Morettini on Management

General Management and Marketing Advice for Software and Tech Companies

Category: Distribution Channels

Extending Your Technology With Spinoff Products

Many software and hardware businesses, particularly smaller ones, are religiously focused on a specific vertical market. As well they should; focus is one of the most important attributes that can bring a business from startup to a strong growing business. This is often one of the key areas I concentrate on with many of my consulting clients. Many businesses just can’t turn down any sort of deal, no matter what the effect it has on their existing product development plans or other key corporate initiatives.

But there is another side to the focus issue. Many tech companies have developed excellent, mature technology bases at huge expense. If that basic technology has a horizontal appeal, it can be quite profitable to spend a modest amount of additional effort to bring that technology to other adjacent markets that the company is currently not serving.

Care needs to be taken, of course, to not spread your marketing efforts too thin. But if you’re smart about it your company can increase, sometimes dramatically, the return on its product development investments. Let’s take a look at a few potential tactics, all of which I’ve used successfully both at companies I’ve run and with consulting clients:

Customize your products for adjacent markets

As an example, maybe you have an ERP software package aimed at retail markets. It might be quite easy to customize the product for other inventory-oriented businesses, such as distribution or service/repair businesses. By doing this you’ve created a potentially large new revenue source, at a fraction what building that product from scratch might cost. The trick in this instance is often marketing the product–read below for a couple of ideas on how to accomplish that without doubling your marketing budget.

Private Label/OEM products

Private labeling or OEMing your product to another vendor can be an excellent way to extend your product development ROI. It might be as simple as partnering with a non-competitive vendor who takes your existing product “as is” or with minor modifications, as well as changing the product identity and labeling. The target partner would be a company very strong in a market segment that you aren’t successful in, have no interest in directly marketing in, or simply is beyond your resource level. If done well, this is a win-win for both companies. Your company gets additional revenues with little to no additional costs (“pure profit”), while your partner gains additional revenue in it’s target market–without any product development investment.

Integration & bundling with other products

One of the best things a software vendor is to create a “developer’s version” of it’s product, which essentially consists of creating APIs (application programming interface) to the software. This allows easy integration with complementary software applications and even hardware. Back when I was CEO of a mapping software company with limited resources, we created a developer’s version which enabled both integration and bundling with a number of complementary applications, notably in the real estate and CRM segments. Once again, this tactic required only modest product development investment and enabled us to draw revenue from a number of different markets. We would never have had the resources to pursue these markets if we tried to build a new product from scratch as a company would traditionally do.

Different price points

Using my favorite mapping software company example, we were often forced to think creatively to wring out as much revenue as we could out from our existing technology. One of the other tactics we used was “de-feature” our existing $99 high-end consumer application to create a $9.95 version, which we then sold through mass market retailers of all kinds. Not only did this create more revenue, but the high volume business also created a bunch of opportunities to upgrade these entry level customers to our higher-end core product. This is a strategy I’ve used many times; you almost can’t go wrong when creating a larger customer base for your technology. I use the simplistic phrase “the more you sell, the more you sell” to illustrate the advantages of this approach.

Business vs. consumer version

At that very same mapping software company we used one other great approach to extending your technology: creating a B2B version of our consumer product which was aimed at road warriors such as sales and service professionals (the converse works just as well). The B2B version had a few additional features and we sold it via different channels and strategic partners. It didn’t have the unit volume of the consumer version, but the margins were much higher.

So there are a few ideas on how to extend the use of your IP to increase your overall ROI. What are your ideas on creatively utilizing existing assets to create additional growth? Please post a comment with your own thoughts so we can all benefit.

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

1 Comment by admin on December 5, 2011
filed in B2C, Business Models, Corporate Strategy, Distribution Channels, General Management, Product Marketing/Management, Software/Product Development, Startup/Early Stage, enterprise software, hardware
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The Rise and Fall of Novell

Once again one of the great brand names of High Tech has been prominently in the news, this one  for it’s demise as a standalone company. This time it’s Novell, Inc.  Attachmate announced that it had closed its purchase of Novell, which becomes a brand of Attachmate.  The price was $2.2B–not chicken feed, but much less than the promise held by this company in the distant past.

This company holds a special place in my memory. In the early 90’s the Novell name was synonymous with Networking. The company was a pioneer in Corporate Networking, and played a major role in helping to create this market as we now know it. When I entered this market in 1990, the company’s core product, NetWare, held a commanding 70%+ market share in the networking software space, which was already very large at the time, and growing at a rapid rate. It was in this environment that I began my first general management position, starting up a systems and network management software business. Netware being the dominant NOS at the time, I got a very close look at the company’s activities, and some of the decisions and events that began Novell’s long decline. Novell is still a $1B business, but in terms of power and prominence, they are a shadow of the company I kept a close eye on in the 90s. There’s been speculation that the company would be an acquisition candidate for some time, so the news isn’t a big surprise. But it’s a story which is a cautionary tale, and many lessons for tech company management teams that don’t want to “blow it”.

So what caused the unfortunate change in fortunes for this former industry high-roller?

It’s a familiar story, actually, especially for those of you who are regular readers. The Novell story is particularly interesting, because several factors, each one itself capable of wreaking havoc on a solid company, came together to put this company into a long nosedive.

MICROSOFT-ITIS

The first problem was what I call “Microsoft-itis”. Novell became very successful on the back of its flagship NetWare platform, which drew the attention of Microsoft. Microsoft tends to become unhappy when any other software company grows too big, too fast. The upstart is then viewed as a potential threat in Redmond, as well as the fact that the market this other company has helped grow now becomes large enough to be attractive to MS. So the first problem was getting in the gun sight of Microsoft. Now, it’s hard to blame the company for this, it’s more of a side effect of success. This situation has caused problems for many a company, and is enough unto itself to throw a large majority of companies off their game. To have Microsoft target you is quite disconcerting, and if you don’t make the right decisions, you may be in serious trouble. How a company reacts to this challenge is critical, and in truth, often life or death.

ARROGANCE

Unfortunately, in some cases, being targeted by Microsoft sometimes builds a company up in its own view. It’s almost a baptism into the big-time. Microsoft is worried about us; we’re a peer to them now! We must really be smart! This leads to a false sense of security about the company’s true position in the market, leading to the second factor which can bring a company down—Arrogance.

Novell had plenty of excuses to be arrogant, even without Microsoft’s attention. They were truly dominating the Network Operating System business. The brand was dominant, the product was good, and the worldwide distribution network of VARs and distributors was second to none. Sales people at Novell no longer had to sell—they took orders. That led to a need to keep the big ball fast growth rolling, even as the market matured and became quite large. Wall Street, you know. Novell became known as a company that pushed, rather than created via pull marketing. There were numerous channel-stuffing scandals, so sales people could make their quarterly numbers and max out their bonus. No matter, things were well in hand, Novell was on a roll.

The closest competitor at the time was Banyan, with their VINES operating system. Banyan had a nice niche in the largest, WAN oriented corporations, but was no threat to Novell’s dominance. There was also a fast growing peer-to-peer player, Artisoft, who had a nice niche in the entry level market. Again, Artisoft posed no serious threat. And then there was Microsoft, with its alliance on the LAN Manager NOS with 3Com. At the time, Microsoft’s distribution strategy was still to primarily be an OEM supplier, preferring to let others take the lead in bringing the product to the end user market. They had piggybacked the hardware vendors with DOS and the emerging Windows 3.0, and were attempting to use that strategy in the Networking market with 3Com as their main partner. 3Com at the time was a dominant networking hardware vendor. They also teamed with many suppliers of UNIX software to create private label versions of LAN Manager for each UNIX flavor—HP UX, for instance. There were about 17 other platform partners, as I recall. It looked like a formidable syndicate which could challenge Novell for market leadership.

However, like many early Microsoft entrées into new markets, the offering was a joke. LAN Manager ran on top of OS/2, which should tell you something about its lack of success, right there. Technically inferior, with too many players involved to advance and support it, LAN Manager never gained significant traction vs. Netware, even with huge amounts of money being poured into development and marketing. Major new releases would be announced, each which was supposed be the one to give Novell a run for its money. It became a running joke in the network business. At this point, Novell looked invincible.

LOSING FOCUS

Then the arrogance at Novell rose to new levels. Apparently thinking Microsoft couldn’t beat them at their own game, Ray Noorda and senior management at Novell decided to also take on Microsoft on their own turf. Not only that, but to compete across many, many categories. They decided they wanted to become the new Microsoft, and in doing so opened a multi-front war against a larger competitor, with far more resources (See Hitler opening up the Russian front in the War against the Allies).

Novell bought WordPerfect to compete with MS Word, Quattro Pro to compete with Excel, and announced a dizzying array of additional new initiatives. (See Netscape taking a similar approach in its heyday, as well as Google is now, as we speak—that ought to be interesting). No one, I repeat, NO ONE, has won a multi-front war with Microsoft. The people that have fended them off (which is a small list), when MS has put them in their headlights, have done so by sticking to their knitting, and playing by the rules of their own market segment. Intuit is a notable example, which was able to keep MS in a minor role in the Personal Financial software segment, by advancing and focusing on its own offerings and current market.

WHAT HAPPENED?

Well, many of you who have been in High Tech for a while probably already know the result. Microsoft finally split with 3COM, developed Windows NT, essentially building Networking into the Operating System. This finally began to hurt Netware, and although it wasn’t an immediate rout, over time NT became the clear winner. The terminator of Redmond can be knocked down, but they almost never give up—they just go deeper into their pockets, and keep on coming.

The acquisitions that Novell made were already second or third tier products, and their markets were outside of Novell’s core market and competency. Drained of resources and fighting losing battles on many fronts, Novell was soundly defeated, ultimately selling off many of its acquisitions, retrenching and changing their strategy—quite a few times over the years, I might add. They went into a long, slow decline, and once this begins at a large company, it’s very difficult to truly turn it around.

WHAT IF?

So what would have happened it Novell hadn’t reacted like Netscape later did, choosing to battle it out toe-to-toe with Microsoft, blinded in a fit of rage and bravado? What if they had followed a similar strategy to the one that Intuit took? What if they had marshaled their resources, and kept their focus on maintaining the lead they had in Network Operating Systems and related businesses—which were pretty big markets in their own right? Hindsight is always 20/20, but my guess is that they would have had a much better chance of continued success—and possibly avoided the headlines in the Trade Magazines of the last few weeks.

Have you seen similar missteps in your own companies or markets?—please post a comment below to share the insights.

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

5 Comments by admin on May 3, 2011
filed in Business Models, Corporate Strategy, Distribution Channels, General Management, Operations, Software/Product Development, VARs, enterprise software

International Expansion: Partner or Invest?

This is an age-old question facing software and hardware companies. In this article we’ll examine the pros and cons, as well as the specific conditions that should drive your decision process.

Two basic options confront a tech company considering a foray outside of their home market:

  1. Set up your own subsidiary hiring your own employees to “put on the ground”
  2. Partner with established traditional distributors or strategic partners in the target foreign market

Let’s look at some of the key factors to consider when designing an international business development strategy:

Available Capital

How much money does your company have available for international expansion? If the answer is “not much”, this alone can be the deciding factor in your decision. If capital is very scarce, you’re almost forced to start out using distribution partners. This isn’t all bad, in my opinion. Using partners initially when you are an international newbie is a much lower risk way to start, and allows you to learn this part of the business without “losing your shirt”. I’ve seen a number of control-oriented management teams invest large amounts of money by putting people on the ground in subsidiaries, only to waste it in spectacular failure. Often this failure is due to inexperience.

Product Price and Complexity

If you have a high priced, technically-complex product with a long sales cycle, you will tend to benefit more than others by having people on the ground in the foreign market. These are the types of products which are most often sold directly, even in home markets. In this scenario, even if capital is tight and you can’t afford to put down a fully-loaded subsidiary with a dedicated direct sales force in every foreign market, it still may make sense to put some folks on the ground. As an example, you might be able to afford a channel sales rep and a couple of field engineers to support a large network of sophisticated local country distributors and VARs, across an entire continent like Europe or Asia.

Management Skills

What is the skill set of your corporate management team? If no one on the team has any experience with indirect distribution, for example, it’s going to be pretty tough to successfully build a working distribution channel in FOREIGN MARKETS which are far from home, in more ways than one. In this case, the most cost effective thing to do is to add someone to the top management team with the requisite skills and experience, or at least retain a long term consultant. Going without this hire often seems the cheaper route initially, but in most cases this end up being “penny-wise but pound-foolish” in hindsight.

Local Market Cost Structure

Each foreign market should be evaluated individually before deciding an approach for that market. For example, in large emerging markets with low costs (such as China, India, Brazil for many verticals) it may make sense to put your own people on the ground, regardless of the distribution strategy. When costs are low and the market is strategically important in the long run, the relative benefits of having your own subsidiary are high. In a high cost market with lower sales potential (Switzerland and Norway may be good examples for some businesses,) relying exclusively on a dedicated local partner may be a better way to go.

Availability of Partners

In some cases what may be the best strategy for your company and market in theory is overridden by facts on the ground. Many vertical software and hardware markets have a well established set of distributors and resellers dedicated to their marketplace. In these cases it’s relatively easy to find an appropriate distribution partner. But what if you’re in a business in which this ISN’T the case, which is not all that unusual? Or maybe there is an established channel, but you’re late to the game and all the obvious “good” partners are tied up with your competitors. Sometimes you may choose to not enter that market immediately. But if the geographic market is considered strategic, then you will need to choose a course that looks sub-optimal in theory. That might mean biting the bullet and outlaying the investment to start your own subsidiary. Or, you might find a local entrepreneur with the skill set to set up a new distributorship. If it’s a geographic market that you just HAVE to participate in, then you will find a way!

There are obviously a wide range of combinations and intermediate options, but “partner or invest” represent the extreme ends of potential strategies. In many cases (particularly large, established markets) the optimal distribution strategy will be a combination of these two main approaches: pairing a wholly-owned subsidiary with local distribution partners. In smaller markets, partnering with an established distributor or strategic partner may be the only viable strategy. In other cases, the optimal strategy may be dependent on the specific factors of a particular marketplace (local costs, available partners, etc).

What’s most important is to closely analyze your specific company’s situation and vertical market, as well as the “facts on the ground” in each individual geographic market. Resist the temptation to simply copy your competitor’s strategy or fall back on approaches that you are comfortable with from other vertical and geographic markets. That is how you make mistakes.

What’s your approach to international expansion? Post a comment and share your own personal experience.

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 March 13, 2011
filed in Business Development, Business Models, Corporate Strategy, Distribution Channels, VARs, enterprise software, hardware
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Choosing an Advisory Board for your Tech Company

Advisory Boards have become a very chic addition to software and hardware companies over the last 5 or 10 years. So what are the key criteria you should use in putting together an advisory board? Well examine this issue below.

Prior to the 5-10 year period mentioned above, it was rare to hear of a company that had an advisory board. What’s driven this trend? For public companies, it’s mostly because desirable advisers who formerly would have served as on the Board of Directors may shy away, as a result of additional potential liability in that role. For private companies, I believe it was the recognition that those filling private company board seats primarily are there because of ownership (VCs, local angels, founders etc.), and may not have all key domain or technology expertise important to the company at the board level.

As a result, advisory boards are very much in vogue, sometimes to great effect–but often not. I’d compare this phenomenon to strategic partnerships. In strategic partnering, you’ll see everything from deals that greatly benefit both companies, to others which start and end with a vague press release. Similarly, many companies seem to put together an advisory board just because it’s the “thing to do”. This is just a waste of time, of course. Like most anything, if you put little thought and effort into it, very little usually comes back.

Let’s take a look at some criteria that could be useful in putting together your particular group of advisers:

Domain or technology expertise

This may appear obvious, but I see a lot of advisers on boards that are there just because they know someone, or maybe possess specific expertise that just isn’t core to the company’s success. I believe it is very important to use your advisory board to fill holes in your management team’s knowledge or experience.

Access to capital

This is a common reason that CEO’s will recruit an advisory board member, especially in early stage companies where capital needs are a critical strategic topic. But I’m not sure that this is always the best use of an advisory board seat; unless raising capital will be almost a constant need. I prefer to fill advisory boards with more scarce talents specific to the company’s market and technology.

Access to distribution channels

Distribution access is another common motivation in seeking advisory board members. I believe this is a very legitimate goal for your board, especially if the adviser truly has special access, or if distribution expertise is a real weakness within the company.

Honest and straightforward counsel

It’s very important to attract experts who aren’t afraid to challenge the management team’s view of the world and “common business sense”. Of course as advisers they need to be tactful in how they convey their viewpoints. But “Yes Man” panel that makes senior management feel good is of no real use, and can even be harmful by reinforcing a false sense of reality.

Available bandwidth

I believe this is a criterion that is very critical, and is often overlooked. I see companies rejoice when they are able to convince a high profile, “heavy hitter” to join their advisory board. While the name may look great on a company backgrounder or on your website, the reality is often that their time is spread too thin to be of real benefit to you. So make sure that you have a frank discussion, and reach agreement on what level of involvement they can actually have with your company.

Motivation

This is the most important criterion of all, in my opinion. Probably also the one on this list that is used the least in considering potential advisers. It’s easy to get excited about someone that fits perfectly what you need on paper. But you will find many folks that are interested strictly from a self-promotion viewpoint. It’s exposure for them, and looks good on their resume. There’s nothing wrong with this, as long as it’s not the sole or primary motivator. Others may think it will help them in getting to use their services in the future. Or they may have some more sinister reason for getting close to your company. So make sure that the candidate’s reasons for engaging are above board, and that your interests align. I’m not trying to create paranoia in anyone’s mind. But I believe that the adviser’s motivation is the single greatest indicator of success or failure in this role. Don’t ignore it.

So there’s some basic advice to consider when putting together your software or hardware company advisory board. Many of you have done this as well. Post your own advice, successes or horror stories in the comment section below so we can expand this discussion interactively.

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

2 Comments by admin on December 7, 2010
filed in Corporate Strategy, Distribution Channels, Financing, General Management, Startup/Early Stage, hardware
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How Soon Should Your Software or Hardware Company Go International?

This is a question that frankly doesn’t come up often enough at early stage tech companies. There is usually an assumption that you first conquer your home market, and then sometime way down the road, when you are already flush and successful, it will be time to expand internationally. US-based tech companies are most guilty of this often questionable thinking.

What’s wrong with this approach, especially for US-based companies? After all, the US is the largest market in the world, and it’s far easier to sell to customers close by, then it is halfway around the world. With this the case, why should you use your scarce early-stage capital in a risky international expansion? This is how the thinking goes.

The problem is that you may be leaving significant low-hanging fruit on the table, at the very time that you need those customers the most. Let’s look at 4 important reasons to go international as soon as possible:

Reasons for Early International Business Development

Early adopters needed

As an early stage software or hardware company, you need to find early adopters of your product. These folks fit a certain psychographic profile, and they are rarer than the average customer. You sometimes need to cover the earth to find them. Limiting your geographic net unnecessarily only makes the job harder.

Distribution partnerships can provide tremendous leverage for a young company

This is one of the big reasons to go international that newbies don’t understand. They think that with all the money they are spending to penetrate the home market, selling internationally will be much more expensive yet. Not necessarily. In many markets, you can find distributors who will take on much or most of the marketing and sales load, reducing your investment tremendously and allowing you to leverage their existing relationships–rather than “starting from scratch”.

Many markets are less competitive than your home market, especially if it’s the US

Unless your home market is a tiny one, there are most likely many underserved markets available to you that have a lot of low hanging fruit. Why? Every startup software or tech company thinks the same and focuses initially on their home market. Since the bulk of the tech business is located in the US, it’s by far the most brutally competitive of all.

Beat your competition to the punch

Getting to a market early can often mean the difference between success and failure. If you’re the first one in a country or region, the early adopters and other low-hanging fruit are there for you alone. You will get your pick of the best distribution partners, and your product category will be “fresh” news for the media. Once established, it will be hard for later arriving competitors to push you down the market share ladder, even if they are larger than you overall.

So when should a company go International? The short answer is as soon as you can possibly do it. But what’s most important is to fully evaluate when “as soon as you can” actually is.

What to Evaluate Prior to Deciding to Go International

Your product must be stable

This should go without saying, but the only thing that causes a greater catastrophe than an unstable product is an unstable product distributed worldwide! Don’t do this–make sure things are solid before venturing away from where it’s easiest to “babysit” early problems.

Your product must be “market-tested” in your home market

While I’m a proponent of aggressive international business development at an early stage, there is such a thing as “too early”. Make sure that you know your product has a market before going far away from home. It’s a pointless exercise to be recruiting distributors and customers in foreign markets with a product that doesn’t really hit the mark, and one which doesn’t even had a reference customer list. If you can’t gain 10 or 20 or 30 customers close to home, heading far away likely won’t help.

Inventory or License only

Businesses that involve large amounts of inventory are one of my exceptions to aggressive early international development. That means hardware companies generally need to be more careful that software companies. Companies that distribute through retail channels involve more inventory than those who sell via VARs or direct, so they also need to be more cautious. The issues that come with inventory such as repairs and returns are exacerbated by borders and distance. So if you’re inventory intensive, maybe start with one smaller market rather than a large regional rollout, to test that everything goes smoothly before placing a big bet.

Direct or Channel distribution

If you have to establish your own local foreign operation, hire a bunch of people, rent office space, etc–you generally need to wait. Most startups can’t afford this type of risk and investment. However, although some feel this route is their preference due to control, it’s generally not mine. It’s quite risky and slows your international progress rate down significantly. Most companies can start out by using partners, and usually this is a good long run strategy as well. If you’re wildly successful and really feel the need for total control, you can always buy out distributors later on.

English or Local Language

English is the universal language of technology. In some vertical markets (such as IT software) English language-only products are fine. These are markets where you can make the fastest penetration after proving your product in your home market. If you do need local translations, they really aren’t that expensive in most cases and can be done quickly, and distribution partners can often help. But make sure that you don’t skimp on a good translation; nothing will hurt your local credibility more than language that isn’t proper, or at worst, makes no sense.

Safety, Legal or Electrical Specifications

This is also an area that can slow down the potential for fast international market development. Many countries or regions have safety or electrical standards that will require product modification or testing (and thereby investment). There are also legal aspects that need to be considered (European privacy laws when selling security or marketing software, as an example.) Don’t let these stop you from doing an evaluation of your international prospects, but these factors can change the calculus of your decision making.

SaaS

If you’re a software company using the SaaS model there may be very little downside to early international business development. If latency isn’t an issue for your product, you may need no international investment at all. Or maybe you need your servers hosted in other parts of the world to reduce latency issues, but this shouldn’t be a huge investment. You still need marketing in the local markets, either by your own direct (albeit remote) methods or through partners. But given the potential rewards, these investments should be a small price to pay.

Process or Cultural Differences

When you first go into a foreign market, it’s important to understand that you can’t fully comprehend the local culture, as well as how commerce functions. Listen more than you talk at first. Hire a consultant if you can afford to. Partners can also help greatly here. But if you are a savvy international business person it certainly raises your odds when attacking foreign markets early on.

Existing Demand

Are there customers “chomping at the bit” for the benefits your product offers? Or will there be a bit of an education process and a long sales cycle? Obvious existing demand is a key indicator for aggressive international business development.

The bottom line is that going international quickly can be a big boost to early growth for a tech company. Be careful, but not overly cautious. Evaluate your specific situation, and take the plunge if the odds are with you. What’s your take on the proper pace for international business development? Post a comment or send us your story.

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 October 12, 2010
filed in Business Development, Corporate Strategy, Distribution Channels, Retail, SaaS, Startup/Early Stage, VARs, hardware, sales
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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

2 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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