Morettini on Management

General Management and Marketing Advice for Software and Tech Companies

Tag: distributor

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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Structuring Channel Discounts for Software and Technology Companies

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

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

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

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

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

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

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

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

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

Phil Morettini
PJM Consulting
www.pjmconsult.com

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

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

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

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

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

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

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

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

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

4 GOALS TO ENSURE A HIGH RETURN FROM A TRADE SHOW

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

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

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

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

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

Phil Morettini
PJM Consulting
www.pjmconsult.com

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

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

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

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

IS RETAIL SOFTWARE DISTRIBUTION DEAD?

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

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

WHY PEOPLE STILL BUY SOFTWARE AT RETAIL

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

WHEN SHOULD A SOFTWARE VENDOR CONSIDER RETAIL DISTRIBUTION?

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

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

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

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

SUMMARY

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

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

Phil Morettini
PJM Consulting
www.pjmconsult.com

No Comments by admin on April 11, 2008
filed in B2C, Corporate Strategy, Distribution Channels, Pricing, Promotion, Retail
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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
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