthy, complex and sometimes extensive setup and configuration period for some B2B apps. (This strength is a potential problem for VARs).
  • Available from any web browser - This is one of the great capabilities driving the SaaS revolution. Of course, traditional apps can have a web-based interface as well, but SaaS apps by definition are web-centric. Browser-based apps can limit functionality in some cases, but is becoming less of an issue all the time.
  •  Simplicity of maintenance for the vendor - This is a big one. With traditional on-premises apps, the vendor has to deal with “pushing” updates to the client, often into wildly varying hardware and software environments. With SaaS, the vendor presses a button and the new version is universally available to everyone. This is a huge advantage leading to reduced rollout costs for the vendor, and less pain for the client. (Also a potential problem for VARs) 
  • Less IT infrastructure required by clients - Theoretically a company could nearly eliminate their IT department by adopting all SaaS apps. As a practical matter, this isn’t happening in companies of any size, and likely won’t. But any reduction in reliance on perennially overworked IT departments is usually seen as a good thing. (Potential problem for VARs, but also an opportunity)

 Major VAR motivations

 Sell Services (not products) – Contrary to the expectations of channel neophytes, VARs are generally seriously interested in products to the extent that they have the ability to generate service revenue for the VAR. (Early SaaS models eliminate many traditional service revenue streams)

 Secure ongoing revenue – VARs don’t own intellectual property(products) to stabilize long-term revenues as a rule, so they’re always interested in ways of “smoothing out” their business with predictable, ongoing revenue streams. (SaaS eliminates much traditional service revenue, but subscriptions open up new possibilities)

 Maintain client control – VARs are very sensitive about retaining control of the relationship with their clients. They view these relationships as hard-won, and without owning the intellectual property, they are probably the most strategic aspect of their business. (VARs shy away from vendors who try to wrest account control from them, and many new SaaS vendors have this “direct-first” mentality).

 The Gap

 The problem as discussed in the above paragraphs is that the ways VARs traditionally make money (installation, training, integration, customization, support, client control) have been eliminated or severely reduced as opportunities by first generation SaaS vendors. Frankly, it’s never been easy for any software vendor to recruit VARs who are “active” with their products. The current situation sets up the typical first generation SaaS vendor as an arch- enemy to VARs. The SaaS vendors aren’t attractive partners due to the lack of potential service revenue (and often aren’t looking to partner), but are targeting the VAR’s customer base. To some, it looks like the end of the VAR channel for anyone running a SaaS-based company. Sound like a caution sign to SaaS vendors, one which makes the vendor focus strictly on direct selling? Maybe–but let’s explore a few ideas for changing the equation.

 Ideas on how to bridge the gap and attract VARs to your SaaS offering

 There are some forward-thinking SaaS who have been able to leverage the VAR channel for their companies. But at this point, they are few and far between. For many of the reasons stated in the above paragraphs, there is no established, tried and true model for attracting VARs to a SaaS offering today.

The biggest thing I’d like you to consider with respect to the sentence underlined above, is that when things are least established, there is the MOST opportunity for newcomers. Since there is no established perfect SaaS/VAR cooperative business model yet, no SaaS player is dominating in this still very influential channel. For a newcomer, this creates great opportunity and potential payback for creative approaches. Let’s take a look at a few such ideas to attract VARs:

 Design your SaaS offering from the ground up for easy customization and integration

Unfortunately I don’t see many SaaS vendors considering channel strategy when designing their first product. In the early days of SaaS, enabling customization and integration with other products was tough to do. Now the tools are there to make it very possible, but it’s a lot harder if you try to do it “after the fact”, once your architecture has been set and the first commercial release is done. This one step can be a huge asset when you are later trying to design programs attractive to VARs, and it can of course be a huge advantage with certain end users as well.

 Offer solid upfront margins, but focus on downstream revenue streams for your VARs

I recommend offering competitive upfront-sale margins, but going overboard here can be a waste of resources. Remember that VARs don’t build their business on upfront product sales revenue. Focus on finding ways VARs can make money dealing with you after the initial sale is complete. As an example, how about sharing downstream subscription revenue–but only if the VAR creates X amount of new sales revenue for the year? This is an example of a win/win which could lead to great loyalty to your offerings, tying the VAR’s interest to your business in the long run.

 Instead of building a large in-house consulting team, use VARs to help fill IT gaps for your customers

VARs have a lot of capability to offer services that your end users might require and demand. Rather than competing with VARs (and using scarce capital that could be deployed elsewhere), take a look at creating programs to utilize the best of your channel partners as your outsourced consulting team.

 Create a program to enable the outsourcing of upfront product training to your VARs

Initial product training is a great example of a “consulting service” to outsource to your channel. Most product groups see training as a necessary evil and an afterthought, often giving it away for free–while providing it with insufficient attention from the end user’s perspective. With the right tools, a VAR could turn this into a profit center for their business, reducing your utilization of key resources on a non-core activity, while tying the VAR tightly to your products.

 Be careful to allow your VARs to continue to lead in account management activities

In everything you do, keep in mind that the VAR is paranoid about account control (with good reason, unfortunately). Remember, you are in a business partnership with the VAR, and you need to trust them to do the right things for your joint business interests in the account. If you don’t feel like you can trust a particular VAR in this regard, don’t change your program to wrest account control from your channel. Stop doing business with that VAR.

I’m optimistic that adopting a few of these ideas can give you a leg up over the competition in building a productive channel business. I hope that you’ll find this article provocative, if not accurate in your view! This is an emerging, rapidly changing environment. Please post a comment with your own thoughts to expand the discussion.

Follow Phil Morettini and Morettini on Management via Twitter, Facebook, LinkedIn, RSS, or the PJM Consulting Quarterly Newsletter. Contact Phil directly at info@pjmconsult.com

No Comments by admin on July 18, 2010
filed in Business Models, Corporate Strategy, Distribution Channels, Product Marketing/Management, SaaS, VARs, enterprise software
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Growing from a Startup to a Mid-Market Software or Hardware Company

Every stage of a company’s growth holds unique challenges. In my opinion, startup to about $2M in revenue for a software company, and startup to $10M for a hardware company is the hardest phase of all. But growing a business is almost always hard, and there are several natural revenue levels where companies tend to “get stuck”.

 As in the hardware/software contrast above, revenue levels for different business models can be quite different. So it’s hard to generalize strictly upon gross revenue levels. But undoubtedly there are stages that every company goes through (startup to profitability, profitability to stable small company, stable small company to midsized company, etc.) which represent points of inflection in terms of the way a company operates. For example, you need quite a bit more formal process to operate a large company than a very small one. The methods of capitalizing a large company are very different from a bootstrapped or VC-backed startup. There are many more possible examples; I’m sure you get the picture. For this article we’ll focus on growth into the Mid Market stage.

 First of all, there is no perfect definition of a “Mid-Market” company. People have defined it many different ways: by number of employees, revenue level and many other factors. For the purposes of this discussion, we’ll define a Mid Market company as one having between 100 and 999 employees. . Let’s take a look at some of the major changes required to successfully grow from a startup to a mid-market sized company:

Hiring

As a startup or smaller company, you’re often restricted by resource realities with respect to who you can hire. Startups are often forced to hire people with less direct experience than they’d like, and pay them less than the going rate in cash compensation. You often can’t fill every hole, even all the ones that you think are critical. People have to wear two or more hats, and the type of people you can attract might be those that really prefer the small company environment, or are dreaming big dreams based upon the stock options. In short, it’s continuous compromise. As you grow into the mid market you have more resources to pay market rates, and are generally more attractive to a larger pool of employee prospects.

 But please, be careful–just because you can hire differently, doesn’t mean you should. I’ve seen folks get drunk on hiring at this phase, and get loaded down with overhead that makes running the business to optimal profitability much harder. There is also a tendency to go after people with big, blue chip company resumes, which can be very dangerous. If these candidates don’t also have experience in smaller companies, you’re setting yourself up for a very premature and inappropriate culture change. It’s important to guard against building a big company bureaucracy in a middle market company.

 Business processes

Much like in hiring, there is often a tendency to want to add too much process, too soon. In fact, I believe this is the absolute biggest danger executive management needs to guard against during this transition. The CEO and senior team are usually very aware that the business is outgrowing its current level of checks, balances and controls. Inevitably there is a need for additional and more formal processes. The typical mistake I see is that instead of adding carefully and gradually, folks want to radically change the business overnight. The result is often a still-modest-sized business operating like one with 20,000 employees: Meaning operating VERYSLOWLY. Guard against this! Mid Market companies still need to rely on speed and agility to compete with the corporate giants, who have many more competitive advantages that you can’t yet replicate.

 Scope of target market

Around the mid market stage, a single-product or single market segment company may be running out of room to grow at the rates it has historically enjoyed. This is a day of reckoning and a danger point that stops many promising companies in their tracks. If you need to expand into new products or markets, make sure that you do so rationally. Don’t go out and acquire a company in a complete different business, because your investment banker thinks it’s undervalued and a great buy. Do “diversify” into “adjacent” markets, taking one of your existing technologies into a different market, or introducing a new technology or product category to your existing market segment.

 Capitalization

This is the stage where you absolutely need to hire a serious CFO with financial market savvy and connections. Many startups have someone with a CFO title whose background is really accounting and financial controls. Or possibly and outsourced, part-time CFO. This usually is fine up to this stage. But once you are talking about opening new offices, funding a new market focus or new line of product technology, the game has changed. The skill set of controlling the company’s simple expenses, dealing with angel and VC investors now becomes inadequate. The company needs someone that understands raising money in institutional financial markets, along with the contacts that go with that knowledge. Budgeting and controls will also start to become more decentralized, requiring a different financial management style, as the company continues to grow into the upper end of the mid market phase.

 Distribution and regional offices

As your business grows into new markets and product categories, your distribution system must often change and grow with it. This might be the time that you begin to open offices in all the key geographic markets of the world. But don’t do this “just because it’s time”. It should be done only for good business reasons, such as increasing marketing in countries where a distributor won’t or can’t do what’s necessary. It might also be the time that a single distribution channel business needs to become multi-channel. For example, a direct-only company adds retail or VAR channels. Again, avoid the temptation to do these types of things because your business has grown to a certain stage. It adds complexity and overhead to your business, so make sure there are sound business reasons for the change.

 Product Development

Moving to a different customer set or new base technology can have a profound effect on the product planning and development process. It is often at this stage that you must stop relying on a single set of market veterans or insiders, who have been successful in bringing out products due to deep, long-term domain knowledge in your original market/product focus. Now is often the time where there needs to be a bit more standardized product planning and development process, as you broaden both the number and scope of development projects.

 The bottom line is that as you grow out of the startup phase, the way your business operates necessarily will need to adjust to continue strong growth. The biggest danger here is trying to “get big” before your time. While the big blue chip companies are often envied, trying to duplicate their current mode of operation while you’re just entering the mid-market stage is probably the best way to ensure that your company will never reach that blue chip status. “Get big” in the way you operate cautiously–because once you’ve bureaucratized your business, it’s very difficult going back.

 That’s my take on going from a startup to mid-market. Share your own growth stories with us to start a discussion.

 Follow Phil Morettini and Morettini on Management via Twitter, Facebook, LinkedIn, RSS, or the PJM Consulting Quarterly Newsletter. Contact Phil directly at info@pjmconsult.com

No Comments by admin on June 8, 2010
filed in Business Models, Corporate Strategy, Distribution Channels, General Management, Operations, Startup/Early Stage
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What is the Best Place to Locate a Tech Company?

There are many great places in the world where software and technology companies thrive.

Outside the US, India has a rich history and deep resources in software development.

Brazil, China and Eastern Europe also are emerging, low cost development centers. All of these areas are better know for outsourced software development services, however, and are only slowing emerging as homes of actual product-based companies. China and the “tigers” of Southeast Asia are known as low cost manufacturing (and in some cases low-cost development) centers.

Canada is promoted by many as the best place in the world to conduct software development, due to aggressive tax credits and other government incentives.

Israel has become an important center of networking and security development.

The point is, I could probably write a book on the many places tech companies thrive. But in the interest of brevity, I’ll use US-based locations as examples in this article, while discussing what regional attributes in general are important to consider when locating a new operation or complete company.

Labor cost considerations
This is obviously, very, important. But I contend that it’s not everything, especially in the tech business. You still need access to all of the key components that make a software or technology company successful–regardless of cost. Having said this, where in the country you locate can have a pretty major effect on your cost structure, and therefore your competitiveness over time. If for example you decide to locate in the Bay Area, you will be paying the highest salaries, rent, etc when compared to just about everywhere else. You may believe it is worth it, and of course there are strategies such as outsourcing that can be used to reduce some of that cost disadvantage. But it is important to understand what effect location will have on your cost structure, and plan for that effect.

Product development resources
Generally the most important consideration with respect to product development resources is to locate in an area where there is access to the talent flowing out of engineering colleges. This might be a major metro area, but it also could be a smaller city (with the advantage of lower overall costs) which is the home of a major university. For example, most of the Big Ten Universities have small tech clusters located in their regions, even though they are mostly located in smaller cities. It also helps to be located in an area where developers WANT to live–warm weather and recreational opportunities tend to dominate this aspect of discussion. Another factor is what type of developer you’re looking for. For example, if you’re involved in the wireless business, you will be hard-pressed to find a stronger preponderance of development talent than you will in San Diego. If you decide to locate in any area where your access to developers is limited, outsourcing is no longer an option but a necessity, and will play an important role in your success or failure.

Management resources
Access to management resources is strongly correlated with whether or not a region has a critical mass of tech companies. As a result, the Bay Area is superior to anywhere else with respect to the overall depth of management talent. But I think this is often overplayed (especially by those residing in the Bay Area!). There is arrogance by some in the technology business that says if you don’t live in one of the major tech centers, you couldn’t possibly be a top-notch tech executive. The reality is that not every talented person wants to live in the Bay Area or Boston, so they executive talent be found everywhere. If you’re putting together a startup, only a small cadre of senior executives is needed to launch successfully.

Lifestyle preferences
This is an important consideration, and a highly variable and very personal factor. I contend that it’s important to be happy if you’re going to be successful in business, at least in the long run. If you’re a skier, it might be great for you to locate operations in Boulder, CO. If you love the beach or are a tri-athlete, San Diego is a great choice. If you love cultural activities New York or San Francisco might be ideal. If you’re all business all the time, you can’t beat Silicon Valley. Know who you are and what you like, and set yourself up somewhere you won’t regret in the long run.

Outsourcing
Outsourcing today is a factor that can be the great equalizer with respect to locating your company. For example, you strongly desire to locate in the Bay Area because of the overall tech business climate, access to capital and senior management talent, but are worried about development or manufacturing costs. Done correctly, strategic outsourcing can overcome those issues.

Where do the traditional high tech centers of the country rank for you?

Here’s my ranking:

Tech Center Costs Developers Management Lifestyle
Bay Area Worst Highest Highest Good
Boston Worst Plentiful Plentiful Good
Southern California High Good Good Great
Austin Moderate Good OK Good
North Carolina Moderate Good OK Good
Smaller-metro areas Lowest Scarce Scarce OK

Before anyone screams that I’m short-changing their area, this is obviously VERY subjective. This is my take, and what is important is that you create your own grading system before deciding where to locate your operations. Some may consider a smaller area which isn’t a traditional tech center to be an IDEAL location. Others might feel that Bay Area is a great place to live. A lot of this is simply personal taste.

What’s the most important location attribute?
The one most important consideration is the preferences of you or your team! What’s key to keep in mind as you make this decision is to think globally and long term about what’s important. The beginning of a new company business unit is an opportunity to start with a clean sheet about what’s important for the business, as well as the founders personally. Don’t just start up you new business in a location because “you’re already there”, maybe because the parent company is there, or you just lost or quit an employee position. This decision will have many implications down the road, and once you make it, your flexibility to overturn it will be much more limited in the future. The bottom line is that while geography should play a role in your decision, no place is perfect; you can start up and successfully run a tech company just about anywhere is you plan up front.

What’s your view on where’s the best place or most important attributes to starting a new software or tech business? Leave a comment and clue us in.

Follow Phil Morettini and Morettini on Management via Twitter, Facebook, RSS, or the PJM Consulting Quarterly Newsletter. Contact Phil directly at info@pjmconsult.com

No Comments by admin on March 29, 2010
filed in Corporate Strategy, Distribution Channels, General Management, Startup/Early Stage
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VAR vs. Retail Distribution in Software and Technology Markets

There is much talk in the software and technology industry about distribution through the “Channel”. Generically that means selling through some type of a third party company, rather than selling directly to the end customer. But in reality the “Channel” includes a wide variety of disparate types of third party resellers. Today we’ll take a look at when to consider partnering with two of the main channel reseller types, VARs and Retailer–which also happen to be two of the most different.

What’s the difference between a VAR and a Retailer?

Let’s start with the retailer, as that’s a bit more obvious. With respect to software and hardware products, we’re talking about computer, specialty electronics and mass market stores, independents as well as regional and national chains. Retail is both a B2C channel and a B2B channel, especially when talking about serving the small and medium size business (SBM) market. While retailers may offer some “value-added” services such as extended warranties, delivery, installation, etc., the main purpose of a retail store is quite simple. The retailer serves primarily as a point-of-sale location, holding inventory and enabling end customers to have immediate access to products at favorable prices.

VARs (Value-Added-Resellers) are in many respects the polar opposite to retailers. The VAR channel is strictly B2B, and sells to both large enterprises and the SMB market. Usually there isn’t a retail storefront–if there is, it’s not a big part of the business. Expensive retail space is avoided to minimize their real estate costs, because walk-in traffic isn’t part of the business model. Unlike retailers, VARs are focused on selling their services, such as installation, configuration, integration, customization, etc, rather than turning over large quantities of products. VARs aren’t interested in having a large “assortment” of products like retailers. This is a key point that channel newbie are prone to miss–at great cost to their company. While VARs do sell products, they are motivated to do so in only two instances:

1) Core products which are strategic because the VAR’s services are built around them
2) Easy to sell, demand-driven commodity products requested by their customer base

If you take just one thing away from this article, let it be this: VARs aren’t dying to sell most products. If your product doesn’t fit into one of the two categories above, you will be pushing on a rope trying to make progress in the VAR channel.

Is one of these channel types “better” than another?

One is not superior to the other. Each reseller type is better for different product types and circumstances. They both can be used quite profitably, but they serve different purposes. It’s important when designing a channel strategy to start with the end customer and work backwards. Where would the end customer like to buy? How important is price vs. services and support? What reseller type best meets the desires and needs of your target customer type(s)?

When you should use the VAR channel

While VARs aren’t product-oriented businesses, in aggregate they are still a very important channel for many product types. If you have a product which requires a high level of support, or “value-added” services such as expert installation, integration with other products, customization or 24/7 support, VARs can play a key role in your distribution strategy. If you have a popular commodity product, they can be useful (in aggregate) to greatly expand your distribution points. The VAR channel is highly segmented by vertical market, so if your product has a vertical orientation (networking, medical, insurance, etc.) this often creates an opportunity for VARs to be an important channel partner.

When you should use the Retail channel

Retailers are usually best for horizontal, commodity or mature products. They are effective at providing broad, immediate access to your products across a wide geographic area. Retailers typically are “inventory turn” oriented in their business models, and tend to work on thin margins. So if keeping your price point low is important while still using a third party channel, they are an excellent choice. Of course the fact that they provide instant access to your products during business hours can be a very important asset.

Can you use both VARs and Retailers for the same product?

Yes, but you must know what you are doing, or you may end up very sorry that you did. Since VARs and retailers bring very different things to your distribution, there is a strong chance of serious channel conflict if you use both reseller types for the same product. The biggest potential issue is degradation of your product street price, because while VARs typically work off high product margins and low turnover, retailers are the opposite. Retailers optimize their businesses for high inventory turnover, while accepting low product margins. The low margin strategy causes the street price of your product to fall for all channels distributing your product. If the street prices drop too low, the margins may drop too far to be interesting to VARs (even though they are focused primarily on their service offerings). Companies new to multi-channel distribution sometime make this problem even more acute by offering price discounts based on volume, which makes the situation even worse. A volume-based pricing strategy favors the higher volume retail channel, and also incentivizes even deeper street price drops, to create higher volumes and resulting better wholesale prices. Multi-channel pricing is a complex area fraught with danger for the uninitiated–new players should solicit outside advice, and tread carefully.

VARs and retailers can be important, high volume distribution channels for many software and tech companies. They can each be primary distribution channels, or combined with direct a sales approach and other channels to form highly efficient multi-channel distribution networks. More distribution is not always better, however. Companies need to know what they are doing when proceeding with a multi-channel strategy, or risk doing great damage to their sales and marketing efforts.

That’s how I view using VARs and retail in your distribution strategy. How do you see it? Post a comment to get a discussion going. Follow Phil Morettini and Morettini on Management via Twitter, Facebook, RSS, or the PJM Consulting Quarterly Newsletter.

No Comments by admin on November 8, 2009
filed in Business Development, Distribution Channels, Retail, VARs
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Compensating the High Tech Sales Force

A very controversial topic within many software and other tech companies is how to best compensate the sales force. How much is required? How much is too much? What’s the best mix of salary and incentive comp?

If you’ve read anything I’ve written before, you’ll find my next comment familiar:

It all depends on your particular situation.

There is no across-the-board best practice for optimizing your sales force’s performance via compensation strategy. Every company, market and competitive landscape is different at any given point in time.

Let’s take a look at some of the more common variables and how they might affect your compensation strategy:

Established brand vs. startup
If you’re a startup, plan on paying your sales reps more. It will be harder to attract great reps as a startup, unless you are in a special situation with an incredibly hot new product (of course, every startup CEO thinks this way about their product!). You may need to pay reps a higher base, and certainly richer commissions than your established competitors. Some of this can be mitigated if you are offering an equity opportunity, as discussed later. But for sure, prospective reps need to believe that there is a good chance they can make more money at your startup, or you won’t be able to compete with established companies for the same level of folks. That’s just a fact of life.

Price Point
If your price points are higher, you may need to pay a higher base salary, if the total number of sales made will be low. Lower price points lend themselves to higher commissions and lower bases, because the rep will be able to start making money sooner, and more regularly.

Length of sales cycle
The sales cycle aspect is pretty straightforward, and tied closely to the price point discussion above. Price points and sales cycles almost always have a direct relationship. High price points lead to longer sales cycles, and low price points to shorter cycles. It’s harder to compensate heavily on commission if there is a long sales cycle, because sales reps need to eat regularly, too. If you have a product that takes a long time to sell, make sure that you have a decent base salary for your reps, if you want to keep the good ones.

Growth vs. harvest
Companies generally highly value reps that can sell new products and into new accounts–they want to pay for growth. So the more you are asking your reps to do what is considered to be the hardest thing in sales — sell “new”– the higher the commission structure should be. Selling “new” is the highest form of risk in sales, and it should be compensated by the highest reward. Selling established products and selling into established accounts (harvesting) is not as risky, and as a result can often carry lower commission structures.

Initial sale vs. ongoing revenue
Similar to the growth vs. harvest discussion, sometime you are selling a product that has upfront revenue as well as ongoing revenue, typically from updates, replacements or services. You generally want to pay higher commissions for the upfront portion than you do the ongoing revenue. A good example of this is a traditional software license with an annual maintenance fee. If you pay commissions on the maintenance portion at all, in most circumstances the payout should be lower than the incentive on the upfront license fee.

Commodity vs. missionary sales
Commodity sales lend themselves to high commissions and low (sometimes even zero) base salaries. This is because sales cycles are usually short for commodities, and since they are by definition in big markets it’s easier to make a base level of sales and resulting commissions, even for a new rep. By the very nature of commodities the rep’s service is often a major differentiating success factor, so a comp mix toward commissions rewards the exceptional rep to really work hard. Missionary sales, on the other hand, require a great deal of patience by the rep, as well as a lot of hand-holding and relationship building. To keep good sales reps in such a situation, it’s important to have base salaries which are adequate to enable the best sales reps to exhibit patience with the long sales process. Missionary sales are an area that really demands both high bases and strong commission structures, as they are one of the most demanding forms of selling.

Hunters vs. Farmers
Hunters obtain new accounts while Farmers maintain and maximize the sales into existing accounts. These two situations require two different sales personalities, and the compensation packages should be different as well. The hard-charging hunter will require a decent base salary, but really needs the high commission structure to keep him motivated. The Farmer is likely to be a more stability-oriented, relationship-building style of rep. A relatively higher base and lower commission structure is usually more comfortable for reps in situation.

Equity
In most cases, the playing field is slanted toward established companies when it comes to compensating and attracting sales reps. Equity participation can be the great equalizer for startups in compensation. Every company has a different view of how broadly to offer equity. But a startup that offers equity participation to its sales force can often give up less in cash compensation. For risk-taking reps, equity can even be the deciding factor in recruiting, in some cases. The lure of equity that might grow into a significant stake at a successful startup can help pull a rep from a more established job.

So what specifically should you be paying your reps? Laying out actual numbers is beyond the scope of this discussion, because there are too many factors and potential situations to generalize. All the factors above come into play in structuring a sales compensation package, as well as factors such as inside vs. outside sales. Every situation is different, and competitive factors also come into play, if you’re competing directly with your rivals for reps. Local market circumstances, as well as the overall economy, can also play a strong role in setting the final package.

Above all, if you want to optimize the performance of your sales force using compensation as a tool, you must do your homework. Don’t just quickly come up with something that “sounds good” or is “how you’ve done if before”. Analyze the situation of your unique company at this particular point in time, and at certainly consider at a minimum the factors mentioned above.

That’s my thinking on how to compensate your sales force–what’s yours? Post a comment below or shoot me an email if there is a particular situation you’d like to discuss.

Follow Phil Morettini and Morettini on Management via Twitter, Facebook, RSS, or the PJM Consulting Quarterly Newsletter.

2 Comments by admin on August 17, 2009
filed in Distribution Channels, Startup/Early Stage, sales
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Structuring a High Tech Sales Force

There are many ways to organize a sales force. In my opinion, there is no one “right” way. There is only the BEST way for unique circumstances of your current company.

Like most aspects of developing a software or technology company, there are guidelines, but no exact roadmap to building a successful sales force. In my practice at PJM Consulting, I often suggest that a management exercise like structuring a sales force should begin with a series of questions:

What stage of development is your company in?
This important, because an early stage company may not have the resources to fully fund the outside sales force that may be ideal for its situation. Or the company may want to sell primarily via an inside sales force, but hasn’t had enough early success or nailed down the sales process sufficiently, to sell effectively through this less “high touch” method. Stage of development can be as important as what the ideal “steady state” organization would look like–don’t over shoot your development stage in designing your sales organization.

What are you asking your sales force to do?
Are you using your sales force primarily as closers, supported by strong marketing, etc — or will your sales force be doing a lot of cold calling, handling the customer “cradle to grave”? In general the more you are asking your sales force to do, the more “high touch” the structure needs to be.

What markets are you targeting?
In some markets (such as many enterprise IT market segments) an outside rep knocking on the customer’s door is absolutely expected, and essential. In other markets (like many SMB markets), this type of attention would be considered a nuisance, not a service. It’s important to understand what the target customers want and are expecting in a sales interface.

What are your product price points?
The implications of this question are usually well understood. High priced products can support a more expensive outside sales force, and may require one to make the sale. Lower priced products can’t usually be sold profitably this way, and an inbound or outbound telesales operation is often the optimal structure.

Is your product more of a commodity sale, or is there a longer, more complex sales cycle?
Commodities lend themselves to lower cost inside sales, as well as a higher mix of channels. The more complex your sales cycle, the more likely your company will need a captive, outside direct sales force.

This is just a sample of key questions to ask yourself as you design your sales function. There are many more relevant questions that should be asked, depending upon the specific situation. I won’t attempt to cover them all, or this article will become a book. Once you’ve done a good job of asking and answering the relevant questions, it’s time to actually start designing your organization. Below are some of the personnel types and organizational structure that a software or tech company would typically consider as part of its sales organization:

SALES REP TYPES

Outside Reps
This is the classic sales rep style that has been around since the beginning of time. In the “old days” even consumer products were often sold this way (those of a certain age can remember the “door to door” Fuller Brush Salesmen). But this is the most expensive form of sales person, and depending upon the market, products and other factors, is not always the most efficient or even effective. There are still a lot of companies that sell almost exclusively through outside direct sales forces. But in companies where they direct outside sales reps do exist, they are often used more sparingly, in combination with other types of reps and channels.

Inside Reps
This is a favorite form of rep for commodity products, companies that sell heavily through third party channels, and inexpensive, higher volume products. Inside reps can also be used effectively in a “teamed” approach with outside reps, helping to optimize a territory. They may source or qualify leads for the outside reps, handle smaller accounts in the territory or generally act as a “junior sales rep” to the more senior outside reps.

Hybrid Reps
This rep type is own invention (the term is at least). This rep is part outside rep, part inside rep. A rep of this type would be appropriate for those “tweener” products and markets, which don’t fit neatly into a pure inside or outside model. For example, software products with an average sales price of $5-10,000–too low cost to be sold strictly through an outside sales force, but maybe too complex or expensive for a pure phone sale. Hybrid reps spend most of their time in the office on the phone, but also travel modestly, approximately one trip/month. Example trips might be to staff trade shows, visit channel partners and call on major accounts. This type of rep may be very appropriate for early stage companies that can’t yet afford to build out full inside and outside sales organizations.

Sales Managers
This is pretty self-explanatory, but not every tech company can afford a classical, full-time sales manager. Often you will see individual reps reporting to a manager of another function in startups, and occasionally you will see the concept of a “producing manager”, who has line sales responsibilities in addition to management. This personnel type is very important to setting the tone for your sales organization, and is applicable to managing all rep types within any organizational structure.

Sales Administrator
A specialist that you tend to see in larger sales organizations, or at least those that have a lot of complexity (a lot of return activity, inventory management, repairs, rep splits, etc.)

SALE ORGANIZATION TYPES

All of the organizational types listed below can be commonly found as the dominant sales organizational type in many companies, as well as in combination with each other in larger, more complex companies:

Region-specific organizations
This is probably the most common organizational structure, which may include any of the sales reps types, who are assigned to specific territories. In many cases I favor this arrangement, as it tends to be the most unambiguous to measure and manage. The downside is that certain regions can prove to be much more naturally fertile than others, which can make the management process more difficult to do fairly. You also may lose the advantages that certain reps may have in terms of contacts or vertical market knowledge which lies outside of their geographic region.

Channel-Specific organizations
This is the second most common sale organizational type, which of course tends to be found in companies which make strong use of third-party sales channels. There may be a direct sales force, a VAR or retail sales force, an OEM sales force, and so on. Sometime there is an “intermixing of these organizations, for example, an “overlay” VAR channel rep as part of a direct sales force.

Industry-specific organizations
Likely the least common of organization types, but one which is very appropriate in certain circumstances. For example, a tech company which has very different value propositions in a number of vertical industries, where “insider status” in important to selling into a particular vertical market, or the product offerings are arranged by vertical market.

SUMMARY
There are many possible sales organization types and styles for software and tech companies. Many different ways of organizing can work–and the people you have are always more important than organizational structure to your ultimate success. But by carefully considering your company’s specific situa
tion, and matching your organizational structure to your market, products and available resources, your company will have the best chance of achieving sales optimal results.

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

No Comments by admin on November 5, 2008
filed in Corporate Strategy, Distribution Channels, General Management, Operations, Pricing, Retail, Startup/Early Stage, enterprise software, sales
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Structuring Channel Discounts for Software and Technology Companies

Selling through sales and distribution channels of various types is very important to many software and tech companies. Yet channel programs, and specifically discount structures, are often thrown together quickly and haphazardly, without looking at any real hard data. Let’s examine some of the key items it’s advisable to consider, when structuring a channel discount program:

Market Norms
The absolute first place to start when considering channel discounts is to survey the SPECIFIC market that you are entering. By this I mean look at similar products through the EXACT profile of channel partners you are considering selling through. For example for consumer software, retail margins of 15-18% are common, whereas for a specific VAR segments the discount norms may be in the 25-40% range. If your discounts fall too far below the market norm, your program will likely fail. If discounts are set much higher than the market norm (without good reason), your company will be leaving considerable profits on the table. It is very important to do upfront research on actual conditions in your segment–don’t just “assume”! Preferably, you want to find out what your direct competitors are offering in terms of a channel program. This may seem obvious. But in my consulting practice at PJM Consulting, instead of using objective data, I see significant numbers of companies use their own theories about what the right discount structure SHOULD be from their perspective. This often ends up being the main reason for a painful “restart” of their channel program at a later date.

Product and Pricing Strategy (Street Price)
Channel discount structures cannot be constructed in a vacuum. They are but one component of your overall product and distribution strategy. As such, they must be consistent with the overall goals you establish for the product. If you are seeking to penetrate a new market or a new channel, it may be wise to be more aggressive than the market norms to gain market share and shelf space. If your market is more mature and you are in a harvest mode on a particular product line, it may be wise to minimize channel discounts to maximize profitability. In any event, consider channel discounts early in the product planning phase as part of your overall product pricing strategy.

Type of Channel
There are many different types of partners for software and tech companies that fall into the category of “channel resellers”. Computer retail, mass market retail, Value-Added resellers (VARs), Systems Integrators (SI), Domestic Distributors, International Distributors, Manufacturers Reps–and many more. Each of these reseller types are quite different from the others, and each add different types and levels of value to your distribution systems. Yet every one that you distribute through will be competing with the others (as well as your direct sales model), at least indirectly.

Multi-Channel Pricing Equity
It’s important if you are selling through more than one channel (including direct sales) to attempt to equalize, as much as possible, the street prices charged by the various channel types. The best way to do this is to consider the costs incurred by the various types of resellers in delivering your products to the target customer. For example, a VAR that provides support, pre-sales consulting and other services may need a higher level of discount to achieve an adequate profit margin than a retailer that simply is providing shelf space might. In reality, the retailer is likely to have a lower street price, but it is important to try to minimize this gap. Otherwise the VAR who may be providing important services to a segment of your customers may be driven out of the market, and refuse to sell your product–which is not in your company’s interests. The most common practice which causes inequities in channel pricing is a volume-driven discount model. New entrants to the channel often use this approach–why wouldn’t you want to incentivize volume sales by giving the biggest discounts to the largest volume sellers? Although this may work fine if you have a monolithic reseller channel, where all the players have the same business model and offer the same value add, it otherwise will quickly cause the problems discussed here. The resellers possessing the lowest cost structure and providing the lowest value-add will quickly dominate the market, driving the high-cost/high value-add resellers away. This may be ok with you; just make sure you explicitly consider this possibility before embarking on a volume-driven channel discount strategy.

Value Added
One of the things that I recommend considering explicitly up front is: what is the key value-add that you are seeking from the channel? Is it pre-sales consulting, installation services, post-sale support, shelf space and inventory for immediate customer access, or one of many other factors? Make sure you understand what channel value-add is most important to you, and build protections into your discount structure for the reseller type who best provides this value.

Components of Discounts
It’s not always necessary (or wise) to offer a single, monolithic discount level for resellers. How you structure your discounts components should be closely tied to your product and pricing strategy–what you are trying to accomplish with your overall channel strategy. For example, if you are trying to manage your street price at a certain level, it can be dangerous to offer a large discount to certain types of resellers who may pass that discount on as a lower street price. Yet this segment of resellers (for example, retailers) may be an important, high volume channel for your product type. In this case, it may be wise to offer additional, conditional discount for activities that you value. Again as an example, to keep your street price up but incentivize a high level of activities through retail, you could offer a high level of added discount for approved co-op marketing activities. A segmented discount structure driven by costs and value-add, rather than volume, is often the most effective structure to maximize multi-channel sales. This will also limit discount-driven reductions in street price, which ultimately can severely reduce profit levels and incentives to sell for both the vendor and all channel partners–if not properly controlled.

SUMMARY
Creating a Channel Discount Strategy and structure is NOT a theoretical exercise. It should be primarily a tactical exercise based on a realistic view of market conditions, and include collection and analysis of objective market data. While what you hope to accomplish with your discount strategy is important, the overwhelmingly most important factors in creating your discount strategy should be what is happening in your segment of the channel–and what will work best for your company. Try not to create a structure based on what you’d like to see with respect to the channel. Focus on creating a pragmatic, workable strategy upfront, to avoid an unsuccessful channel entry and painful restructuring that results. If you are new to the channel game, seeking outside assistance may help you avoid experiencing one of these painful false starts that happen frequently in the channel.

That’s my view of how best to create a channel discount structure. I welcome you to post a comment with your own thoughts on this important technology management decision.

Phil Morettini
PJM Consulting
www.pjmconsult.com

No Comments by admin on September 8, 2008
filed in Distribution Channels, Pricing, Product Marketing/Management, Retail, VARs, enterprise software, hardware, sales
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Trade Shows for Software & Technology Firms – Do They Still Make Sense?

Let’s talk about what, for some people, is a marketing method from a bygone era: Trade shows, or Trade Fairs, as they’re referred to in most places outside of the US.

At one point in time, Trade Shows were a staple in most every tech company’s marketing budget–shows like Comdex, PC Expo, Network World and a host of others were annual rites of passage. But in this Internet age, they have been greatly reduced in the marketing mix, if not taken completely out of the picture.

There are many reasons for this. First and foremost, the ROI of tradeshows was always very questionable for most exhibitors. In marketing departments everywhere there were sharp discussions during budget time, on whether to continue the expense of the major shows. They always seemed important to be at, but usually it was pretty difficult to make a direct correlation to enough actual revenue, to justify the large expense. As the Internet became more prominent, this ROI looked even worse in comparison–as it did for many other “offline” marketing methods, such as traditional direct mail and print advertising.

So are tradeshows now obsolete? Probably not, but many marketing folks might say that they are on the endangered species list. So when, if at all, do traditional trade shows still make sense today? And what should your goals be, if you do decide to invest in a show or two? Let’s take a quick look at 4 points relevant to each of these two questions.

4 REASONS IT MAKE SENSE TO GO TO A TRADE SHOWA CONTRARIAN APPROACH
One of the major enduring tactics of marketing is to “zig when your competitors zag”. If you are in a market where a show is still well attended, but vendors are starting to stay home rather than pay for booths, you may have an opportunity. If your competitors aren’t there, you have a larger, captive audience of prospects to strut your stuff to. One of the basic tenets of a good marketing program is to find a “communications channel” which isn’t too crowded. With trade shows falling out of favor in marketing budgets, there is potential to benefit from a contrarian approach in some markets.

INTRODUCTION INTO A NEW MARKET
This is always one of the strongest reasons to attend a few shows. If you have a brand new company, or your company is entering a market space it hasn’t previously participated in, a couple of well-selected shows can be a very good investment. Remember, you only get one chance to make a first impression.

INTRODUCTION OF A NEW PRODUCT
Much like a company entering a new market, a new product introduction is a very traditional reason to exhibit at a trade show. In my opinion, introducing new products at shows has historically been over-estimated as a marketing tactic. Sure, the press is there covering the show, but if 50 other vendors are also announcing new products, your new product might get lost, or at least get less press coverage then if you announced two weeks before or after the show. Remember the comment above about over-crowded communications channel?. In some cases, announcing at a show fits this description. This can still be a very sound marketing tactic–just do careful research and planning to ensure it is a net positive.

IMPORTANCE OF HIGH TOUCH
If you have a product that absolutely requires some hands-on or personal selling before prospects buy, trade shows can be an excellent investment. For example, if the product is quite expensive, or an expert demo sells far more than prospect downloads from your site. I have a software company client at PJM Consulting who is in a market where expert demos are essential; they have grown the company, to a great extent with trade shows, and almost always can demonstrate a profit on their show budgets.

4 GOALS TO ENSURE A HIGH RETURN FROM A TRADE SHOW

PRESS COVERAGE
This is always one of the most important reasons to go to many shows. If it is an important show, the press will be there in full force. You really need to plan PR tactics ahead of time, however, as all of the other exhibitors have the same goal of getting press appointments and coverage. It is CRITICAL to plan far ahead in securing appointments with target editors, and have a “tease” of substantial news to obtain the appointment. Editor’s schedules fill up far in advance. Properly planned, the show can pay for itself here by eliminating the need for a dedicated press tour. But if not well planned, you will end up “wasting” your product introduction or other news, resulting in little or no press coverage.

EFFICIENCY OF INDUSTRY NETWORKING
Networking with the other exhibitors is often overlooked by many vendors. The focus is generally solely on customers, and maybe distribution channels. Often many companies with complementary offerings are attending exhibiting, along with a few competitors. This can be a great arena to begin or continue discussions with potential strategic partners. At a minimum, makes sure to set aside some time to walk the show floor, and see who might have synergy with your company. Even if you’re pressed for time, shake a few hands and gather some business cards–it can be an excellent setup for future discussions.

LOCAL CUSTOMER VISITS
This is also an area that holds potential to lift your show budget’s ROI, which is often overlooked by many exhibitors. You are flying staff to a faraway city–why not go in a couple of days early, and call on a few potential major customers? At a minimum, make sure you get those free show tickets that often go to waste out to local prospects in your database, so they can come to the show for a meeting or demo at your booth.

LOCAL CHANNEL VISITS
In the same vein as visits to customers, it makes a lot of sense to call on current or potential channel partners, once you decide you’ll be spending money going to a show in a certain region. Add a couple of days to your trip and visit a few key partners and prospective partners in the area. And make sure to invite them to the show well in advance and supply those free tickets, so you can see many more later at your booth.

SUMMARY
If you just fly to a city, set up your booth, and wait for new customers to flock by to see you–you are likely to be very disappointed in your return on investment. But if you use a tradeshow as a hub for a variety of related activity, adding a couple of key shows into your marketing mix can still bring a very nice ROI. The key is preparation and planning, to make sure your results are optimized. I’ve outlined a few reasons why it may make sense to exhibit at tradeshows/trade fairs even today, along with some ways to maximize your return. What’s your reason for attending tradeshows in the Internet Age? And what concrete results do you hope to achieve? Post a comment to continue this discussion.

Phil Morettini
PJM Consulting
www.pjmconsult.com

1 Comment by admin on June 5, 2008
filed in Distribution Channels, Marcom, Promotion, Retail, VARs
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Retail Distribution of Software Products

Selling software at retail at one point in time was the “Holy Grail” for consumer, home office and small office software suppliers. That’s where the volume was. Everything that a company did starting up was intended to build enough volume to get into a distributor, so they could then pursue shelf space at the major retailers of software.

But oh, how times have changed. The advent of the Internet and wide availability of broadband has made nearly every consumer and small business application downloadable with the click of a mouse, and a major credit card. In the meantime, major sellers of software have dropped like flies (CompUSA, Computer City) or have de-emphasized software in their retail assortment.

PROFITABLE retail distribution of software, which has been a major challenge for software companies dating back more than 20 years, has gotten tougher every year, as the retail distribution pipe shrinks. And even twenty years ago, it was already very tough, for small software companies, in particular. I’ve even seen a credible authority recently predict that distribution of software through retail outlets will CEASE TO EXIST within five years.

IS RETAIL SOFTWARE DISTRIBUTION DEAD?

So should you forget about retail as a potential distribution channel for your consumer or SMB software application?

First of all, it’s my opinion that the near term extinction of retail software distribution is greatly exaggerated. While it has been in decline for a very long time, and will continue to decline, it still has some life left. There is still quite a bit of software sold at retail. There are still some reasons that people buy at retail. And last but not least, nearly every thing in high technology takes more time to “go away” than the pundits predict. People just don’t change their habits that quickly, no matter the technological reasons for that change to occur. Among several reasons people still buy at retail:

WHY PEOPLE STILL BUY SOFTWARE AT RETAIL

Impulse – They are in a store looking for something else, and happen upon a product that looks neat or useful. In this respect, software benefits from this “in-store effect”, much like any other retail product.
Credibility – Buying software, or any other item over the Internet from some unknown company, is scary for many people. Just the fact that it’s in a “touchable” package, and is “blessed” by the retailer stocking it, gives comfort to many, especially the mainstream and late adopter types.
Physical Media – Most folks want a backup copy of the application which they’ve put out good money for. Sure, you can burn a backup CD on your own. But to some folks that’s technologically challenging–and seems like a lot of work to others.
Internet Phobia – There still are folks, more than want to admit it, that just aren’t comfortable with the Internet, particularly the ecommerce aspects.

WHEN SHOULD A SOFTWARE VENDOR CONSIDER RETAIL DISTRIBUTION?

So in some cases, software vendors should still give consideration to packaging their products for retail distribution. What are the elements which may make retail still a viable distribution channel for a particular product line?

* A VERY hot product – In one of these rare instances where you’ve hit a product home run, it’s beneficial to get your product in as many channels as possible. When you have a product “selling like hotcakes”, retail can be ideal to help you maximize your return on the high demand. Make sure that you’ve proven that it’s a brisk seller via other marketing and distribution methods BEFORE you enter the retail channel, however.
* A well-known brand – Almost nothing helps product sell through retail as much as a well-established brand. There is almost never anyone to “sell” your product in a retail store. You are relying almost soles on the box copy to be your salesman. In this situation, the credibility of a strong brand is often the difference between a customer purchasing, and leaving the box on the shelf.
* A related portfolio of products that can be sold to the same customer. It is very hard to make money on a single product being sold through retail channels. The upfront marketing programs and thin margins make breakeven a huge challenge for a single product company. However, if you can profit indirectly even if you just break even on the actual retail sale, by building your customer list and selling related products to them–that’s a huge advantage.
* Add-on services to sell – Much like having a large portfolio of products, a single product vendor can also have a greater chance at profitability if the “retail product” is a front-end to other revenue generating services. Maybe the product leads to subscriptions to an add-on web-based service, or there are custom forms or other tangible supplies that can be sold to users of the software application.

These are a few of the circumstances where I would actually encourage an ISV to consider retail distribution. I want to caution that in the best of circumstances, this channel isn’t for the “faint of heart”. Startup costs are high, margins are generally lower than other forms of software distribution, and there are substantial inventory issues and risks. There’s an old saying in the software business about retail distribution–”the only people who make money at it are the freight companies who ship the inventory back and forth among vendors, distributors and retailers”. In short, it’s a great place to lose money–if you aren’t careful. I highly recommend that you retain an expert to help you through the process, if you are new to retail and decide that it may be appropriate for your products.

There are many more angles to cover on this topic. To name a few, the need for a relationship with a major distributor of software to retailers, what marketing programs to use, the importance of a retail package–and much more. As important as they are, we’ll have to leave the detailed mechanics of getting your software into retail distribution (and making a profit!) for a later article.

SUMMARY

So don’t dismiss retail distribution of your software applications completely, even in this age of Internet instant gratification. But make sure that you are doing it for the right reasons, with a solid plan for how it will benefit your company. If your company is entering retail for the first time, consider retaining an expert to reduce your risk of failure.

I’d enjoy hearing your own experiences with retail distribution, past and present, as well as your attitude about this channel today. Post a comment so we can all learn from your experience.

Phil Morettini
PJM Consulting
www.pjmconsult.com

No Comments by admin on April 11, 2008
filed in B2C, Corporate Strategy, Distribution Channels, Pricing, Promotion, Retail
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Negotiating and Working with Large Technology OEM Partners

The Holy Grail for many software and technology companies, especially the early stage type, is the big deal. Everyone is looking for the big deal, the one that will fund the company’s early activities, provide market credibility and momentum in the marketplace. Of course, if it goes well, there can be nothing better. Many times the big deal takes the form of an OEM partnership with a much larger company. But often when these deals do happen, they end up fitting in the category of “be careful what you wish for”.

TARGET YOUR OEM PARTNERS CAREFULLY
This is where it all starts, good or bad. It’s important to pick compatible partners. Companies looking for large OEM partners are often blinded by the potential of what the OEM can do FOR their business. They often fail to pay any attention at all to what the OEM might do TO their business!

Can the partner cause severe channel conflict? Will they tie the small company up in endless meetings, procedures and negotiations? Do they have a corporate structure and culture so foreign to your way of doing business, where you end up pulling your hair out from frustration–unable to accomplish even the most simple business objective without moving mountains? Sometimes with large companies, its difficult even figure out who you need to speak with–let alone get a prompt, unambiguous answer.

Get to know your partners well before you sign a deal. It’s tempting to rush in before “they change their mind”, but the actual relationship is critical to potential success. It’s like dating before a marriage–no matter how attractive the partner is, you need to make sure you can live with them later on.

NEGOTIATE FROM STRENGTH
I don’t like to do deals with people that are sure they have the upper hand. If they think they can push you around–they almost certainly will. Usually one partner needs the other to a greater extent, but you want to try to avoid dealing with partners where you have no leverage at all. It generally doesn’t’ turn out well. Make sure that you negotiate a deal that you can live with. Above all, you need to have a “line in the sand” that you won’t cross–and be prepared to walk away if the negotiations cross that line.

This can be a painful and difficult thing to do when you are seeing big “dollar signs” in your eyes–and fear if you stay strong, you might blow the deal. But remember, you have something that the other side wants as well–or they wouldn’t be talking to you. If you don’t know what your minimum successful deal looks like, and you aren’t prepared to walk, you may sign a deal that you will regret. Not to mention tying up your time and resources, which might have been used working with a more compatible partner.

WORK ON EVEN TERMS
Once you’ve negotiated a deal that you can live with (and hopefully prosper with!), it’s time to get to work with your partner. Try to keep things as fair and even as possible in the relationship. Of course, it’s important to be accommodating to your partner, and respect the differences in operational procedures. Big OEMs will usually move slower than you, be more process-oriented and structured, and include more people in the relationship. All of this is fine, but it needs to be tempered so that the larger partner doesn’t “swallow all of you available resources whole”. It can easily happen if you don’t guard against it. They have more resources than you (but will always think they are busier!) as well as more process-driven requirements that need to be met. But don’t be afraid to draw the line at a reasonable point, and remind them that you have fewer people and resources available. Suggest a phone meeting instead of flying three people across the country–ask that they come to your place, rather than always trekking to their headquarters. Propose that one of there folks spearhead writing that joint position paper, instead of some scarce resource in your company–you get the picture. Sometimes larger companies will smother you without even knowing they are doing it–don’t be afraid to remind them that you need to do business a little differently.

KNOW WHEN TO SAY “NO”
If you’ve tried everything you know, politely, to keep the relationship equitable and reasonable–but it just isn’t–don’t be afraid to say NO. I meet many smaller company executives in my consulting practice whojust don’t feel they can do this with a larger partner. They’ll talk tough in internal meetings, but when back in discussions with the partner, the tough talk turns to submission. They just feel like the partner is too important to their business to risk ever offending them in any way. That attitude is a prescription for servitude for your company. I’m not suggesting being unpleasant; in fact, when standing up to a larger partner, it’s critical to be calm, polite and non-defensive. But by all means be firm in delivering the message of what your business can, cannot–and won’t'–do. If you don’t, what could be a profitable relationship can turn very sour.

HAVE REALISTIC EXPECTATIONS
The last point I’d like to convey is that it’s important to have reasonable expectations in partnering with large OEMs. Many companies go into these deals believing they will be “company-makers”. In my experience, this rarely happens. Understand what the OEM can do for you, and build your business model around the most conservative projections of their performance that’s possible.

Companies usually turn to OEM products from partners to fill niches that they don’t fully understand, or don’t feel would pay back–if they invested in developing it themselves. It is very rare for products licensed or resold from partners to get anywhere near the push that internally-developed products do. Be realistic about this, and you won’t be disappointed. If revenue exceeds your conservative expectations, you’ll be overjoyed.

SUMMARY
That’s my condensed advice on working with the big software and technology OEMs of the world. This is a common activity for many companies–what’s been your own experience? Post a comment and let me know your own view.

Phil Morettini
PJM Consulting
www.pjmconsult.com

1 Comment by admin on December 14, 2007
filed in Business Development, Corporate Strategy, Distribution Channels, Software/Product Development, Startup/Early Stage, enterprise software, sales
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