Morettini on Management

General Management and Marketing Advice for Software and Tech Companies

Category: sales

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
tagged , , , , , , , , , , ,

Business Models in the SMB Market

The SMB market is typically a very popular topic for hardware and software companies. Every one wants to sell to the Enterprise market; as a result, competition is fierce and standards are very high. If you get to the Enterprise market early, with an innovation that creates a new category, you can find success if you are truly making a contribution to the market. But late entries into a market segment, as well as early stage companies competing with larger, established companies, often have a very tough go of it. In these situations, attention often turns to the Small and Medium-Size Business, or SMB, market.

And why not? At first blush, the SMB market appears to be huge, as well as underserved. It looks like a perfect haven for an early stage or turnaround company with a solid product, but not quite enough differentiation, brand name, or marketing muscle to push out the big boys in the Enterprise space. So the decision is made to focus on SMBs.

What’s Wrong With This Decision?

There is nothing wrong with this decision, per se–if it’s done with eyes open, for the right reasons. But too often, it is done to run away from a problem (the inability to penetrate enterprises), rather than run to a great opportunity. A lot of times, companies see the SMB market as easier turf; simply a larger, less competitive market than the Enterprise market. Major problems can result from this type of mentality, and I see it quite often in my consulting practice. Companies that enter the SMB market from this perspective usually aren’t fully prepared to do what it takes to be successful, in what is a very different type of market than they may be familiar with. So where are the land mines in the SMB marketplace?

What’s Not Obvious in Marketing to SMBs

The first thing to consider is that customer needs are often quite different. A lot of this depends upon what technology and market segment you are in, and whether your product is aimed more at the “S” (small) segment, or the “M” (medium) segment of the SMB space. For example, if you are selling a single user productivity tool which is useful staff accountants, you may not see much difference. If on the other hand you are marketing a company wide, networked application of some complexity, the differences may be huge. Like everything in technology marketing–the devil’s in the details. Every situation needs to be evaluated closely, and treated differently on its individual merits. The most important thing is TO NOT ASSUME THAT THINGS ARE THE SAME BETWEEN SMBs AND ENTERPRISES IN YOUR CATEGORY. Do the work, evaluate the situation–don’t assume. Assumptions, without verification, are what get you burned in this transition. Below is a list of some of the major differences in the SMB market:

IT Departments are small and less of a factor–if they exist at all.–In Enterprises you may be dealing with persnickety CIOs that want thing just so. In SMBs, if there is a CIO at all, he will be looking for an off the shelf SOLUTION that will “just get the job done”. Or you may end up struggling to figure out how you can sell your complex solution, to a company that has NO IT DEPARTMENT AT ALL.

There is less money to spend–It’s harder to make money with big ticket hardware and software, let alone customization and expensive services. Your products better have value – and margin – right out of the box.

Ease-of-use is even more critical–There probably is no training department or other corporate staff, and people are busier overall. If they can’t figure out how to use it quickly, you’re going to have a hard time selling it.

There is much less time available to purchase products–Even the sales process may be compressed, in terms of how much time the prospect spends reviewing your marketing literature, or talking to your sales people. The actual TIME ELAPSED during the sales cycle could be EVEN LONGER due to lack of time available to the prospect, but the INTENSITY of the purchasing engagement is often much less.

How Do You Need To Structure Your Business Model Differently?

Lower prices– They just can’t, and won’t pay the same prices that you can get in the Enterprise space, in most cases. So you’d better come into this segment with a price and value proposition that makes sense to these price-sensitive customers.

Marketing vs. sales–The SMB market is more marketing intensive, with respect to marketing/sales ratios, than the Enterprise market. There are many more customers; the average sale amount is much lower, and much less face time available for direct sales. While in many respects Enterprises are the most demanding customers in the world, you’ve got to be a better marketer to succeed in the SMB space than you need to in the Enterprise world.

Low cost sales force– With much lower average sales amounts, and much less time available on the customer side, it is usually impractical to have a large, high-cost field sales force. Inside sales forces are the general rule in this market. If you have a product that demands customization and hands-on support, VARs are a good adjunct to consider. The more they are taking orders generated from marketing, and the less they are cold calling prospects, the better.

Better usability and reliability– You’ll need many more units being sold to get to the same level of Enterprise revenue, across a much larger customer base, with much less (if any) maintenance revenue to fund a large support staff. Your product better work when it’s installed and better be very easy to use over time. Unless you have a highly customizable solution and are using VARs as a channel, SaaS is a great platform for delivering software to this market.

Little or No IT support–The good news is that there is no prickly IT committee or staff that you have to “go through” to sell to the real users. The bad news is that if even the littlest thing goes wrong, there’s no one internally at the customer to pick up the slack–you’re going to hear about it directly from the user–over an over again.

Summary

The SMB market is actually a simplistic catch-all phrase for a large, heterogeneous group of markets. But it is a useful abstraction, as a starting point for understanding how to penetrate and thrive in B2B marketing to smaller companies. I hope this short introduction is useful–feel free to pitch in and post a comment adding to this topic.

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

1 Comment by admin on June 10, 2007
filed in Business Models, Corporate Strategy, Distribution Channels, Pricing, Product Marketing/Management, Software/Product Development, Startup/Early Stage, VARs, sales
tagged , , , , , , , , , , ,

The Mechanics of Email Marketing

There are many different possibilities for technology and software companies, when it comes to formulating a marketing mix. I’ve written before about some of my favorites. One method that can be a big winner, if done well, can also be a big loser if done poorly. I’m referring to email marketing. If you want to be successful, you need to do it very well, as a result of SPAM and the general bursting of everyone’s email inbox these days.

Why Email Marketing?
Email marketing can be so productive for a company, because unlike more passive forms of online marketing (ex: PPC advertising, Banner Ads), you can usually target you audience very effectively. This is especially true if you are using an in house list; by definition, these are prospects that have some reason to have an interest in your products. In B2B marketing, there is an abundance of excellent niche lists available for rental, to use in a targeted campaign. In B2C they aren’t quite as good overall, but there may be very good lists available for a particular category.

Like all other forms of online marketing, another primary benefit to this method is the ability to measure results with great accuracy, granularity and speed. Lastly, you can make a very big impact quite quickly, unlike other online methods which may fit more into the “steady as you go” category.

The Elements of a Successful Email Campaign
So if “doing it right” is so important, just what are the important things to concentrate on, to achieve success in email marketing? Let’s take a look at some of the most important elements:

Relevancy
First and foremost, your email must be relevant to the people who are receiving it. This is the great problem with the email marketing universe today, especially when considering the Spammers. Scattershot emails to every name that you can get your hands on not only won’t raise your sales; it will ruin your online reputation, and prevent you from effectively marketing online in the future. It’s been said by others that the difference between SPAM and legitimate commercial email is RELEVANCY. I firmly believe this. If your offer resonates with the list that you send it to, you will receive very few complaints.

The List
After relevancy, the next most important thing is the list. Absolutely do send your message to a list of folks that you have good reason to believe will be interested in what you have to offer. This is called target marketing; it is good practice across ALL marketing media. In email marketing–IT’S ESSENTIAL.

The Offer
Next comes the offer; often this is the most critical thing that you have a lot of control over. You need to remember that in email marketing, you are “going to the people”. They aren’t coming to you–actively looking for your product or service. As a result, your offer needs to be very aggressive to get their interest, and to compel them to act in the manner you desire. I always say that in direct marketing you want to make your very best offer. In email direct marketing, make them an offer that is so aggressive, it actually makes you wince a bit!

Creative
The above categories are the most critical to success. If you don’t get them right, nothing else will matter. However, it’s still very important to properly execute your relevant offer to the proper list. Even if you’ve got these elements formulate properly, poor creative execution can still lead to failure. My advice here is to make the email look like an email–not a web page. People’s expectations in an email message are very different from visiting a website (and attention spans are short enough in web-viewing!). I recommend that you keep your message simple, direct and relatively short. Feel free to include some attractive, eye-catching graphics. But remember, this is direct marketing–not an art project. The most recent research suggests that email graphics has no effect whatsoever on response rates. It’s all about the copywriting. Make your copy compelling, and get to the point very quickly–there isn’t much time before the “delete key” get punched.

Legal
The legal aspects of marketing via email are important, and quite a bit more restrictive, relative to any other form of direct marketing. So make sure you are aware of the laws which apply to your message–they vary from country to country. In the US, for example, the CAN-SPAM act requires an honest subject line, “remove requests” instruction, and a listing of the sender’s physical address–among other things. In some cases there are also state laws that apply. In Europe and other countries, the requirements can be far more restrictive, sometimes going so far as to require “opt-in” permission before any message can be sent. So be sure to research the local laws and comply with them at all times. To do otherwise risks ruining your online reputation–or worse.

Deliverability
This is one of the most difficult aspects to this particular direct marketing method. The advent of SPAM has created many barriers to delivering even the most welcomed messages to email inboxes. This was necessary, of course, for the preservation of the ability to use email at all. But deliverability is a very challenging, every changing scenario that has morphed into a marketing specialty of its own. There are many good places on the Web to assist you in getting your email delivered to your prospects. Return Path and Habeas are two of the more well known new companies that specialize in this area. I have used a free tool called SpamCheck to great effect over the last year, in screening my messages for deliverability problems. Contactology also has a great free Spam checking tool, as well as a turnkey service which enables you to easily create highly-deliverable email messages. EmailReach is another company that has some deliverability great tools. They aren’t free, but they do offer a 24 hour free trial for their service.

Continuous Measurement & Testing
The last thing I want to mention, which should be part and parcel to any successful email program, is measurement and testing. Since email is an online medium, it’s easy and cheap (or free) to measure your results. Frankly, doing any form of direct marketing without measurement is dumb. Online direct marketing with measurement is criminally dumb. There is just no excuse for it, other than laziness. Direct email marketing works best when it isn’t considered a “single-shot” campaign. Each drop should be part of an overall campaign aimed at continuous improvement. Multiple elements of your message should be tested and measured with each drop. If you do this, you WILL improve your results as you go–and likely will end up with a highly successful, and repeatable, marketing method to help drive your company’s growth.

Wrap Up
That’s my review of the nuts and bolts of good email marketing. Let’s hear from some of the other experts out there, on your best email practices. Post a comment so we can discuss this important marketing method in depth.

Phil Morettini
PJM Consulting
www.pjmconsult.com

No Comments by admin on April 7, 2007
filed in B2C, Marcom, Online Marketing, Pricing, Promotion, sales
tagged , , , , , , , , , ,

Pay Per Click (PPC) Online Advertising

It’s known by several names: PPC or Pay Per Click advertising, CPC or Cost Per Click advertising, or sometimes by the best known PPC advertising engine, Google Adwords.

Pay Per Click advertising is no longer new; as a result, much of the “easy” money has already been made. But I’m struck by how many companies I run across that are still NOT using this method to attract prospects or make sales on the web. While it is now a competitive channel unlike in the early days of this medium, it can still be very effective and cost-effective in many markets.

PPC should be a staple of the promotion budget of nearly every company (although not a major portion of the overall budget, in most cases). It should also be one of the first promotional methods utilized on behalf of a new product, service or company. Here’s why:

Complex to Optimize–But Simple to Start
PPC advertising campaigns can be very complex and extensive, and will be once you get them optimized. Many companies are spending tens of thousands of dollars/month on PPC. At that point they should be making a lot of money for you–so it’s worth the investment and the trouble!

But getting started is quite easy–anyone can do it. You simply open an account with one of the major advertising engines, which will take you all of five minutes or so. You can put together a basic test campaign in less than an hour’s time. I always recommend starting with Google Adwords first. Once you are successful and understand what you are doing on Adwords, it is pretty easy to move your functioning campaigns to the other major system (Microsoft Adcenter) and the tertiary players. There are differences, but they are fundamentally the same.

Adwords is the most powerful and has by far the greatest reach, yet it is still very easy to set up your initial trial campaigns. There is an excellent set of online Help and tutorials to walk you through the basics. When you set up your initial campaigns, you WILL make mistakes. But don’t worry. Just set your budget limits to a low number that you can easily afford, and you will quickly climb the learning curve. Once you’ve learned the basics of what you are doing, you can then seek assistance to do the final optimizations to your campaigns, which will lead to the greatest success. You may decide to “do it yourself”; if so, there are a lot of different experts out there with modestly priced guides and services to bring you to the top of your PPC game. Or at this point, you may wish to outsource your PPC advertising activity. I always recommend opening an account on your own first, even if you plan to outsource. The knowledge that you gain will help you in hiring a third party who will best optimize your PPC activity, if you decide a third party PPC firm is the way to go for you.

Easy on the Budget
If you are a thinly capitalized startup company, or have a tight budget for a new product or market segment, you can start a PPC campaign that brings you results that you can continually improve, for just a few dollars/month. As usually is the case, the more money available the better. The more money you have to spend, the faster you can receive statistically significant results–which can then be used to tweak your campaigns for improvement, over and over again. But if you can only spare $50, $100 or $500 per month at first–don’t let that deter you. In most cases you can get started and move your campaign forward, at even these low budget levels. The beauty of PPC is that you really don’t need to commit to a large budget until you’re sure that you’ve got a profitable campaign. At that point, you’ll want to pour as much money into your campaign that you can muster. Once a campaign is proven profitable, pouring more money into it is like turning up a profit meter!

Precise Measurements
One of the major advantages of PPC advertising, compared to traditional offline adverting and other promotional methods, is the ability to precisely measure nearly every important aspect of your campaign. The ability to precisely track your results is much greater than any other form of promotion I’ve utilized in my career. This measurement precision turns PPC advertising into the most scientific form of marketing available. After some initial hypotheses with respect to Ad copy, keyword selection and landing page design, it is possible to systematically improve your results by tweaking these elements of your campaign  almost forever–increasing your profitability as you go.

Fast Results
The other important aspect of PPC advertising, in conjunction with measurement precision which makes this medium so systematic and scientific, is the ability to get this precise feedback in near real time. As an example, in traditional, offline advertising campaign, you need to invest tens of thousands of dollars upfront. After this large investment, you won’t even know if your campaign was successful for months. With PPC advertising, you quickly get feedback in the form of precise, quantifiable results, sometimes only minutes after you started it. As a result, you can have a fully optimized, profitable PPC campaign working, before you would even get your initial measurements with other methods.

The Ideal Platform to Test Messaging, Campaigns and Offers
The expediency and precision of PPC advertising make it a great platform to kick off any new product, market segment or company. It is very efficient way of testing messages, offers and websites. Once you’ve discovered and proven the things that work best, you can transfer this knowledge to your rollout of other promotional vehicles. This greatly reduces the risk inherent in starting up new marketing campaigns of any type, and should increase your profitability across platforms and promotional vehicles from day one.

Summary
As you can tell, I am a big proponent of PPC advertising as a staple of every marketing budget. Unless your market is so small that it consists of only a few hundred prospects, I recommend it to nearly every software and high tech company on the planet. Consumer, Enterprise or SMB–it’s very effective across many markets. In fact, the more of a niche your market is, the more cost-effective PPC becomes, due to reduced competition and lower resulting bid prices. There are a few highly competitive markets these days which are so competitive, that it’s hard to run a profitable PPC campaign. But these are still the minority. So if you aren’t active in PPC advertising today–get started! Give it a try, and let me know your questions or comments.

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 February 26, 2007
filed in B2C, Marcom, Online Marketing, Promotion, sales
tagged , , , , , , , , , , ,

Dell Computer

Dell has been in the news recently, and like many big companies that have had a glitch in their performance, not in a good way.

Slowing revenue growth, accounting scandals and customer service issues–you’ve heard it all before. By the way, where was the seminar that all big company managements attended, encouraging them to cut corners on their financial reporting practices? It seems that the same pattern has been replicated to an astounding degree across a broad array of large corporations. There has to be some root cause of this; too much smoke in this area to be a coincidence. And of course, the “Professional CEO” relieved of his duties–and replaced by the company founder, returning on a white horse to his original role to refocus the company.

These things have been so common in corporate America. Business writers may have been able to perform an automated “search and replace” in their word processor and write a new, yet the same, story for each additional corporation unfortunate enough to make the headlines. So what’s the deal with Dell–the details always tell the real story–and what happens from here?

ENORMOUS SUCCESS OVER TIME

First off, I want to give Dell Computer and Michael Dell their just due. This is one of the great success stories in corporate history. Started in a dorm room, Mr. Dell built the company into the dominant PC maker of its time, with a long history of exceptional growth and profitability. The company used the direct model at the time when it was counter-intuitive that this would allow a long run of success–which it did. The story of Dell is much more about what has been done right–than wrong. I had some limited contact with Mr. Dell years after Dell was already a large company. He was courteous and thoughtful and very impressive. I have nothing but great respect for the company and its founder.

Probably the strongest endorsement I can make of my opinion of the company, is that the last 3 computers that I’ve purchased have been Dells–even though I am a proud alumnus of HP.

THE FATE OF ALL BIG COMPANIES

But Dell has definitely hit a major pothole, and has had its reputation tarnished on many levels. As I’ve written before, these things inevitably happen to all successful large companies. Nothing great lasts forever–and it should be pointed out that at Dell, it’s lasted a very long time.

Growth has leveled off, and they are no longer the darling of Wall Street’s growth followers. Accounting scandals always reduce a company in the eyes of the public, and firing your CEO, who you’ve been raving about for a while, doesn’t exactly induce confidence in your future. But I think the biggest issue for Dell, is that they’ve taken their eye off of the ball when it comes to quality–and even more importantly–customer service.

I’ve written about this in the past, and I think it has played a primary role in Dell’s current problems. When I bought my first Dell computer, quality was almost unquestioned, and customer service and support was a real strength. Unlimited support was bundled in with the product, and it was great. Contrast that with the situation today: Now you are buying a product which is perceived as lower quality, and you almost can’t talk to anyone about anything without a charge. If you are allowed to speak someone in support, it’s hit or miss whether they are knowledgeable, or speak your language fluently. I really believe that the root of the problems has been what I’d call “too much of a good thing”: The relentless drive to reduce costs. As the PC business matured, Dell was far and away the low cost producer, and used this fact to great advantage. I believe that they got carried away with this strategy, and took their eye off of the ball of what made the company great in the first place. Service/Support quality has become such an issue for Dell that they’ve acknowledged it publicly, and announced plans to make significant investments to fix customer service. But real damage to the Dell brand has already been done, in my opinion. I, along with many others, will be looking closely at HP and other competitors when it comes to future computer and related technology purchases.

SO WHERE DO THEY GO FROM HERE?

All great companies hit this point eventually, and with all the company has going for it, the problems are imminently fixable. Unlike most companies that hit a bump in the road at this point, it doesn’t appear that it has happened because the company has become grossly “fat, dumb and happy”, with a bloated bureaucracy. No doubt there is some bureaucracy with a company this size, but ironically, cutting in the wrong places has been the major problem. Michael Dell has announced that he will look at “new strategies” for the company in his return to the CEO role. I consider this a positive. Often founders want to “go back to the future”, and return to what they know made them successful in the first place–I don’t believe that this is the right answer here.

THE OBVIOUS ANSWERS

The first thing is to fix customer service and support, regardless of the cost. The brand will continue to suffer without this, and that would ultimately be deadly. Mr. Dell has announced that he plans to greatly reduce the number of direct reports to the CEO. If done for the right reasons, I applaud this directive.

Even in a famously lean company like Dell, a company at this size tends to become pretty bureaucratic. There tends to be a lot of people around with curious, abstract job titles, who only serve to slow down, and get in the way of progress. Personnel in companies this size often end up spending a lot of time in large internal meetings–talking to each other, instead of listening to the market. Getting ahead in a company at this mature stage often is dependent on bureaucratic skills, rather that creating actual marketplace value. It’s usually important to cull the herd of extraneous roles, and simplify and focus business processes on only those things that create revenue and profit. This looks painful in the short run, but the company actually runs much more smoothly in the long run.

THE NOT SO OBVIOUS ANSWERS

A more difficult decision is whether to remain with a largely “direct-only” business model. This is particularly difficult for Dell, because it has always been what they’ve hung their hats on. In fact, years ago when I had a few discussions with senior managers at the company, the feeling among upper management was that they didn’t know how to do other forms of distribution, and that they had failed in their few toe dips into indirect waters.

In hindsight, at that time, the decision to remain primarily direct-only was the right one. Enormous value has been created with that strategy–you can’t question it in hindsight. But at this stage of the company’s development, I believe that they really need to rethink this. There is evidence that they’ve run out of steam with a direct-only distribution model. In fact, Dell has been dealing with the channel in a very low key manner for years. But both sides have sort of looked at it like “dealing with the devil”: do it because you have to, but be careful not to get burned.

In my opinion, while it may appear risky, it is time for Dell to look at becoming a company that wants to be a real business partner with the channel. Do they want to have a real chance to stay a growth company?(which I assume they do–this is where the high stock P/Es are). If so, there are few other choices other than indirect distribution, at their current size, that will enable the kind of growth opportunities required for real growth. As they’ve looked farther from their core computer offering, to find other things to push through their direct pipe, they’ve been much less successful–as generally is the case. They’ve not become a real player in consumer electronics, and
while they were initially pretty good at giving away printers–they were not so good at selling them, or more importantly, the consumables which are the money maker in that business. The company should proceed carefully and thoughtfully in this regard. I’m sure that Mr. Dell has other initiatives that he is considering, but I’d be shocked if consideration of a major indirect distribution push isn’t high on his list of possibilities.

SUMMARY

What happens from here? Your guess is as good as mine. It should be very interesting to watch what new strategy emerges, and if this company famous for execution can return to those ways–especially if the future includes a major strategy shift. Corporations that have been as successful as Dell for as long as it has usually have 9 lives (see Apple Computer), and Dell is only on its second, by my count. So I wouldn’t bet against them.

That’s my opinion–what’s yours? Post a comment or send me an email.

Phil Morettini
PJM Consulting
www.pjmconsult.com

No Comments by admin on February 13, 2007
filed in B2C, Business Models, Corporate Strategy, Distribution Channels, General Management, Online Marketing, Retail, VARs, sales
tagged , , , , , , , , , ,

Marketing and Selling Technology Products through the Value-Added Reseller (VAR) Channel

Selling through multiple channels is one of my preferred strategies in technology marketing. If done properly, it allows a company to fully exploit its expensive, hard-earned intellectual property to the maximum extent. One of the most popular channels (and one of my favorites) used to sell B2B software and hardware is the Value-added Reseller, or VAR channel.

VARS ARE THE DISTRIBUTION HOLY GRAIL FOR MANY STARTUP COMPANIES

In fact, with a great many startup software and technology companies, building a VAR channel network to sell their companies products is the first thing they want to do, upon releasing their first product. This is especially true when the founding management team primarily comes from a technical background. The thinking goes; they are technologists who have created a great product. They don’t have a lot of experience selling or marketing–and most of the startup money has gone to, and will continue to go to developing products. Why not just recruit a bunch of resellers to market and sell their product for them? Sounds like a great idea on the surface, doesn’t it?

Unfortunately, there are few strategies that are more flawed, and which have continuously led to failure than this one.

Let’s contrast the realities of the VAR channel, against this simplistic notion that has been tried again and again, without success:

WHAT VARS DON’T DO

1) First of all, VARs DON’T market. At least not YOUR products, anyway (they may market their services). So the very first flaw in this strategy is that it is based on a gross misconception of what a VAR typically does.

2) VARs don’t create new markets. VARs are great at selling into established markets and further expanding already growing ones. Missionary sales: brand new markets, categories and products? Not so much.

3) They don’t sell a wide variety, or a large assortment of products. In fact, VARs are focused on actively selling VERY FEW products–if they are even focused on selling products at all.

4) VARs aren’t motivated by high product margins.

5) The individual VAR does not exist to help YOUR company make money.

Now if you’re not a sales or marketing professional with experience working with the VAR channel, you’re probably very confused by the list just above. So what is it that VARs actually do? And why is it worth dealing with them at all!

What happens time and time again is that a technologist startup CEO will pursue the VAR channel as their exclusive distribution channel, without knowing any of the points in the list above. Their effort will fail miserably, and they will then scramble to begin selling their product directly, or through some other means. They will swear off the VAR channel forever, and I do mean swear:

“Those !!@#$%^^* resellers are good for nothing. They take a big cut of your margins, while adding no value in return. I’ll never deal with them again.”

I can’t tell you how many times I’ve heard some version of the quote above.

But the VAR channel is a major force in the technology business, and if you know what you’re doing, it can be used to great leverage by your company. So let’s now take a more realistic look at what VARs CAN DO:

WHAT VARS ACTUALLY DO

1) First and foremost, VARs are in business to sell their own HIGH MARGIN SERVICES. That is why they exist, and how they put bread on the table. This revelation may be discouraging to some product vendors, but you must understand and respect this above all, if you hope to leverage this channel. The only exception to this is the “core” product, which will be discussed later in this article.

2) VARs are very interested in things that apply to their own vertical focus. Although it wasn’t so true many years ago, most successful VARs these days have a very tight vertical focus.

3) Many VARs act as “thought leaders” for their corporate customers. So they are very interested in “what’s new” in the market, so they can stay on top of trends and remain market experts for their clients. This means that they will sometimes spend a lot of time talking to you about your new product, but never find the time to actually “sell” it (even if they have the best of intentions). In the busy world of the small VAR, client demands and selling the core product and services usually soak up all excess time.

4) VARs are often used as “aggregators” of purchases by corporate clients. This way, the corporation can use a single vendor point of contact for their technology purchases, greatly simplifying their purchasing process. They can also leverage the VAR as an evaluator/validator of new products and technologies. This makes them a very important part of the purchasing chain for many corporations.

5) If they put any real effort into selling products at all, it is usually into one or two “core” products that they have built their service offerings around. If you aren’t a product that pulls services, forget about getting high mindshare with the VAR.

6) When it comes to selling “non-core” products, VARs are almost completely driven by the demand they see in their installed customer base. They won’t often add in new products that they don’t see a demand for, unless they are really techie, early adopter types. And these techies will often add a product, but never find time to actually offer it (let alone sell it) to their customers.

7) The VAR channel is EXCELLENT at fulfilling demand for great new products into their existing, installed customer base.

8) VARs can be an excellent proxy for a vendor in installing, configuring and offering first level support. This can enable a vendor extend its reach and to leverage the VAR channels existing infrastructure rather than building out a large field organization (which depending on the product category, may not even be feasible).

So given the points outlined above, what are the “best practices” to follow when you are seeking to build and leverage a VAR channel?

VAR CHANNEL BEST PRACTICES

*Always sell your new product directly in the beginning. Even if you don’t plan to build a direct sales force and sell directly in the long run, it is critical to establish that the product works, and can be sold successfully. If you can’t sell your own product, no VAR will be able to either (and few smart ones will be willing to try). De-bug and systemize the sales process, make sure that your end user price points are right, and build a small reference account list–at a minimum. Only at this point should you begin to approach VARs to distribute your product.

*Marketing the product is the vendor’s responsibility. Do not naively think that the VAR will market the product for you, or that since you have VARs to sell, you don’t need to market at all. Remember, VARs are great at fulfilling demand among their existing customers–and very poor at creating it among new customers. The vendor must position its products in the market and create demand for them–otherwise your channel efforts will certainly fail

*Treat VARs like the valued business partners they should be. If you do sell direct, don’t “steal a deal” and take it direct just to make a few more points on one sale. Nothing is more short-sighted. Not only will this VAR not do business with you again, in any given vertical it’s a small community–and word gets around fast. You risk becoming a pariah in the VAR channel, and losing all the hard work that you put into building your network. My philosophy is: when in doubt, cut the VAR in on the deal. If you don’t feel he’s adding any value to your business, eliminate him from your network after the deal. But don’t use your low opinion of a particular VAR to convince yourself to cut him out of the deal. You risk cutting off your own nose in spite.

*Be realistic in what the VAR channel can do for you.
If you have a non-core offering, be happy that they “make it available” to their customer base, rather than expecting them to sell it actively. Remember, VARs are key influencers of their clients; just being available to endorse your product as something they offer, to a customer that hears about the product elsewhere, can be very valuable.

*Provide a reasonable margin, but don’t “throw margin away” thinking that it will motivate a VAR to actively push your product–if they otherwise would not. It won’t work, and you’ll just be giving away money for no reason–that you could use creating demand instead.

*For most products, make sure that you don’t over-distribute by signing up more VARs than your market will support. Even though greater margins might not make a VAR push your products, the erosion of margins to near zero will cause a VAR to eliminate your product from their portfolio. It’s better to leave a few deals on the table, than to risk demotivating your entire reseller network, because they are 6 competitors are bidding on every deal in an particular area. The exception to this is if you represent a “core” product that pulls significant service revenue, you can get away with a lot more stuff, because the product margins are trivial to the VAR compared to the lucrative service revenue. But in this case, be careful when using your market strength to abuse partners. People have long memories, and “what goes around, comes around.”

SUMMARY

That’s my primer on how to approach, and even more importantly, how NOT to approach doing business with Value-Added Resellers. Post a comment or send me an email to delve into this important topic further.

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

7 Comments by admin on January 28, 2007
filed in Business Models, Corporate Strategy, Distribution Channels, Product Marketing/Management, Startup/Early Stage, VARs, enterprise software, sales
tagged , , , , , , , , , ,

Technology Sales & Marketing-Is a direct or indirect approach best?

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

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

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

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

How Complex is the Product?

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

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

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

How High is the Product Price?

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

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

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

What does the Promotion Mix look like?

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

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

What Channels are available to you?

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

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

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

How does the customer want to buy?

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

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

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

4 Comments by admin on January 11, 2006
filed in Business Models, Corporate Strategy, Distribution Channels, Online Marketing, Pricing, Product Marketing/Management, Promotion, Retail, VARs, enterprise software, sales

CRM Blog

For you marketers and CEOs out there, I wanted to share a great resource to educate and keep you up to speed about this important topic. Jim Berkowitz is a long-time CRM expert, and his CRM Mastery E-Journal is just packed with information on the topic. This blog does a great job of tracking industry events within the CRM space, in addition to Jim’s enlightening commentary on customer management. In my experience, high tech companies (particularly early stage) spend shockingly little time “managing the customer experience”. I find that for the most part, high tech companies aren’t even doing a good job of gathering and organizing basic data on their costomers–let alone using the data to its full potential. Maybe it’s the focus on gathering new customers, since technology changes so quickly. Anyway, I recommend to take a look at Jim’s E-Journal–let me know what you think.

Phil Morettini
PJM Consulting
www.pjmconsult.com

No Comments by admin on September 18, 2005
filed in Online Marketing, Product Marketing/Management, market research, sales

Direct Email–Good or Evil?

One of the most misunderstood tools in the Marketer’s Bag of Tricks is direct email. There’s good reason for it, of course. Everyone hates SPAM! I expect that even the most evil, notorious spammers of the world have SPAM filters on their personal email accounts.

The end result of this universal distaste of SPAM is a belief, held by many, that sending emails to prospects or customers “just isn’t a good thing to do”. Lot’s of potential issues—from alienating your customers and potential users, to having some wacko attack and bring down your website, just because he doesn’t like the message sent to his in-box. So should we just forget about direct email as a legitimate marketing tactic, and spent our time and money focused on other aspects of the marketing mix?

I suggest not.

NOT ALL EMAIL IS CREATED EQUAL

Let’s step back and be rational here. First of all, not all direct email is the same. Let’s start with the “worst of” direct email campaigns:

Scenario #1

Bob’s Computer Stuff, Inc., buys “20 million email addresses for $99” from a SPAM email that they randomly received. Bob’s then fires off an email to the entire list with an offer for its extremely niche-y computer accessory, the “Swiss Army Computer Widget”. This is bad. Bob will be punished in quite a few ways, and probably deserves it.

Now let’s look at the “best of” direct email:

Scenario #2

Distinct Software Corp. has been methodically building a list of customers and prospects obtained using a variety of online and offline marketing methods, not the least of which is visits to the company’s website. The list has been carefully compiled, and in each case the client is either doing business with Distinct or has expressly given permission to receive email. Distinct has decided it would like to launch its new IT software product, with a special offer to targeted prospects. The company mines it’s database for prospects that meet the targeted customer profile for the new product. It supplements it’s own list by renting an opt-in email list from a broker, that was compiled from subscribers to a magazine that covers issues related to the new product. Distinct then puts together a classic direct response offer (discounted product, money-back guarantee, free gift, time-limited). The company crafts a short email message describing the special offer, careful to adhere to the rules of the CAN-SPAM Act, and other applicable state or international laws. The company sends it out its offer to the target list it has compiled, as one component of the marketing mix for its new product launch.

IS IT SPAM?

Do you really think that these two scenarios have anything in common? In actuality, the only thing they have in common is the delivery mechanism—email. Yet it’s very common for these two very different activities to be lumped together in one basket. It’s all SPAM, many people will say.

I beg to differ. One is terrible marketing, the other is classic marketing. BAD, scatter shot marketing is almost always poorly received, and GOOD, targeted marketing will only offend the zealots out there who are offended by ALL forms of marketing. This is true regardless of the delivery mechanism. There are people who hate traditional direct mail, unsolicited phone calls, advertising on TV, people with flyers at the shopping mall, even print ads that take up 2/3 of their favorite magazine. There’s nothing you can do about them. The only way to please these folks is to go out of business, so we don’t worry about them. Don’t let the crazy few stop your business from being successful.

GREAT FOR “OBJECTIVE” MARKETING DECISIONS

There are many reasons NOT to do direct email. One of the most important is that it’s easy to do, so it is a very crowded medium (thus “SPAM). But there’s a lot of great reasons to try it, as well.

One of the best is its ability to add “objectivity” to the marketing process. Marketing, especially to a high tech audience, is both art and science. It’s best when you can tilt toward more science than art, but with new products and offers, it often tends to be primarily art. How are new product prices usually set, for example? Well, a few objective things are usually done, like a quick look at competitors price, but mostly, somebody with decision making power just picks a price out of the air that looks good to them. It may be a good price, it may not be, but there it is.

The beauty of direct marketing is that you can OBJECTIVELY test until you come up with the “right” price. Divide the list up into modules, keep all other elements of the offer static, and use a different price for each module. If you use statistically significant samples, YOU WILL converge on the price that yields the greatest profit. That’s a rare and valuable thing to a marketer in high tech, where things change so fast, and are often so squishy, that it’s sometimes hard to tell which end is up. And you can do this with any elements of your offer, simply by keeping everything but your test element static, and using the “module” approach to test different “sizes” of that element.

Of course you can do this with any direct form of marketing, but direct email adds the important ability to do your testing faster. You can test and revise, test and revise, almost in real time, quickly converging on your optimal offer for the market. This is very powerful, and the results can then used to optimize other marketing activities in the mix. It really enables you to switch from subjective guessing to objective decision-making, which could well mean the difference between success and failure in a competitive market.

IT’S ONLY SPAM IF YOUR AUDIENCE ISN’T INTERESTED

If your offer is targeted at the appropriate people, it provides benefits for them, and you deliver your message in a legal manner, you will have very few problems. The closer it comes to a “one to one” message, and the farther from a mass message, the fewer problems you will have.

IF DONE RIGHT, VERY FEW COMPLAINTS

I have conducted many direct marketing campaigns over the years, including quite a few direct email campaigns. The most telling is a most personal campaign I have used over the years. Prior to starting my consulting practice, I used this technique in job searches, as well as to reach out to potential customers when I worked as an employee. Since I have started my consulting practice, I have used it with great success as well. I send email messages directly to CEOs of target companies. The messages are extremely “one to one”, tailored to the company and person I am sending it to, and the target is always chosen to be a close fit with whatever I my “offer” has been at the time (A potential senior executive, a product that I knew the potential client could use, my consulting services).

I have been using this technique literally since the beginning of commercial use of the Internet. I have had exactly ONE complaint since I started using this approach. The gentleman who complained—I actually knew. I had previously had a personal meeting with him, and he handed me his business card himself! Needless to say, most people thought this guy was a real jerk! A few people over the years have asked that I “take their name off of my list”. I always do—anyone that requests it, never hears from me again. But not many have made this request. A lot of non-responses, a lot of polite no thanks, and many, many requests for meeting that have led to a successful outcome for both the addressee and myself. But literally no complaints save the one “exception that proves the rule.”

THE BOTTOM LINE

My basic message is don’t let fear stop you from using Direct Email effectively as part of your marketing mix. Maybe it makes sense for your particular situation, maybe it doesn’t. But don’t let fear of persecution and alienation rule it out. If done properly, it is often a profitable, efficient, and very effective method of reaching your target audience. Just remember to live by the rules:

DIRECT EMAIL RULES

  • Only email to a targeted audience
  • Craft an offer that is very appealing to your target list
  • Do extensive testing, for objective analysis of each element of your offer
  • Always be honest, never deceitful
  • Use an opt-in or in-house list only
  • Always make it easy for addresses to opt out
  • Never send additional messages to those that opt out
  • Include your physical address and phone number in all messages
  • Don’t overdue it—send messages sparingly, only when you have something important to offer or communicate
  • No more than monthly messages in most cases, less frequently is usually better


So that’s it! Email is a controversial and often emotional issue for many people. I look forward to hear what you all have to say–post a comment with your own experience and thoughts…

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 August 28, 2005
filed in B2C, Marcom, Online Marketing, Promotion, sales
tagged , , , , , , , , , , , , , , , , , , ,

US Government Sales & Marketing

What’s the difference between selling to the US Government and selling to the Commercial market?

It’s like night and day.

Sales and Marketing to the government is truly the flip side of commercial activities. You really can’t believe how different these markets are–until you’ve actually come from one side–and tried to go over to the other. I emphasize tried, because it usually doesn’t work out very well!

First of all, in the Government world the term “marketing” is a standard term. But its meaning in the government world is very different from its definition in the commercial world. When you hear someone talk about “Marketing” to the government—they really mean SELLING. That’s in large part because those businesses that deal primarily, or exclusively with the government really don’t do much in the way of marketing in the commercial markets sense.

Everything’s Different

In a traditional government contractor, there is usually no one with a sales title. There are often a couple of people with grand titles like “Vice President of Marketing” or “Vice President of Business Development”. These people have very little in the way of real marketing responsibilities–they are the chief sales people of the company. They are often former government employees, and in the case of a military contractor, frequently an ex-general or ex-colonel. Key to their hiring was that they are very well connected in the government or service branch that the company is targeting. Included in their charter are some “light” Marcom activities–putting together data sheets, and coordinating a few targeted trade shows.  That’s the extent of activities a commercial company would consider to be “marketing”. In addition to the dedicated “Marketing People”, much of the technical selling of individual deals is done at the project manager level.

Of course, it’s not just the sales & marketing functions that are so different in the government world vs. commercial. Almost everything is! The typical government contracting business model more closely resembles a grocery store, than it does a typical high tech company. Margins are very thin, but profit is pretty much guaranteed once you’ve secured a contract. Up front R&D (“IR&D;” in government terminology) is generally discouraged, as it’s a great way to lose money. IR&D; can also be funded by the government; that is utilized heavily but it has limitations. Spending an amount(without government funding) that would be modest in the commercial world on up front R&D can easily wipe out the thin margins that the government contracting business yields. The government contracting model works like this: Hire an ex-employee from the agency that you are targeting your “marketing” at. Leverage that relationship to secure the contract, with a minimum of up front product development expenses. Then hire the people to staff the project, and of course do a good job executing the project. Add new “marketer” from another agency–rinse and repeat.

So for those purely commercial readers out there, this must sound pretty different than what you’re used to. That’s only because it is! There is no Product Marketing/Product Management function in a true government contractor. In the government world your “market” is one customer, or a small number of customers, who are basically specifying the product for you. There are a few sales people, but as I mentioned earlier, they’re called marketing people. The actual marketing tasks are few and far between—collateral creation, trade shows, a party here or there.

Difficult to make the Jump

As you imagine from the discussion above, it’s difficult to move between the two worlds. That’s the reason that nearly EVERY government contractor that has tried to enter commercial markets in any major way has failed abysmally. Government-oriented companies typically don’t have the entrepreneurial cultures found in commercial high tech companies. They lack fundamental Market Evaluation and Product Planning skills required for success in the commercial world—because it’s not required in their core market.

Senior managers at Government contractors are often profoundly aware of all of this. They may intellectually understand that they need to do things differently for their companies to make the jump to the commercial side. But especially if they have been very successful in the government business, a difficulty emerges that won’t be obvious on the surface. And this can be the worst of all: Successful senior managers tend to fall back on their what I like to call their “Common Business Sense” when they encounter new or stressful situations. Often they don’t even realize that they are doing it. Unfortunately, when an executive with a government contractor utilizes their “common business sense” to make a decision involving a commercial business, the results can be disastrous. The “right way” of doing things in the two businesses are so fundamentally different that it might work out better if they took the OPPOSITE path from what their instincts told them. Not an easy way to do business.

Commercial to Government

So what’s a C-level manager in a commercial company, which would like to secure some government orders, to do? Given the different business cultures of the two markets, it seems pretty daunting. Those poor government guys who have tried to go commercial have had their hats handed to them—does the same fate await me?

Fortunately, it doesn’t necessarily need to be so bad. If you are selling services, or highly customized products, you may need to closely replicate the government-contracting model, if you are going to be successful. If you are selling fairly standard products, however, it may be possible to gain significant government business leveraging your normal commercial marketing efforts.

A few years back, I was running a startup commercial software product group within a company that was otherwise a pure government contractor. It was a diversification effort for the company. Our sister groups within the company were all very successful, and extremely well connected within government contracting and procurement circles. I expected, and was promised, a lot of help in placing our products in large quantities within various government agencies and military branches. For a lot of different reasons, that help never materialized. But a funny thing happened—this startup software product group ended up with 40% of its revenue from US and foreign governments. This was without a government-specific product, no real marketing advantage provided by our well-connected parent, and no special government emphasis in our sales and marketing programs. Contrary to popular belief, if you have a great commercial standard product that has use within the government, the agencies and branches will find a way to purchase it. Our product was aimed at Network Administrators, and their needs were similar to their commercial counterparts. The government market is huge, and we did well in the government sector. With a few modest investments, however, we could have done even better. So what steps should a commercial company do to maximize its penetration in the government marketplace?

Tips for Success

Create a great product—Above all, your market research and product planning are the starting point to success. Make sure to include a few potential government customers in your upfront planning, which should ensure that you don’t miss any special requirements they might have. This is a huge market you don’t want to miss.

Have a modest entry-level price for your product—Even if in a production environment your product costs hundreds of thousands of dollars, or even millions, it’s very helpful to have a low entry-level price– ideally less than a thousand dollars per unit. This will allow a motivated prospect to acquire your product initially by “going around” the laborious, lengthy, confusing—and often competitive—contracting process. Even if you have to go through a contract later to secure the full production purchase price, the bidding process may then be “written to your specifications”.

Hire an experienced government sales executive—This can NEVER hurt. It really helps having someone who knows his way around your target agencies, to head your Government Sales Division.

Place your products on the GSA schedule via an established Government Reseller—Getting on the GSA (Government Services Agency) via your own company is a long and complex process. For most commercial entities, it isn’t worth the effort. It’s much easier to give up a few margin points to a reseller already on the schedule. It’s much easier for him to add your products. They won’t do much for you in the way of promotion, and I’ve found that being on the GSA schedule in most cases isn’t REQUIRED to buy your products (although some will tell you otherwise). But it does make it easier for the customer inside the government, and if nothing else, raises their comfort level. They will know that they won’t face a major hassle to buy your product.

That’s my take on selling to the US government. Hopefully there’s a nugget or two in there that can help you. Post a comment with a few of your own tips.

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 June 17, 2005
filed in Business Development, Business Models, Corporate Strategy, Distribution Channels, Marcom, Product Marketing/Management, Software/Product Development, VARs, market research, sales
tagged , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,
« Older Posts
Newer Posts »