Morettini on Management

General Management and Marketing Advice for Software and Tech Companies

Tag: Retail

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

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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

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VAR vs. Retail Distribution in Software and Technology Markets

There is much talk in the software and technology industry about distribution through the “Channel”. Generically that means selling through some type of a third party company, rather than selling directly to the end customer. But in reality the “Channel” includes a wide variety of disparate types of third party resellers. Today we’ll take a look at when to consider partnering with two of the main channel reseller types, VARs and Retailer–which also happen to be two of the most different.

What’s the difference between a VAR and a Retailer?

Let’s start with the retailer, as that’s a bit more obvious. With respect to software and hardware products, we’re talking about computer, specialty electronics and mass market stores, independents as well as regional and national chains. Retail is both a B2C channel and a B2B channel, especially when talking about serving the small and medium size business (SBM) market. While retailers may offer some “value-added” services such as extended warranties, delivery, installation, etc., the main purpose of a retail store is quite simple. The retailer serves primarily as a point-of-sale location, holding inventory and enabling end customers to have immediate access to products at favorable prices.

VARs (Value-Added-Resellers) are in many respects the polar opposite to retailers. The VAR channel is strictly B2B, and sells to both large enterprises and the SMB market. Usually there isn’t a retail storefront–if there is, it’s not a big part of the business. Expensive retail space is avoided to minimize their real estate costs, because walk-in traffic isn’t part of the business model. Unlike retailers, VARs are focused on selling their services, such as installation, configuration, integration, customization, etc, rather than turning over large quantities of products. VARs aren’t interested in having a large “assortment” of products like retailers. This is a key point that channel newbie are prone to miss–at great cost to their company. While VARs do sell products, they are motivated to do so in only two instances:

1) Core products which are strategic because the VAR’s services are built around them
2) Easy to sell, demand-driven commodity products requested by their customer base

If you take just one thing away from this article, let it be this: VARs aren’t dying to sell most products. If your product doesn’t fit into one of the two categories above, you will be pushing on a rope trying to make progress in the VAR channel.

Is one of these channel types “better” than another?

One is not superior to the other. Each reseller type is better for different product types and circumstances. They both can be used quite profitably, but they serve different purposes. It’s important when designing a channel strategy to start with the end customer and work backwards. Where would the end customer like to buy? How important is price vs. services and support? What reseller type best meets the desires and needs of your target customer type(s)?

When you should use the VAR channel

While VARs aren’t product-oriented businesses, in aggregate they are still a very important channel for many product types. If you have a product which requires a high level of support, or “value-added” services such as expert installation, integration with other products, customization or 24/7 support, VARs can play a key role in your distribution strategy. If you have a popular commodity product, they can be useful (in aggregate) to greatly expand your distribution points. The VAR channel is highly segmented by vertical market, so if your product has a vertical orientation (networking, medical, insurance, etc.) this often creates an opportunity for VARs to be an important channel partner.

When you should use the Retail channel

Retailers are usually best for horizontal, commodity or mature products. They are effective at providing broad, immediate access to your products across a wide geographic area. Retailers typically are “inventory turn” oriented in their business models, and tend to work on thin margins. So if keeping your price point low is important while still using a third party channel, they are an excellent choice. Of course the fact that they provide instant access to your products during business hours can be a very important asset.

Can you use both VARs and Retailers for the same product?

Yes, but you must know what you are doing, or you may end up very sorry that you did. Since VARs and retailers bring very different things to your distribution, there is a strong chance of serious channel conflict if you use both reseller types for the same product. The biggest potential issue is degradation of your product street price, because while VARs typically work off high product margins and low turnover, retailers are the opposite. Retailers optimize their businesses for high inventory turnover, while accepting low product margins. The low margin strategy causes the street price of your product to fall for all channels distributing your product. If the street prices drop too low, the margins may drop too far to be interesting to VARs (even though they are focused primarily on their service offerings). Companies new to multi-channel distribution sometime make this problem even more acute by offering price discounts based on volume, which makes the situation even worse. A volume-based pricing strategy favors the higher volume retail channel, and also incentivizes even deeper street price drops, to create higher volumes and resulting better wholesale prices. Multi-channel pricing is a complex area fraught with danger for the uninitiated–new players should solicit outside advice, and tread carefully.

VARs and retailers can be important, high volume distribution channels for many software and tech companies. They can each be primary distribution channels, or combined with direct a sales approach and other channels to form highly efficient multi-channel distribution networks. More distribution is not always better, however. Companies need to know what they are doing when proceeding with a multi-channel strategy, or risk doing great damage to their sales and marketing efforts.

That’s how I view using VARs and retail in your distribution strategy. How do you see it? Post a comment to get a discussion going. Follow Phil Morettini and Morettini on Management via Twitter, Facebook, RSS, or the PJM Consulting Quarterly Newsletter.

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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 hardware 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 being sold 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 will want to find out what your direct competitors are offering in terms of a channel program. This may seem obvious. But I see often in my consulting practice at PJM Consulting many companies using their own theories or experience from their past to ascertain what the right discount structure SHOULD be, instead of using objective data gleaned from the current situation.  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, pricing 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 any product planning phase as part of your overall product marketing strategy.

Type of Channel
There are many different types of partners for software and hardware companies that fall into the category of “channel resellers”. Computer/electronics 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.

Multichannel 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 use a “value-based” approach. A simple way of doing 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 value-added 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
As mentioned above, 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 which channel value-adds are 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.

As an example, to keep your street price up but incentivize a high level of activity 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 multichannel sales. This will also limit discount-driven reductions in street price, which ultimately can severely reduce profit levels and incentives to sell, affecting 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.

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

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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

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Channel Pricing Strategy for Software and Hardware Products

Pricing software products is always a difficult exercise. With high product development costs, but near zero costs of goods sold, there are many different strategies that people have followed successfully (and not so successfully!) over time. Pricing hardware products is a bit simpler because there is generally a significant cost of goods sold that acts as a governor on pricing behavior. But even with hardware, technology markets are dynamic and fast moving. And it’s a complex enough topic when all sales are going direct–once you bring channels into the picture, it only gets worse.

CHANNEL CONFLICT
The biggest concern most companies have when pricing for multiple channels is channel conflict. I have seen many companies who actually AVOID selling through channels for fear of the pricing implications it brings. They are afraid of a channel undercutting their direct sales force in price, and channel conflict in general, which arises as a result of different prices being presented to customers from representatives of different channels. But this doesn’t have to be so with a savvy understanding of the implications of pricing actions. This comes from both experience, and “paying attention to what actually HAPPENS in the marketplace. If you price properly and run your channel programs well, you can sell successfully via multiple channels–with these channels living in relative harmony.

VALUE-BASE CHANNEL PRICING
I’ve written about value-based pricing before in the context of the perceived value of a product, as seen by the end-user, being the guidepost for pricing actions. A similar concept exists for channel discounts. Rather than taking a simplistic approach and give the greatest discount to the channel players that move the most product ( a destructive strategy–more on that later), it’s important to measure how much “value” a particular channel provides both you and your end-user customers. Look at things like 24/7 support, inventory & product availability, technical/customization expertise, credit services, and the like. In this case it is helpful to let the cost of delivery of each of these attributes be your guide to the value they provide.

VALUE-BASED CHANNEL DISCOUNT STRUCTURE
For example, you may figure that the cost of a VAR providing 24/7 support to end users (meaning YOUR company doesn’t have to) is equal to 5% of the list price of the product. And the inventory held by a retailer (again, meaning YOUR company doesn’t have to hold it, at a cost) is equal to 2% of the list price. And so on and so forth. Using this value-based method, you can calculate the actual costs borne by your partners in delivering marketplace value, and use this as a guide in building your channel discount schedules for various types of channel partners. This value-based channel pricing approach is not well-known, and seldom considered; most people seem to figure the only value-add worth extra discount is sales volume. If you use a value pricing approach, you actually have a chance to build a multi-channel strategy that “clicks on all cylinders” by providing discount structures that are equitable based upon cost and value associated with each channel.

LIMIT VOLUME DISCOUNTS
If you choose the “more volume=greater discount approach, your multi-channel strategy is a house of cards which will soon collapse around you. One channel will quickly grow to dominate, and the other channel types will soon quit selling on your behalf and wither away. Unfortunately, this is the most common scenario seen in the marketplace for first-time vendors using the channel (and remarkably a lot of experienced practitioners as well).

THE GOAL IS TO MAXIMIZE SALES AND PROFITS THROUGH ALL CHANNELS
Again, the key is to not let one channel dominate. Ideally, you would like all channels to be presenting prices to the end customer that are equal. In reality, that pretty much can’t happen without price fixing (which some folks may be able to get away with, but that’s another story….). But you should strive as much as possible to have end user pricing equity for all channels. But this is where the counter-intuitive part of this discussion comes in to play. As discussed above, most people pricing high tech products have a tendency to price based upon the volume of product a particular channel player can move. It seems logical–why wouldn’t you want to incent and reward a partner with better margins if they are selling more products?

While this appears logical, it is actually penny-wise and pound-foolish. In fact, it is usually catastrophic to your plans to maximize sales through multiple channels. Let’s look at a simple case of how this often “breaks” a multi-channel strategy for a common case: a vendor selling through both retailers and VARs.

A SIMPLE EXAMPLE
Retailers provide a vendor with a point of purchase holding inventory, where their customers can go to immediately purchase a product. VARs often don’t hold inventory, but provide other services important to the vendor and many customers, such as tech support, training, customization and integration with other software and hardware products. Each of these channels may have an important role to play in the overall strategy to maximize vendor sales.

But the retailer will usually be a high volume partner, with the VAR less likely to be a volume outlet (although the VAR CHANNEL, in total, may hold great promise to move volume). If you structure your pricing by volume, the retailer will get better discounts. Because individual VARs generally have higher costs spread over lower product volumes, they actually need HIGHER discounts to stay even or close in pricing potential vs. the Retailer. This situation is exacerbated by the fact that retailers tend to be volume-oriented, usually accepting a relatively small, fixed margin on everything they sell. If you provide discounts based upon the volume that a partner moves, what will happen is inevitable: The retailer will take over your channel business, because the VARs will be “squeezed out” by the relatively low prices charged by the retailer. They won’t be able to make a profit on your products, so they will ignore the business, and you will lose the opportunity to realize significant sales through the large (in aggregate) VAR channel, especially those customers that desire the service and support they supply. I am oversimplifying this situation, of course, because VARs are more interested in the service revenue that a product can pull than they are in product margins. But I have seen this scenario play out many times and kill product sales through VARs channel that might otherwise generate healthy sales. This can be a heavy penalty for naïve technology product managers and other executives who are charged with pricing their products and moving them through multiple channels, but who don’t fully realize the consequences of their actions.

SUMMARY
Pricing seems pretty simple on the surface–it really isn’t and when channels are involved, it’s anything but. It’s important to fully think through the downstream effects of your pricing policies when multiple distribution channel are involved. Let me know if you have questions or post a comment with your own channel pricing stories that you’d like to share.

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

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No Comments by admin on November 23, 2007
filed in B2C, Business Models, Corporate Strategy, Distribution Channels, Pricing, Product Marketing/Management, enterprise software, hardware
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Channel Conflict

In my consulting practice I do 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.

Just as 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 become unwilling 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 particular 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 in how you structure your channel business.

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 should also 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 partner 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. Strive as much as possible for equity in street pricing between partner types. Sounds pretty easy to me–of course it isn’t! Add your own thoughts on selling through multiple channels and managing potential conflict-post a comment below to add to 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

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