Morettini on Management

General Management and Marketing Advice for Software and Tech Companies

Tag: channel sales

Creating a Distribution Channel Where One Doesn’t Exist

One of the least well understood activities in growing a hardware or software business is the building of distribution channels. This looks very easy to the uninitiated, but in reality it’s extremely difficult. There are many subtleties that are far from obvious, and some aspects that are necessary for success are downright counter-intuitive. Building a distribution channel for your company is difficult in the best of circumstances.

How hard is it when there are no current, obvious existing channel partners already selling your category of products to start with?

It’s very hard. In fact, most people in the know would likely tell you to forget about it, and not even try. That might actually be pretty good advice, because this activity could easily become a real time and money sink if you’re not careful.

But the other side of the coin is that this might be the circumstance where building a channel carries the very highest potential payoff. One of the great truths I’ve discovered in my career is that the most effective marketing and sales strategies are the ones that haven’t yet become mainstream in your marketplace. Once a strategy or tactic becomes very popular, the results become watered down until at some point it’s marginally attractive at best. In terms of strategy, this move fits in the “high risk, high reward” category. But the payback, if successful, is extremely high.

In terms of strategy, creating your own channel definitely fits in the “high risk, high reward” category. Because while it’s very difficult, if successful, you alone among all competitors in your segment will have the leverage and resulting strategic advantage that a well-executed channel strategy can provide.

So the question is how do you go about this? Where do you even start if there are no existing channel partners for your category? Let’s take a look at a few places to mine that I’ve found some success in the past:

Adjancent Markets

This is the most fertile place to begin, imo. The first step is to think strategically about what type of software application or hardware product is complementary to yours. Whose product might it make sense to integrate with your own, for example? These types of potential strategic partners might also have existing channel partners that might be interested in selling your product as a companion product. An example scenario that I recently successfully implemented for a client was an analytics software company that uses a lot of data to help forecast and mitigate decision risk. We were able to attract a number of channel partners in two adjacent categories: Business Intelligence (BI) and Project Management. Both of these categories are large, with good-sized existing channels selling their solutions. BI creates a lot of date which could be used by my client’s software for forward-looking action, and the Project Management category involves a lot of complex decision-making and risk mitigation which was a natural fit for my client’s software.

Private Label/OEM products

Potential OEMs are another great place to look for channel partners. One obvious possibility is hardware OEMs for a software company, where the software might be integrated with the hardware for a full solution. If the hardware OEM has a channel, Voilà! you have a channel. Even if the hardware company isn’t interested in an OEM relationship, you might be able to entice them into a more vanilla reseller relationship with light or no integration. Lastly, you can always approach their channel directly to sell you software as an add-on product to the hardware vendor’s.

Former Employees

The first two categories above are pretty fertile with respect to creating a channel from scratch. After mining those two approaches, we’re getting into the area where you’ll need some really creative thinking. The first idea is former employees; I’ve seen many VARs who have started their systems integration business by specializing in their old employers products after leaving the mother ship. Another similar possibility is a former employee who lives in or moves to another country; they might start an entrepreneurial “exclusive” distributorship in that country.

Former Competitors

Very similar to the “Former Employee” category above is partnering with employees of former competitors whom you may know or come across. They will likely have similar knowledge and skill sets to your former employees, so the same type of potential applies. The only caveat here is you need to be careful of any existing relationships with your competitors or special agendas that could poison a potential relationship.

Product Fans

This category of prospective partner is again very similar to the former employee and competitor categories in terms of potential. A user or former user who loves your product and who you have a good relationship with can be a good candidate for an entrepreneurial VAR/distributor startup, whether domestic or international. The area to be careful of here is they may be very skilled in your product and some internal operating specialty, but may be poorly prepared to market, sell and run an overall business. This of course is a potential risk in the former employee and competitor categories as well.

These are some ways you can take the difficult step of creating your own channel from ground zero. Has anyone else tried this–what were your results? What are your ideas on how best to go about it? Please post a comment to expand the discussion.

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

1 Comment by admin on February 6, 2012
filed in Business Models, Corporate Strategy, Distribution Channels, Retail, VARs, enterprise software, hardware, sales
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International Expansion: Partner or Invest?

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

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

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

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

Available Capital

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

Product Price and Complexity

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

Management Skills

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

Local Market Cost Structure

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

Availability of Partners

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

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

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

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

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

No Comments by admin on March 13, 2011
filed in Business Development, Business Models, Corporate Strategy, Distribution Channels, VARs, enterprise software, hardware
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How Soon Should Your Software or Hardware Company Go International?

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

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

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

Reasons for Early International Business Development

Early adopters needed

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

Distribution partnerships can provide tremendous leverage for a young company

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

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

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

Beat your competition to the punch

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

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

What to Evaluate Prior to Deciding to Go International

Your product must be stable

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

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

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

Inventory or License only

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

Direct or Channel distribution

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

English or Local Language

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

Safety, Legal or Electrical Specifications

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

SaaS

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

Process or Cultural Differences

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

Existing Demand

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

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

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

No Comments by admin on October 12, 2010
filed in Business Development, Corporate Strategy, Distribution Channels, Retail, SaaS, Startup/Early Stage, VARs, hardware, sales
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Selling SaaS through the VAR Channel

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

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

 Major SaaS strengths

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

 Major VAR motivations

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

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

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

 The Gap

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

2 Comments by admin on July 18, 2010
filed in Business Models, Corporate Strategy, Distribution Channels, Product Marketing/Management, SaaS, VARs, enterprise software
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Promoting Software and Hardware Products through the VAR Channel

With the exception of some software and hardware vendors who sell super-expensive products to the largest enterprises, a large percentage tech companies uses the Value Added Reseller (VAR) channel, to one extent or another. So how do you best go about doing this successfully? Create a great product, throw it to the channel, and sit back and collect the money?

If only it were so. Unfortunately, many tech companies new to the channel find out the hard way that you will fail by taking the word “seller” in the VAR label too seriously. For those of use with experience in the VAR channel, you know that it is still incumbent upon the vendor to create end user demand for their product. Yes, you need to market to VARs as well. And you will take whatever “push” you can get from the channel. But you must have an active promotional program aimed at end users for a realistic chance at channel success.

So what are the best marketing approaches to support channel sales activities? If depends, of course, on the specifics of your product, market, price point, etc. But let’s take a quick look at some popular promotion methods used in conjunction with channel sales. I’ll break it down into three basic categories:

End user demand creation

This is first and foremost the most critical activity. It’s an unfortunate fact that most new players in the channel don’t understand this initially. Many have to learn it through a painful hands-on lesson, which sometimes leads to rejecting use of the channel outright, due to spectacular failure. It may be counter-intuitive, but it doesn’t even matter whether you establish end user demand for your products by selling direct or via the channel. The important thing is that with few exceptions there needs to be serious interest in your products at the end user level if you’re to successfully sell through VARs. In fact, it’s almost always necessary to be successful selling directly to end users, before you can hope to have a successful VAR channel for your products. Almost any end user marketing method that fits with your product type and budget can be used to create this demand, but here are some commonly used promotional types:

• SEO (Search engine optimization)
• PPC (Pay per click) advertising
• Press relations
• White paper marketing
• Targeted online banner advertising
• Direct mail, but traditional and email
• Social media marketing (Blogs, Twitter, Linkedin, Facebook, etc.)
• Trade shows

VAR recruitment

In addition to creating end user demand, you’ll also want to market directly to VARs, to get them interested in actively working with you and your products. An important point to remember is that the VAR channel is very large, and generally segmented into many vertical categories. So however you approach them, don’t waste time (yours or theirs!) by contacting VARs who aren’t doing business in your target end user segments. Here’s some common recruitment approaches:

• Direct email through available VAR lists
• Phone campaign using available lists
• Internet research with direct email or phone approach
• Trade Shows (VARs frequent them, and it’s a great opportunity for personal contact)
• Have a highly successful product with strong end user pull (VARs will find you!)

Cooperative marketing with the channel

Lastly, once you’ve created end user demand and recruited enough VARs to have a “program”, you need to establish standard methods of working with your new partners to create and fulfill demand. VAR programs come in all shapes and sizes depending upon the market, and I’ve seen a wide variety of promotional opportunities included in these programs. One of my personal favorite “getting started” methods is to offer to pay for and execute a direct mail campaign (blind to the vendor, if necessary) introducing you and your product family as a new partner of the VAR. Below are some promotional activities that are very commonly included in VAR programs:

• Co-op advertising/promotion with the vendor provides funding for approved VAR-executed promotional programs up to a set percentage (3-6%) of sales of your products
• Free or discounted demo units
• Special pricing for large opportunities
• Co-selling with your in-house sales force
• Deal registration
• Additional discounts for completing product training, certifications or maintaining premium support levels
• Co-branded product literature and other use of the vendor’s logo
• Website and catalog listings of authorized or “preferred” VARs
• Rebates for volume sales (not recommended; fraught with danger)
• Vendor-funded introductory direct mail campaign

That’s my quick primer on successfully promoting your products for sale through the VAR channel. Many of you have your own experience in this area; post a comment or a question to activate our discussion.

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

4 Comments by admin on March 26, 2010
filed in Promotion, VARs
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Compensating the High Tech Sales Force

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

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

It all depends on your particular situation.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

2 Comments by admin on August 17, 2009
filed in Distribution Channels, Startup/Early Stage, sales
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Inside TeleSales versus Outside Sales in Software and High Tech Companies

There are many ways to deliver your software and technology products to the market. For example, one and two step distribution through third party channels, direct marketing/sales over the Internet, OEM relationships and many variations of these, as well as other methods.

One classic method of delivering products to the marketplace is by using a direct sales force. Within the direct sales methodology, two of the most popular variations are an outside sales force and an inside telesales group.

Inside sales forces utilizing telesales are cheaper per rep, so your cost of sales is reduced, and you can potentially afford more reps. Outside sales forces can provide additional credibility and stronger relationship with the account. How do you choose between the two methods? Does it sometimes make sense to use both? Let’s take a look at some of the key aspects to consider when making this decision:

PRODUCT COMPLEXITY AND LENGTH OF SALES CYCLE
Probably the most important consideration in this discussion is the complexity of your product offerings, and the corresponding typical length of your sales cycle. Simple products with shorter sales cycles obviously lend themselves to the less expensive telesales approach. If you have a complex product that requires more in the way of hands-on demos, application engineering and other high-touch sales support, an outside sales force may be warranted.

BRAND STRENGTH AND STAGE OF COMPANY LIFECYCLE
Another important factor is the position of your company in the marketplace. Take an example of two companies selling the same product, to the same market. The newer company with less market presence and a weaker brand may require an outside sales force to maximize its market penetration. The more established brand and company might be able to get by with a lower cost inside telesales approach in similar circumstances.

PRODUCT PRICING
Product price is another important element in this discussion. All things being equal, higher priced products are more likely to require outside sales, while more modestly priced ones may be able to be sold effectively with only an inside sales force. Low price products, unless sold in high volumes, may just not profitably support the use of an outside sales organization.

TARGET CUSTOMER PROFILE
Is the target company large or small, is the prospect themselves young or old, progressive or traditional? It’s important to understand your customer profile and buying style in deciding how best it will be to sell to them. This is of course often decided on a case-by-case basis for individual customers. But in making this decision on how to structure your direct sales force, it’s important to characterize your target market in aggregate. For example, if the bulk of your target market is older, traditional companies and you are trying to sell to their IT departments, you’d better strongly consider building an outside sales force. Many of these customers come from the old “Glass House” era that was dominated by IBM, and are used to having sales people physically call on them. On the other hand, your prime prospects may be in a newer, SMB market segment that has prospects who are more comfortable with remote communications methods. These folks also have less staff, and less corresponding time to meet with outside reps. These targets may be well-served by a competent inside sales force.

HYBRID SALES STRUCTURE
In some cases a mix of inside telesales and outside reps works best. Here are two examples of when this might be optimal: 1) Outside reps for Major Accounts, Inside reps for the rest of the territory and 2) a product with a low sales price that lends itself to an inside sales force, but the product is something that major accounts can use in great quantities, justifying an outside sales force to call specifically on these accounts.

COMPANY CAPITALIZATION
How much money does the company have? Sometimes, there just isn’t enough capital to initially invest in an outside sales force, even if the situation ideally calls for it. In these cases, it makes sense to start with an inside sales force, and do the best you can. There are many ways to compensate in this situation, even if it’s not ideal. We’ll cover the details of this scenario in another article. Suffice it to say that it’s preferable to get by with a sales structure that may not be optimal, rather than bankrupt the company with an outside sales force that it can’t yet afford. I’ve seen this occur more than once in my practice at PJM Consulting.

SUMMARY
Like any other key structural decision that senior management faces in developing a software or technology company, it’s important to carefully consider the details of your particular circumstances. Many times managers will quickly settle on replicating what they know, and are comfortable with from their past experience, or simply attempt to copy what the market leader does. Both of these approaches leave you vulnerable to a potential critical strategic mistake. Be thoughtful upfront in your approach to how to structure your direct sales force, and you are likely to be rewarded with optimal push in your chosen market segment.

Phil Morettini
PJM Consulting
www.pjmconsult.com

No Comments by admin on February 5, 2009
filed in Corporate Strategy, Startup/Early Stage, sales
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Structuring a High Tech Sales Force

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

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

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

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

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

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

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

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

SALES REP TYPES

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

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

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

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

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

SALE ORGANIZATION TYPES

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

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

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

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

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

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

1 Comment by admin on November 5, 2008
filed in Corporate Strategy, Distribution Channels, General Management, Operations, Pricing, Retail, Startup/Early Stage, enterprise software, sales
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