Morettini on Management

General Management and Marketing Advice for Software and Tech Companies

Category: VARs

System Integration vs. Product Development

I’ve recently engaged on assignments with two new clients. Both of them have businesses selling to large, blue chip customers. Customers of the size that are used to “having it their way”; as a result, getting a deal with them often includes the need for a lot of customization.

The interesting thing about these two clients is how they perceive and approach that need to customize.

A Tale of Two Companies

Company A views customization somewhat as a pain and distraction, something to be controlled–I am assisting them with creating a standard solution offering menu outlining the “Base” offering, with a list of options available at an added cost. They really want to discourage certain customizations, absolutely won’t do some things that will be asked, and want to make sure that they charge dearly for items that they find painful. They have the classic mentality of a product company; they want to do the amount of customization necessary to make a large sale to this important customer–but NO more than they have to.

Company B, which also considers itself a product company, has a very different mentality about customization. They welcome it, pride themselves on it, and position themselves to these potential large clients as someone that can quickly bring solutions to the client, customized to their desires. They want their big account reps to be scouring the big accounts for unique pain points or opportunities, which might fall within the company’s core capabilities, enabling them to propose a customized solution. In fact, up till now, their product development approach has really been to find out what individual accounts want–and build it for them.

So which of these two business models is the best way for technology companies to go?

System Integration Business Models

Advantages:
*More flexible and able to change with shifts in the marketplace
*Not as capital-intensive due to less “betting” on upfront product development
*Easier to grow business organically with internally-generated capital than in a product business

Disadvantages:
*Less risk due to lower upfront investments
*More competition; System Integration is an “easier-entry” business
*Generally lower operating margins
*Growth is less scalable than a product-oriented company

Product-Focused Business Models

Advantages:
*Provides greater opportunity for strategic advantage and resulting fast growth
*Less competition if a product/brand/technology differential advantage is created
*Can scale much quicker if a hit product is developed
*Higher operating margins if product is successful
*Usually more marketing-driven and less labor-intensive
*If creating a very large company is the goal, much easier to raise outside capital

Disadvantages:
*Much more risk of “crib death”, resulting in complete capital loss if first product has problems in development or marketing
*Harder to “get over the hump”; success is harder to come by, and success often happens as a step function after a difficult startup period

First of all, I want to emphasize that there isn’t necessarily a “wrong” approach with either of these business models. You can make a lot of money pursuing either model. Both of the companies I have used as models have managed to attract blue chip customer which would be the envy of any company. What we are really talking about here is the difference between a classic product-driven company and a system integrator.

Company A is that classic product-driven company. They customize when they have to, but also have a point where they will say “no”.

Company B also self-identifies itself as a product company, and in fact they have built their business around a small number of standard offerings. But as their core strategic advantage they really are utilizing relationships, the ability to customize beyond what standard product companies (especially larger ones) are willing to do, as well as to react very quickly to customer requests. They’ve built a very nice business doing this, but have some frustrations as well. They are highly dependent upon a small number of major accounts for virtually all of their revenue, and have the major revenue/profit swings that are associated with this type of business–up one year, back down the next. They also are in constant fear that a larger company will come along and “take away” their marketplace, because they’ve continuously failed to create new products which build upon a core offering which is very dated technologically. The core offering appears long-in-tooth and vulnerable. This company is very account-focused, and the lack of a market focus has kept them from being able to create additional, broadly marketable products which provide them with a strong proprietary advantage (and causes a lack of sleep at night!)

Company A understands who they are and what they want. That doesn’t guarantee success, but it makes it much easier to build a plan that everyone agrees on. At that point success or failure usually depends upon execution, unless the plan is awful. If failure ensues in this scenario, more times than not, the problem is in execution. Company B’s biggest problem is that they are floating right in the middle between the two business models. They are trying to leverage both of these business models, and struggling with execution, in some ways with both.

SUMMARY
It isn’t impossible to combine these two business models successfully. I’m sure that many of you can’t point to several examples of such a very successful compromise. In fact, many technology companies combine both of these models to some extent, with good success. But I find that usually, a company identifies itself primarily as a product company first, or a systems integrator. That identification is their strategic focus, and takes precedence when prioritizing the use of always scarce assets.

The secondary business model is usually utilized on an opportunistic basis. Product companies integrate and customize as needed to get a big deal. Integrators create “products” to fill the needs of a big account, and sometimes happily find they are saleable to other accounts. Occasionally, these “products” prove so widely saleable that they are spun off into a separate product company, or the integrator changes its focus into becoming a full-blown product company.

The most important thing, in my opinion, is to understand who you are, and what you are trying to accomplish strategically. It’s the company’s that are trying to leverage both business models at once, without one model taking the lead, that gets itself in a heap of trouble. That’s my opinion–what’s yours?

Phil Morettini
PJM Consulting
www.pjmconsult.com

1 Comment by admin on September 21, 2007
filed in Business Models, Corporate Strategy, Financing, Operations, Software/Product Development, Startup/Early Stage, VARs
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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
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Selling Through OEMS

I’ve recently discussed selling through VARs as a distribution channel strongly favored (maybe a bit too much!) by many early stage technology and software companies. In this article I’m going to look at another channel that is often misunderstood and misused: The OEM channel.

No Leverage
If you approach potential partners with a brand and existing sales, there is no leverage in negotiating with the larger, more established OEM prospective partner. In addition, it’s a much harder sale, because your company and product don’t have a track record.

Important–but secondary–revenue source
Treat OEM business as an important, but secondary revenue source relative to your own brand. This will keep things in perspective and prevent you from putting your company’s future in someone else’s control.

Bundle rather than integrate
Once way to take advantage of large OEMs without the downside of losing your own identity is to seek bundling deals, rather than private label deals. By doing this you are essentially co-branding, building the power of the partner brand through affinity with the bigger company. This leaves you with greater marketing, selling and support requirements, but may lead to a larger, more profitable company in the long run.

Address a vertical out of your reach
A good way to utilize OEMs is to fill a key vertical where your technology has a market. This occurs when you decide that you can’t address this vertical well with your own brand, because you don’t have a presence, and have decided that it doesn’t make sense strategically to expend resources to develop one.

Leverage your IP into a new market
There are also cases where you main technology base can be easily used to create an entirely different type of product, which is intended to serve an entirely different market, relative to what you are selling under your own brand. In these cases it may make sense to team with an OEM in this disparate segment, to market this spin-off product from your main technology.

When a company goes about it the right way, OEM business can be an excellent additional revenue source for startups–and any high tech company, for that matter. Where I want to throw out a caution flag, is when a company decides they are going to rely on OEMs as its primary–or only–channel.

Now this can work, you might say. And you would be right. But in most cases, I believe, it isn’t the best way to proceed. It can work, if you have the right type of product, and you’ve thought your strategy through very thoroughly. The problem is with most companies, this the usual scenario. What I find more prevalent is the old “let’s make it, and we’ll get someone else to sell it for us” approach. As I’ve discussed before, ‘let someone else sell it’ almost never works. This sentiment often occurs with a technology-driven senior team, without a good feel for marketing or sales. The natural tendency in these situations is to avoid the current weaknesses in this organization, and “let somebody else do it”.

The problem here is that sales and marketing needs to be a core competency, in most situations, if a technology company to become as successful as possible.

So what are the “bad effects”, when an early stage technology company pursues OEM relationships as their sole distribution strategy–or at least “too early” in their company development?

EFFECTS OF “BAD” OEM STRATEGY

No development of internal sales & Marketing
Companies with OEM-only business models tend to have weak (or nonexistent!) sales and marketing departments. My belief is that sales and marketing is a core competency–making this a bad idea. While you can run a company this way, in most cases, the ultimate size and profitability will likely be a fraction of what your technology could have otherwise supported.

All push, no pull
Every sales and marketing activity works better if there are “pull” elements, in addition to “push”. If selling to the OEM is almost solely a “push” activity, with no brand or your own market share to help pull–the process is much harder.

All the eggs in one basket
Even if you do well and gain OEM deals with premier partners–success is far from guaranteed. It isn’t unusual for OEM deals, especially early ones, to yield actual revenues in the 10-15% range of forecasts. If this happens to you and you’ve built your company around these projections–you’re basically screwed. You risk “crib death” or at least a difficult restart with your own brand, due to the disappointing sales from the OEM relationship(s).

Your OEMs swallow you whole
A very common scenario is a much larger OEM that starts treating its small, entrepreneurial partner like another department in its bureaucracy. The OEM stunts your overall company development by “tying up” the scarce resources of your smaller company in meetings, special projects, ever-changing product development requirements–and yes–more meetings.

Given the potential pitfalls, how do I recommend using OEMs?

THE “RIGHT WAY” TO INCORPORATE AN OEM STRATEGY

Develop your own brand/channel first
Pursue OEM business only AFTER you’ve established products under your own brand. It not only will provide you with a product that will be more attractive and stable to potential OEM partners, but you’ve got your own branded business to sustain you

Final harvest
Another smart way to use OEMs is to “harvest” a volume product which is now in decline, and is a product which you don’t intend to continue major investments. If you can get such a deal, it can be great way to maximize end-of-life revenue with minimum incremental investment.

Offer another price point
A strategy that can be used successfully in some cases (but is a bit dangerous) is to use an OEM to offer another price point in the market, one that you choose not to address with your own brand. More often you would do this with your own alternative brand or sub-brand. But there are instances where this investment might not make sense. Special care should be taken if the OEM is to fill a lower price point–care needs to be taken so that your own brands share isn’t eroded significantly.

Integration with complementary products
There are some instances in the marketplace where 1+1 does indeed equal 3. In these cases it may make sense to team with an OEM, to gain the advantages of product integration with a key product in your market, offering them as a single, integrated solution.

Summary
The bottom line is that OEM marketing is very important in the software and technology business. I strongly recommend that most everyone pursue this type of business; however, do it as part of a balanced, overall revenue strategy. Tread carefully and wisely and this may be the distribution channel that makes a break-even, or modestly-profitable business, into a profitable winner. It’s easy to say you want OEM revenue, but like most things in business, doing it right is hard–the devil’s in the details.

That’s my thoughts about how OEM strategy best fits into a typical high tech business. Post a comment and let us know how YOU approach OEM relationships–I look forward to your opinions.

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, 2007
filed in B2C, Business Development, Business Models, Corporate Strategy, Distribution Channels, Startup/Early Stage, VARs
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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
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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

Channel Conflict

In my consulting practice I’ve done a lot of work with software and hardware companies in channel development.  One of the hardest things to manage while growing a channel business is the inevitable conflict between all the players throughout your various distribution methods, including your direct sales force.

Of course, my colleagues in the channel might say you can limit this conflict by using the channel exclusively. That is the nature of channel conflict—all parties want the business for THEMSELVES. Much smoke is always blown by the various interested parties about what is right and fair, and commitments that were made and so on, but let’s face it—it’s basically self interest. They just want the business for themselves.

So what’s a company to do? Just sell direct, or just sell through VARs, or just sell through retail? Unless you have strict exclusive territories throughout your distributions system, problems will still arise. You’ll always have some kind of conflict (two direct reps or two resellers fighting over who should have an account), but at least you would eliminate cross-channel conflict, which can be particularly complex and nasty.

Limiting yourself to a single channel focus certainly may make your life less complicated, and less rife with conflict. But unfortunately, in most cases, you’ll be leaving a lot of money on the table. If you rule out any natural channels that can sell your product, you won’t be maximizing your return on your heavy investments in product IP, which should be one of the fundamental concerns of any business.

HAVE YOUR CAKE AND EAT IT TOO

So I say, sell through every channel that makes sense. If done poorly, it can and almost certainly will, be very messy. You’ll be sorry you did it, and probably become a convert to a single channel, or at least less complex, distribution model. But it doesn’t have to be so. Yes, you CAN have your cake and eat it, too.

There are many potential channels for your products: direct, OEM, one-step through VARs, 2-step through distributors/VARs, retailers, independent sales reps, strategic partner referrals, affiliates and more. In extreme cases, ALL of these potential channels may be appropriate ways to deliver your product to the market. The question I am often asked by clients is “How do you make it all work without it blowing up in your face?” The way you can do this is to live by two very simple rules:

1) DON’T EVER SCREW A REAL BUSINESS PARTNER

It actually sounds pretty simple and easy. Yet humans can be greedy creatures, and just a little greed in partnering can quickly ruin reputations for a long time. There’s the greedy VAR who thinks he deserves a piece of every deal with any customer within a 500 mile radius of his office—a customer he might have only sent a piece of mail, or cold-called a year before.

But more seriously, it only takes one weak-willed sales manager at a manufacturer or software developer, trying to make quota or maximize his income, to cause real havoc. If he attempts to cut a channel partner out of a deal that they drove, or had legitimate influence on—this is a mortal sin. Your channel partners will be outraged, and they will spread the word and not soon forget. Your reputation has been tainted, and that crucial trust that is necessary to make any business relationship work is now gone. Everything becomes harder. Partners aren’t willing to share information about what’s going on in accounts—maybe even withholding names on potential new deals. A struggle for account control, rather than teamwork, becomes the rule of the day.

So if it is a REAL partner, one who is trying to drive business to your mutual benefit, do whatever it takes to make it right. Give up short-term profitability to maintain a long-term profitable relationship. Don’t ever, ever screw a partner in the name of short-term gain. It can ruin your channel business long term.

2) DO ALLOW BUYERS TO PURCHASE THE PRODUCT FROM WHOM THEY WANT TO BUY IT

If you are honest and fair with people, potential channel conflict shouldn’t unnecessarily stop you from maximizing revenue by using multiple methods of delivering your product to the market. There is a range of customer profiles in the market.

Some want to buy everything through their trusted VAR/Integrator, who helps give them a third party evaluation of the product’s virtues. Others want to deal directly only with the manufacturer or developer of the specific product they are purchasing. A third category of buyers likes to buy as much as possible through their favorite large manufacturer—this is a great reason to OEM your product to the IBMs of the world. In each of these situations, the channel that is best positioned, via relationship or type of support, should and usually will get the deal. If your product isn’t available in that channel, you may not get the deal.

The last category of buyer, however, is different. This is the bargain basement buyer, the one who couldn’t care less who he buys from, as long as he gets the lowest price. These are the people that can wreak havoc on a multi-channel distribution system, if you aren’t careful.

BEWARE THE BARGAIN BASEMENT BUYER

It’s this price-conscious buyer that will often bring cross-channel conflict to the forefront. Since they are seeking the lowest price, they end up shopping the purchase across many potential sources for the product, creating great price competition among your channel partners. This is where conflict is often born. There are many tactical mechanisms to limit these situations (such as deal registration), which I won’t delve into. The main thing to have thought out is where these customers should end up buying. There are two basic approaches:

1) Tell your value-added channels that this price conscious buyer, who isn’t looking for any added value, isn’t going to buy from them. You might decide that this buyer is going to find the lowest price at retail (if that’s one of your channels), or maybe direct if they buy in volume. In this case, it’s important to set those expectations up front when you recruit channel partners. Let potential partners know where they fit, and where they don’t. They can walk away if they don’t like it; otherwise they’ve been warned. This is being fair and honest. Before potential partners invest in selling your products, they should have the real picture of what they’re getting into.

2) Conversely, you can strive for street price equity between channels. This gets tougher to do the more channel types you have, and also the larger your channel is in general. But it can be done. The main thing here is to avoid giving incremental channels discounts based upon volume. If you do, incentives are created for a channel player to discount to achieve volume—thereby lowering their costs, so they can win more business via even more aggressive discounting. This leads to a continuous downward spiral in your street price, and to unhappiness and channel conflict to such a degree that will drive you to drink, or at least a career change. It will get ugly. But if you limit your channels to those that truly are strategic for your product, and which add real value, it can be managed. The key is to set discount schedules based upon value-add and associated costs, rather than revenue or unit volume.

So there you have it. Sell through all the channels your product belongs in. Be honest and fair with you partners. Sounds pretty easy to me! Let me know how it sounds to you-post a comment below to add to the discussion.

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

5 Comments by admin on July 31, 2005
filed in Business Models, Corporate Strategy, Distribution Channels, Retail, VARs
tagged , , , , , , , , , , , , ,

Partnering

Forming Partnerships, or Strategic Alliances, is one of the key elements that make up the business development function in technology companies. I believe that alliances are underutilized, in many ways. Conceived and executed properly, alliances can greatly extend the partner companies reach in the marketplace.

VARIOUS AND SUNDRY PARTNERSHIPS

There are many types of collaboration that fall under the umbrella of “Partnering”. Let’s examine a few of the most common:

Third Party Programs—Probably the best understood category of partnering. Partnering in this manner is generally low risk, but low reward for both parties. A program usually consists of many smaller partners gaining modest benefits from a larger company. The larger company gains (or at least the illusion) from having a large number of partners working with their product/technology.

Industry Consortiums—Represents another well-understood category. Mild benefits are usually obtained by the participating parties, including some publicity, a stamp of approval, and the opportunity to network with other consortium members. The unique aspect of this form of partnering is its one-to-many relationship, as opposed to “one-to-one” or “one-to-few” relationships found in most partnerships.

Sales Agents—Many people might not consider sales agent relationships partnerships, at least not strategic. But they certainly are. There is usually a minimum of entanglement here, simply a contract that provides a commission for sales generated or leveraged. The product doesn’t change hands between the partners, and there is often less training and support involved, relative to other partnership types used for product distribution.

Service Agreements—These agreements occur when a company doesn’t want to relinquish the sales function for its products, but for some reason it needs a third party for servicing. These agreements are common in high-end hardware markets, where 24/7 on-site support is critical. Storage Hardware or Mainframes are good examples. They are also seen in more commodity markets, where a company has decided that service/support isn’t their core competency, and that a third party can handle service/support at a lower cost. The use of Indian Call Centers by PC manufacturers such as Dell is a recent example of this concept.

Distribution Agreements—This is a common, but often poorly executed form of partnership. The errors usually occur when the Channel partner is treated like an end-user, rather than the true partner they should be viewed as. Distributors and Resellers need to be treated as an extension of a company’s sales force. Sadly, they often are not, leading to such misguided policies such as channel stuffing and over-distribution, which lead to problems that become extremely difficult to resolve.

Joint Marketing—Cooperation on marketing matters should be where most companies reap the greatest benefits. Partnering in this area is really low risk, can have great benefits, and is a great way to get started with a new partner. There are so many ways that companies can cooperate in joint marketing; the list is really only limited by your imagination. Some of the ways I’ve been able to utilize these types of partnerships include discounted product promotional bundles, trade show space cost-sharing, joint press releases (of course!), sharing of prospect and customer lists, referrals, and joint direct mailings. The great thing is that there are many areas to explore, to find overlap in the two companies interests.

Product Integration—Integrating the products of two companies is what often comes to mind when you think of partnerships. It can make great sense, and the potential rewards are great. However, there are some reasons for caution, prior to jumping straight into this, as I’ll discuss below.

POTENTIAL PITFALLS

As discussed above, a partnership or alliance can take many forms. As a result, there is a lot of confusion and disagreement as to what even constitutes a “good” partnership. Let’s take a closer look at two partnering categories, and some common missteps:

The PaRtnership

You see a great many press releases go out trumpeting the partnership between company A and company B. The release goes on to discuss the great benefits that will accrue to customers and the two companies making the announcement. The language tends to be vague and laced with terminology like “synergy” and “market leading value proposition”. More often than not, that initial press release is the high point of the partnership, and little is heard about it subsequently. You may have heard the term “slide-ware” to describe products that exist only in PowerPoint. This type of partnership is the alliance equivalent to slide-ware—I call it a “PaRtner-ship.”

Product Integration Fiasco

On the other end of the partnership spectrum, technical folks usually think of alliances in terms of product integration. Technical integration can be the basis for a great partnership. However, it’s a lot of work and a big commitment for both parties. The danger is that the partners too quickly dive head long into the product integration work, basing their decision on an impulsive belief that it “makes sense”.

In a typical scenario, the two products are complementary, and from an engineering (and often customer) perspective it looks like a marriage made in heaven. Several dangers are lying in the weeds, however. First of all, any product development effort runs a high risk of failure. When you put together two disparate engineering teams who have never worked together on a project, that risk rises exponentially. Usually both engineering departments have their own product releases to worry about concurrently, which are always higher priority. Lack of communication, low priority, cultural differences and ego can easily conspire to lead to a failed integration project, or at least one lacking the features to be of much leverage in the market. At this point, the partners have spent a lot of money and precious engineering resources with little in return, leaving finger pointing, and a search for scapegoats as the next step.

In addition, it takes much more than good product integration for commercial success by the partners. If there isn’t a solid plan for marketing cooperation and distribution (see above!), even technically elegant product integration partnerships will leave both parties disappointed. Alliances that are born from product integration, unless carefully thought out and efficiently executed, can lead to disappointment by one or both of the partners.

There are many “gotchas” involved with working together to push and pull the combined solution in the market. It helps to have some practice working together prior to making the big bet on technical integration. That’s why I often recommend to my clients that product integration be a step down the road in an embryonic partnership, not a beginning.

PARTNERSHIPS MAKE SENSE—BUT EXECUTION IS KEY

So are partnerships to be avoided? Not at all! They are one of the areas that can make be a huge differentiator for your company in a competitive market. But the take-away message here is that too many partnerships are conceived as great ideas—and peak right there. Like most business activities, the devil is in the details, and execution is the key to success. When I’m working with smaller clients with limited capital for marketing and sales, I often recommend an aggressive partnering program. If executed correctly, the company and its partners can gain cost-efficiencies and marketing economies of scale far exceeding their own siz
e. But I have two key pieces of advice before you embark on a new partnering program:

1) The very definition of a partnership is a “win-win” relationship for BOTH parties. Takers don’t build winning partnerships—givers do. Offer to take the first step, do the first piece of the project. A partner that believes you are acting in his best interests will be very impressed, and willing to provide support that you never dreamed of. Build that relationship by being the first to “give”; the trust you build will came back to you multiple times and set the stage for a profitable, long term partnership.

2) Do start, but start small. I’ve discussed above the many pitfalls of moving too fast. It’s best to pick something easy, with obvious benefits to both parties. Working successfully on a small project creates momentum, and helps build the trust and familiarity that is crucial to success on more ambitious future projects. I will often suggest a simple list swap of prospects as an initial step. If either party views even that with suspicion, a blind mailing can be done to each other’s list, where the actual lists don’t change hands. Building a prospect or customer list is very capital-intensive; by partnering with just one other company, you can both double your lists overnight. It’s almost a certain Win-Win, creating excellent leverage, and no financial investment by either party. It’s easy to succeed, and sets the stage for discussions on additional collaboration.

I’m sure you get the picture—does this make sense to you? Post me a comment below so we can get this discussion going.

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

4 Comments by admin on July 19, 2005
filed in Business Development, Business Models, Corporate Strategy, Distribution Channels, Mergers & Acquisitions, VARs
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
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BIG S, little m

Don’t worry; this isn’t going to be an article about Sado-Masochism! Well, come to think of it, that term may apply to what some founders and senior managers in startups are doing to themselves and their companies. What I’m referring to is the VP who gets hired to manage both the Sales and Marketing functions. Oftentimes this turns out to be a job we call “VP-SALES & marketing”. Thus the phrase “Big S, little m”. The position is usually offered to a crack sales guy or gal, who also happens to have a marketing title somewhere in their job background.

JUST GO GET THE ORDERS

To high tech insiders the meaning is clear. The anointed candidate will be expected to go out and beat the bushes for customers, and bring in new orders quickly. Oh, and by the way, Mr. VP, you’ll also be in charge of producing data sheets and attending a few trade shows. You know, all that marketing stuff!

In most of these cases, I would recommend that anyone being approached for a job like this run in the other direction as fast as possible. These positions are usually classic “traps”. The attitude is “We’ve got a great new technology; all we need is someone to go knock on a few customer’s doors and bring the purchase orders back to headquarters”.

Hopefully, most  will recognize that this is a recipe for a very unhappy outcome. The founders and senior management will be unhappy with revenue and profits, the VP will be unhappy because he’s likely to get fired in 9-12 months. The other employees will be depressed and talking about how “Sales & Marketing” is the weak link in the company. And the investors, of course, will be very, very cranky.

Why does this occur? It often occurs when the key senior decision makers (CEO, CFO, Founders, etc.) don’t have a background or appreciation for the difficulty of the sales function. And it’s even more likely to happen when there is no key decision maker with a background in Marketing. The decision maker’s attitude also often includes an over-confidence in the role that superior technology plays in the overall success of a company.

IS TECHNOLOGY ENOUGH?

Certainly having a defensible technological advantage is a major factor in the success of a high tech company, especially when that company is in startup mode. The problem arises when management believes this by itself is enough to “win”. How hard is cold calling and knocking on doors for a sales force with an unknown company name? Not to mention an unproven product, which may solve a problem the customer may not yet know exists? I’ll give you a hint—it’s really, really hard!

Likely there is a lack of understanding of the crucial role marketing plays in establishing a new product in the marketplace. There may be a view that marketing is some theoretical, squishy function that is a waste of money, or maybe something that has value but the company just can’t afford. Management thinks we’ll introduce the product, sell a bunch and build the marketing function later. Unfortunately, that thinking is as backwards as can be, and will usually lead to the unhappy results discussed earlier in this article.

Why IS marketing so important, and why is it such a critical mistake if it isn’t a major part of the new product process? It’s because marketing is crucial in every phase of introducing and growing the revenue of new products, from conception until end-of-life. In the beginning, an engineer may come up with a great new technology that appears to allow someone to do an existing task better. Or maybe it allows someone to do something that wasn’t even possible before. But that’s really just the beginning of the product development process. Product engineers aren’t trained to closely match customer needs with the features of this whiz-bang new technology. Often they think it’s easy – you just go ask the customer what he wants! But customers often don’t tell you the truth;  sometimes they lie, and sometimes they don’t even know what they really want. And even if they tell you the truth, it’s important to make sure that what these customers are telling you is representative of your entire target market segment. This is a task that looks intellectually easy on the surface, but for a lot of reasons, it’s very difficult to get right.

Sometimes companies do get it right even without an experienced, professional marketing function in place. Let’s assume for a moment that they do. There’s still a very long way to go before those purchase orders start pouring in. The product must be positioned properly, relative to the direct and indirect competition in the market. It needs to be priced so that the market is willing to take a close look, but not so high or low that it retards the product’s long-term profit potential. Will it be distributed only through the company’s direct sales force, or should we court VARs, distributors, retailers or OEMs? What kind of pricing can we offer those partners without creating gray markets or channel conflicts? And please, let’s not forget about creating a bit of demand for those poor guys and gals in the sales force. Cold calling really does suck! It’s not good for anyone, the sales reps or the company’s profitability, if cold-calling is going on the majority of time. It will “burn out” your sales force in no time.

Marketing programs that generate hot leads, or even complete sales, are much more cost-effective than relying on highly paid (but beleaguered) sales reps to do their own inefficient “door to door” marketing. And how should we generate those leads? Via PR, Advertising, Direct Marketing, Partnering, Search Engine Optimization, Paid Search Engine Ads, Trade Shows? The Marketing folks are the strategic quarterbacks of the organization who should be driving the answers to these questions—as well as executing the strategy within the required parameters.

IT MIGHT WORK—BUT DON’T BET ON IT

So does “BIG S, little m” NEVER work? Well, in some cases it not only works, it is even appropriate. Take the example of a semiconductor company selling a very niche chip to a vertical segment. They might have only 50 potential customers. In this case you REALLY CAN go ask the customer what he wants, and easily ask enough of them that you will end up building products that will apply to your entire target segment. With respect to lead generation, the target market is so small that traditional outbound marketing programs don’t make sense anyway, and that “door to door” marketing by your sales force might work just fine.

But I propose to you that this example scenario is the classic “exception that proves the rule”. In many, if not most cases, “BIG S, little m” will lead to failure – or at the very least, suboptimal performance. That’s my view—as always I’m very interested in hearing yours–post a comment!

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

4 Comments by admin on June 2, 2005
filed in Distribution Channels, General Management, Product Marketing/Management, Software/Product Development, Startup/Early Stage, VARs, enterprise software, hardware, sales
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