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Morettini on Management
General Management and Marketing Advice for Software and Tech Companies
Tag: sales
Selling and Marketing Software Through the VAR Channel: Morettini on Management Video Series
Is HP acquiring Palm a good idea?
To answer the question posed in the title, it definitely is if you’re Palm!
A long time player and sometime innovator in the mobile device marketplace, Palm was rapidly losing steam, market share and relevancy in the hyper-competitive Smartphone market. The company had staked its future on its new WebOS software platform and the recently release Pre SmartPhone.
After a long period of decline due to an aging product line built on an obsolete software platform, the Palm Pre and its WebOS software was introduced to critical acclaim by industry reviewers and pundits. Had these introductions come a few years ago, they might have indeed turned around Palm’s fortunes.
But competition in the SmartPhone marketplace has heated up to a white-hot level. After a promising early start, sales momentum of the new Pre products stalled, and this “last-stand” product introduction proved to be too little, too late. At nearly the first sign of Pre sales weakness top Palm executives began bailing out, while Telco partners quit promoting the product heavily, and it was also being dropped from the assortment of major retailers such as Radio Shack. The end was clearing in sight for this handheld industry pioneer.
In swoops HP to save what little shareholder equity was left. HP is on a roll, and in conjunction with their upward momentum they seem to be intent on acquiring everything available for sale, as well as competing in nearly every category of the technology business. This particular acquisition appears to me to be particularly high risk/high reward. It raises several key questions:
Did HP pay too much?
Probably. The price HP is paying for Palm is about $1.2M, while most knowledgeable industry observers had placed the value below $500M. This is hard to understand for the casual observer, but you must remember that a company is worth what the highest bidder is willing to pay. Except for those on the inside of the deal-making, no one knows what the sizes of the competitive bids were. So it’s a bit pointless to speculate whether they paid more than they needed to. The better question is what is the intrinsic VALUE of Palm to a company like HP?
A case can be made in this situation for bidding at a price that will prevent the transaction from dragging out. Software loses value quickly–especially in a fast-moving market like SmartPhones, and this is largely a software acquisition. Another big key to the valuation question is whether or not HP is able to hold together and retain the Palm team, especially the key developers. In most cases, buying a software business (which is the key asset of Palm) without the team is nearly worthless.
Can HP compete in the SmartPhone business, and should they?
This is a huge question in my mind. Hewlett Packard is definitely becoming the 10,000 lb gorilla in the tech business. But even the biggest giants reach a limitation on resources, most importantly senior management bandwidth and market segment knowledge. IBM at one time looked much like HP today, competing actively in nearly every important technology market. Eventually IBM lost traction and did a painful restructuring focusing on services. Microsoft is huge and still dominant in software, but they’ve been far from successful everywhere they’ve invested. There are many examples in the tech business of competing in too many competitive markets at once. The often-used analogy (which still rings true) is to Hitler opening up a two front war by invading Russia. The old joke goes that had he been more focused, we might all be speaking German today. I am very skeptical of Hewlett Packard being able to win in all of the major markets they appear to be serious about at the moment.
Can putting two losers together ever create a winner?
Not usually. I can’t think of a single high profile successful instance of this, although I’m sure it’s happened before. It usually doesn’t work in such a highly competitive market as SmartPhones, however. Palm was around 5% market share and fading fast. HP is very successful overall, but its iPaq SmartPhone has less than .1% market share–I’ll bet most of you are shocked to hear that HP was even in the SmartPhone market prior to this deal! When there is a reason that both companies are unsuccessful, it’s very difficult to change the equation simply by combining. Mergers often create more problems then they solve, regardless of how good they look on paper.
Having said all this, there is some synergy here. There is a belief is that one reason the Pre wasn’t gaining much traction was Palm’s precarious financial position. No one wants to carry around a phone that could soon become an orphan. The HP acquisition should help immensely on that front. Hewlett Packard certainly has the financial might, industry muscle and influence to improve the position of a well regarded platform like the Palm Pre and WebOS platform.
Will HP be patient and persistent enough to win in SmartPhones?
To me this is the biggest question. If you asked me 10 years ago I would have said no. As a former HP employee, at one time this wouldn’t have been the type of market that I would expect Hewlett Packard to have success. But since them I’ve seen the company persevere for decades as an also ran in the low margin, down and dirty PC business, and finally push Dell out of the top spot. There was a time when Dell (and a few others) used to laugh at HP in the PC market–but that ended a while ago.
I’m convinced that this ever more powerful version of HP can succeed in SmartPhones if they so choose. But as discussed above, even in a giant company like this, can they win so many tough fights across so many difficult market segments? That is a different question entirely–and something may have to give. They might not be able to win on all fronts.
Bottom line
The bottom line for me is that HP can probably muscle their way into the SmartPhone market if they want to bad enough. But can they do it while they also compete with Cisco in networking, IBM in services, and Dell in PCs–just to name a few? Even for a successful industry giant like Hewlett Packard is today, I believe in the concept of “biting off more than you can chew”. That is the real risk. One thing I think for sure is that this won’t play out quickly. Only time will tell whether HP ultimately has the market knowledge, patience, tenacity and will to win in this hit-driven and brutally competitive market. What’s your take on this high profile acquisition? Post a comment to rev up a 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
Integrating Sales and Marketing at Software and Technology Companies
In some but not all tech companies the Sales and Marketing functions are managed separately. They are separate but closely related functions that some people without a strong background in either function have a tendency to confuse. Normally, there is a VP or Director heading up the Marketing department, and another VP or Director leading the Sales staff. But it is also not unusual to see a VP or Director of Sales & Marketing who leads both functions.
This all seems benign enough, so what’s the issue? The issue comes when actual revenue fails to meet the forecast–that’s when the finger-pointing usually begins. Unfortunately not meeting forecasts is a common event in technology businesses, where forecasting of new software and tech products can be particularly challenging. When that finger-pointing starts, it often breaks out first between the Marketing and Sales departments–here’s how the ensuing “discussion” might go:
SALES: “You haven’t planned products that our customers want to by. You’ve priced them too high. And those leads that you’ve spent SO MUCH money on that you are giving us aren’t qualified and are essentially worthless to us.”
MARKETING: “You’re not selling the right products as we directed, or presenting the positioning of our product line properly. All you do is try to sell on price, constantly discounting and hurting our margins. If you’d follow up on all the leads we gave you, get off of the golf course and work more than 4 hours a day, you’d be well over quota and the company would be doing fine.”
Sales folks and Marketers are different types of people, and tend to view the world differently and from their own selfish perspectives. This often nasty “discussion” as simulated above is far from uncommon, and can get pretty ugly–which can really hurt a company in trying to reach its goals. So what’s the right way to get the Sales and Marketing departments to work together as a team, avoiding all of this counter-productive ugliness?
SOLUTIONS TO REDUCE POTENTIAL CONFLICT
The VP of Sales & Marketing
One way to greatly reduce this conflict is to have a common leadership for the Sales and Marketing functions. This usually means having a VP-Sales & Marketing in your organization. If you can find the right person to fill this role, this can actually be an excellent solution. Having a single leader can go a long way toward eliminating or at least greatly reducing this conflict, assuming he has a balanced background and perspective and is fair, not favoring one department over the other.
Good people to fill this role are out there–but are very rare in my opinion. There are far more managers who have been put in the position of VP-Sales & Marketing than there are those who are well suited for the role. Most of the time you end up with a manager that understands one function well and gives short shrift to or completely screws up the other function. You will often find this combined VP position in companies that are not “marketing-intensive”, where the sales function is the dominant aspect of the job. If the Marketing function is truly less important, a company can get by with this structure, although it usually isn’t ideal. You can read more about the issues with a VP-Sales & Marketing role in a previous article that I’ve written entitled “Big S, little m“.
CEO Demands Communication and Cooperation
If care isn’t taken, the very different personality types in sales and marketing can lead to some pretty intense conflicts. I’ve been a soldier, captain and general on both sides in this war–and let me tell you, it isn’t pretty. I’ve also (effectively) filled the role of VP-Sales & Marketing, which is a story for another day. Much like the battles between Marketing and Engineering that I’ve previously written about, I have seen this battle play out regularly in the companies that I have worked for as an employee as well as at many of my clients in eight years as a consultant at PJM Consulting. Things can get out of hand very quickly, and paralyze a company.
In many cases, the key is how the CEO handles the situation. He must go well out of his way to be a fair arbitrator in these discussions. Even the most benign comment can appear to show favor to one side in the eyes of the other. A CEO can’t ignore or deny the problem or assume it will be handled at the VP level. It is the CEO’s responsibility to prevent, recognize and fix this problem. As a CEO you must also be careful to avoid inadvertently making decisions or setting up policies that reward or tolerate company politics.
Departmental Social Integration
Not everything can be avoided or corrected through traditional management techniques. In this situation relationships are really the key. I recommend planning social activities which allow sales and marketing department counterparts to get to know each other as “people” outside of their project activities. Since a successful sales/marketing interface relies heavily on relationships, it’s very important to closely monitor the personal relationship between VP-Marketing and VP-Sales. Also, make sure that the VPs are monitoring the counterpart relationships below them. Ensure both VPs are open and honest with about the relationship between departments. Also watch for arrogance (especially from “experienced veterans”) when screening potential new hires for either department that will interface with the other –arrogance often is the trigger which starts the battle between departments.
Integration of Departmental Functions
Encourage the sales department to get marketers in front of their customers. Hire marketing people that have had some sales or business development experience, who understand dealing directly with customers–and know what’s it like when your living depends upon making your quota. Insist that the marketing department include the sales folks in determining what a “qualified lead” looks like. If you can get agreement on this up front on this important issue, much of the finger pointing goes away when things don’t go as planned.
Joint Goals and Compensation Structure
It currently isn’t common to design department or individual goals which cross marketing and sales functions, but if you can find a way to do this you are structurally setting up the desire and need for close cooperation. Design goals or MBOs to reward the two departments for working together. It’s crucial that you don’t ever allow one department to “get ahead” by blaming the other–tie them together as much as possible in your goal setting.
SUMMARY
To limit issues between sales and marketing functions and ensure that they “sing from the same sheet’, pay close attention to the specific individual departmental activities which can greatly effect the perceived performance of the other department. Optimizing the cooperation between sales and marketing demands an upfront look at things such as the corporate structure at the highest levels, the social fabric of the company, compensation structure and use of targets/goals, as well as formal cross-departmental reviews so each department can influence the other department’s approaches. All too often I see these things aren’t taken into consideration until after the fact–when things have already blown up and there is a mess to clean up.
That’s my view on this all too common–but not often discussed–conflict. What has been your experience in this area? Post a comment and begin a 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
Forecasting New Technology Products
Forecasting is a thankless job. It’s a lot like being a referee or umpire in your favorite sport; the only time a game official is noticed is when they do something wrong! Similarly, a forecaster’s primary aim is too stay out of the “news”.
Make no mistake, forecasting is a very important function in any business. In the software business, your whole business plan could be riding on meeting the forecast to fund growth and product development. In a hardware business, it’s even worse–you have to worry about creating too much or too little inventory–either of which can be a huge problem for your business.
HARD IN THE BEST OF CIRCUMSTANCES
It’s bad enough when you are trying to forecast an existing mature product in a mature industry. This is a difficult and complex task, using well known techniques such as smoothing, trending and seasonality to fine tune the next monthly or annual forecast.
Early in my career at Hewlett Packard I spend 4 months in a special assignment dedicated solely to improving forecast accuracy. The marketing department was engaged in an ongoing argument with manufacturing over inventory levels. Not surprisingly, manufacturing wanted the inventory levels to be lean, while marketing favored a more robust number. This was because manufacturing was being graded on their costs and at that time “owned” the inventory; while Marketing was graded on revenue–and low inventory levels usually lead to missed sales opportunities.
I became a Lotus spreadsheet guru and we used everything we could find to try to improve our forecast accuracy. Keep in mind that these were high tech products (computer printers), but successful product lines with significant historical data available. Try as we might, the best we could ever do was to get within +/-25% of the eventual unit sales number.
NEW TECHNOLOGY PRODUCT ARE THE WORST POSSIBLE SCENARIO FOR FORECASTERS
The main message here is that forecasting any product in high tech industries is very difficult, from an accuracy perspective. Forecasting accurately the performance of NEW PRODUCTS in technology markets is nearly impossible to do accurately. When you add in brutal competition, a tight market research budget, vague notions of market size, an early stage on the user acceptance curve and often the reality of an unknown brand — forecasters of new technology products needs to make sure they don’t end up in substance abuse clinics. But of course, even though it’s hard– it’s still VERY important. So what’s a forecaster to do?
There are two basic methodologies that I typically utilize when attempting to forecast sales for a brand new technology product:
TOP DOWN FORECASTING METHOD
The first approach that I usually engage is the “top down” method. You might also call this the “Macro” approach. This is an exercise of defining the size of your total addressable market using market research or number of potential users, and also estimating what a reasonable share will be for your product — given the various attributes of your market position. To establish your share consider everything you can in your analysis: your marketing budget, brand strength, an unbiased view of how your product stacks up vs. the competition, etc. It may be helpful to put it all in a spreadsheet, and quantify the various important attributes of your company/product vs. your competition. Be careful about assigning too much precision to these numbers; remember that garbage in equals’ garbage out. But if you go through this exercise thoughtfully it can be very helpful in analyzing your relative market position. In this case, obtaining your top down forecast is then as easy as multiplying the share you think you can obtain times the market size that you came up via research.
BOTTOM UP FORECASTING METHOD
After I’ve done the top down or Macro forecast, I like to use a “bottoms up” or “Micro” approach as a sanity check. To do this, you want to gather information on what you think you can sell by canvassing individual stakeholders in the sales area: direct field sales reps, Online/Web store, dealers, international distributors, etc. It’s helpful to gather info from any channel that will be a significant contributor to sales for this new product. Usually it’s impractical to do a complete survey of everyone that may be involved in the sales effort. What’s important is to obtain a representative sample that is both broad enough and deep enough that the data you gather has some significance. At that point, you can “normalize” the data. For example, say you were able to gather data from a broad cross-section of sales points, totaling approximately 10% of the total sales infrastructure. You would then multiply the total number of units/dollars you obtained from your sales entities times 10, to reach a bottoms up forecast totaling 100%.
DO YOU HAVE CONVERGENCE?
The key to this exercise is to discover whether your two views of the market are close enough that they appear to be focusing on the same topic! If they do, you may be in pretty good shape with your forecast. If they are off by an order of magnitude, it’s probably time to reconsider some of your assumptions.
So there’s my advice on how to approach the unenviable task of forecasting a brand new technology product. It’s a high risk, high return activity under the best of circumstances–and ideal conditions are seldom found in this activity in the technology space. But if you are able to construct both a top down and a bottoms up forecast and the two numbers at least fall in the same ballpark, you’re probably on the right track.
Give it a shot yourself next time you’re faced with a daunting new product forecast. Feel free to shoot me an email with your questions, or leave a comment to extend this 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
Business Models in the SMB Market
The SMB market is typically a very popular topic for hardware and software companies. Of course, everyone wants to sell to the Enterprise market. But as a result, competition is fierce and standards are very high for these select large companies. If you get to the Enterprise market early, with an innovation that creates a new category, you can find success if you are TRULY making a contribution to the market. But late entries into a vertical market segment, as well as early stage companies competing with larger established companies often have a very tough go of it. In these situations, attention often turns to the Small and Medium-Size Business (SMB) portion of the market.
And why not? At first blush, the SMB market appears to be huge, as well as generally underserved. It looks like a perfect haven for an early stage or turnaround company with a solid product, but not quite enough differentiation, brand name, or marketing muscle to push out the big boys in the Enterprise space. So the decision is made to focus on SMBs.
What’s Wrong With This Decision?
There is nothing wrong with this decision, per se–if it’s done with eyes wide open and for the right reasons. But too often, it is done to run away from a problem (the inability to penetrate enterprises), rather than run to a great opportunity. A lot of times, companies see the SMB market as easier turf; simply a less competitive market with more targets than the Enterprise market. Major problems can result from this type of mentality, and I see it quite often in my consulting practice. Companies that enter the SMB market from this perspective usually aren’t fully prepared to do what it takes to be successful, in what is a very different type of market than what they may be familiar with. So where are the land mines in the SMB marketplace?
What’s Not Obvious in Marketing to SMBs
The first thing to consider is that customer needs are often quite different. A lot of this depends upon what technology and market segment you are in, and whether your product is aimed more at the “S” (small) segment, or the “M” (medium) segment of the SMB space. For example, if you are selling a single user productivity tool which is useful to staff accountants, you may not see much difference. If on the other hand you are marketing a company wide, networked application of some complexity, the differences may be huge. Like everything in technology marketing–the devil’s in the details. Every situation needs to be evaluated closely, and treated differently on its individual merits. The most important thing is TO NOT ASSUME THAT THINGS ARE THE SAME BETWEEN SMBs AND ENTERPRISES IN YOUR PARTICULAR CATEGORY. Do the work, evaluate the situation–don’t assume. Assumptions, without verification, are what get you burned in this transition. Below is a list of some of the major differences in the SMB market:
IT Departments are small and less of a factor–if they exist at all.–In Enterprises you may be dealing with persnickety CIOs that want things just so. In SMBs, if there is a CIO at all, he will be looking for an off the shelf SOLUTION that will “just get the job done”. Or you may end up struggling to figure out how you can sell your complex solution, to a company that has NO IT DEPARTMENT AT ALL.
There is less money to spend–It’s harder to make money with big ticket hardware and software, let alone customization and expensive services. Your products better have value – and margin – right out of the box.
Ease-of-use is even more critical–There probably is no training department or other corporate staff, and people are busier overall. If they can’t figure out how to use it quickly, you’re going to have a hard time selling it.
There is much less time available to purchase products–Even the sales process may be compressed, in terms of how much time the prospect spends reviewing your marketing literature, or talking to your sales people. The actual TIME ELAPSED during the sales cycle could be EVEN LONGER due to lack of time available for the prospect to consider your product, but the INTENSITY of the purchasing engagement is often much less.
How Do You Need To Structure Your Business Model Differently?
Lower prices– SMB’s just won’t pay the same prices that you can get in the Enterprise space in most cases. So you’d better come into this segment with a price and value proposition that makes sense to these price-sensitive customers.
Marketing vs. sales–The SMB market is more marketing intensive, with respect to marketing/sales ratios, than the Enterprise market. There are many more customers; the average sale amount is much lower, and much less face time available for direct sales. While in many respects Enterprises are the most demanding customers in the world, you’ve got to be a better marketer to succeed in the SMB space than you need to be in the Enterprise world.
Low cost sales force– With much lower average sales amounts, and much less time available on the customer side, it is usually impractical to have a large, high-cost field sales force. Inside sales forces are the general rule in this market. If you have a product that demands customization and hands-on support, VARs are a good adjunct to a sales operation to consider. The more your sales force is taking orders generated from marketing, and the less they are cold calling prospects, the better.
Better usability and reliability– You’ll need many more units being sold to get to the same level of revenue as in the Enterprise space. This will be across a much larger customer base with much less (if any) maintenance revenue to fund a large support staff. Your product better work when it’s installed and better be very easy to use over time. Unless you have a highly customizable solution and are using VARs as a channel, SaaS is a great platform for delivering software to this market.
Little or No IT support–The good news is that there is no often no prickly IT committee or staff that you have to “go through” to sell to the real users. The bad news is that if even the littlest thing goes wrong, there’s no one internally at the customer to pick up the slack–you’re going to hear about it directly from the user–over an over again.
Summary
The SMB market is actually a simplistic catch-all phrase for a large, heterogeneous group of markets. But it is a useful abstraction as a starting point for understanding how to penetrate and thrive in B2B marketing/sales to smaller companies. I hope this short introduction is useful–feel free to pitch in and post a comment adding to this topic.
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
Is It Time to Sell Your Hardware or Software Company?
This is the point that most, if not all, technology entrepreneurs aspire to reach. They dream of selling their company and laying on a beach somewhere, a colorful drink with the requisite tiny umbrella, cooling in their hand.
There are a few of you out there that would never sell your company (it’s your identity, after all), preferring to work forever lest you slow down and quickly deteriorate. But that’s another story; we’ll save your psychoanalysis for another day…
Some of you that want to sell your company have the most grandiose plan of all in mind: An initial public offering (IPO) through a brand name investment banker, bringing not only unimaginable riches, but fame along with that fortune. But that rarely happens–we’ll also table that discussion for another column…
So let’s get back to the great majority out there, who set out to some day cash in all of your hard work by selling your company directly to another company. How do you know when the time is right?
WHAT MAKES PEOPLE WANT TO SELL
There are many triggers that set off serious reflection about whether or not to pursue a sale of a software or hardware company. Let’s examine a few of the more common:
- A potential acquirer approaches the company with an offer
- A current strategic partnership grows closer, and it seems to make sense to grow closer still
- Business is bad, and the principals begin to worry about losing everything
- Negative cash flow is starving the business, forcing a sale to ward off bankruptcy
- The owners need cash for another reason; be it investing in another business, or personal reasons
- The owner/operators are burnt out and no longer enjoy the business
- Business has been robust, and the owners astutely consider whether now is the time to maximize their return and minimize their risk by selling now
- It becomes clear that there is a viable business but is better suited/more valuable within a larger company
- It’s time for the owners to retire (it seems that very few high tech entrepreneurs make it this far!)
These are the most common reasons that come to mind–it is certainly not a complete list. Although we are talking about companies, the decision to sell ultimately comes down to a personal decision by one or a few individuals. So the reasons that these decisions happen are as varied as the population overall.
Given this list of common rationale for considering a sale, what are the RIGHT and WRONG reasons to consider a sale–if you want to maximize your return within your particular circumstances?
WRONG REASONS TO SELL
On an impulse–you’ve been running your business, not even think about selling your company. An offer comes along, and you get caught up in it–without having planned for it. Or things have been going poorly, and you are at an emotional low. Acting in these circumstances is similar to getting married, divorced or starting a new business–don’t do it without thinking it through, or planning it properly.
Fear–don’t sell just because you are scared; that’s probably the best way to leave money on the table. There are ups and downs to every technology business. In my experience, things usually aren’t as bad as they look at a specific “down” point in time–or as good as it looks at an “up” time. It’s important to look at the prospects of a business over a period of time, considering both how things have gone and the forward-looking forecast.
Sales are in decline–this is the worst time to sell. If you do this, all leverage goes to the buyer. Of course, panic sets in, as you see your valuation melting away, and human instinct is to “get what you can” before it degrades further. But first consider the situation coldly, without emotion–is it reasonable that you can turn it around and reignite growth? Is the decline all specific to your business, or is it a cyclical market, or a bad economy overall–which might turn around in some reasonable time period? Sometimes selling under these circumstances is the right thing to do and is unavoidable. But with proper planning, you may be able to sell your company BEFORE this happens, or turn it around first.
RIGHT REASONS TO SELL
You believe you’ve reached the peak of valuation–this seems obvious, but it is difficult to do. Finding the right time to sell is tricky; you don’t want to exit too early and leave money on the table. So the inclination, given that tech businesses are value as a multiple of revenue or EBITDA is to hold on until growth stalls. But if you wait until you built up your sales so much that little “natural” growth” is left in your product/market cycle, the business may not look as attractive going forward for potential buyers. Most strategic buyers would like to see good growth prospects in a potential acquisition. So it might be best to “leave a little growth on the table”; this might lead to a higher multiple from the buyer.
You haven’t been enjoying running the business for a very long time–I believe strongly this is a time to get out. If you have someone else whom you feel comfortable leaving in charge, that’s fine. But otherwise, either you’ll run it in to the ground from burnout, or you’ll walk away and let someone else destroy it because you just don’t care anymore. Passion is important in the tech business; when it’s gone, it’s usually a good time to sell.
A fundamental shift in the market or your business–This could mean many things: you have lost a number of key people, the economics of your market changes, or a major investment will be required to keep the company on a growth path. The specifics here could be quite varied; the common thread is that with the change in fundamentals there are real clouds on the horizon. This leads you to a thoughtful belief that continuing to operate the business as a standalone entity isn’t optimal.
THINK IT THROUGH
An exit or sale of your company, is a very important “life changing event” for the owners, founders and managers of a software or hardware company. I’ve seen sales come together very quickly and completely unplanned. I view unplanned company sales as the business equivalent to a quicky divorce that ends up as an emotional event, without careful consideration or an objective study of the alternatives and consequences. It is a once in a lifetime event for many, and should be given the careful consideration that these types of events deserve. That’s my view–post a comment with your own Exit tales or opinions.
Follow Phil Morettini and Morettini on Management via Twitter, Facebook, LinkedIn, RSS, or the PJM Consulting Quarterly Newsletter. Contact Phil directly at info@pjmconsult.com
Marketing and Selling Technology Products through the Value-Added Reseller (VAR) Channel
Selling through multiple channels is one of my preferred strategies in technology marketing. If done properly, it allows a company to fully exploit its expensive, hard-earned intellectual property to the maximum extent. One of the most popular channels (and one of my favorites) used to sell B2B software and hardware is the Value-added Reseller, or VAR channel.
VARS ARE THE DISTRIBUTION HOLY GRAIL FOR MANY STARTUP COMPANIES
In fact, with a great many startup software and technology companies, building a VAR channel network to sell their companies products is the first thing they want to do, upon releasing their first product. This is especially true when the founding management team primarily comes from a technical background. The thinking goes: “we are technologists who have created a great product. We don’t have a lot of experience selling or marketing–and most of the startup money has gone to and will continue to go to developing products. Why not just recruit a bunch of resellers to market and sell their product for us?” Sounds like a great idea on the surface, doesn’t it?
Unfortunately, there are few strategies that are more flawed, and which have continuously led to failure than this one.
Let’s contrast the realities of the VAR channel, against this simplistic notion that has been tried again and again, without success:
WHAT VARS DON’T DO
1) First of all, VARs DON’T market. At least not YOUR products, anyway (they market their own services). So the very first flaw in this strategy is that it is based on a gross misconception of what a VAR typically does.
2) VARs don’t create new markets. VARs are great at selling into established markets and further expanding already growing ones. Missionary sales: brand new markets, categories and products? Not so much.
3) They don’t sell a wide variety, or a large assortment of products. In fact, VARs are focused on actively selling and supporting VERY FEW products–if they are even focused on selling products at all.
4) VARs aren’t really all that motivated by high product margins.
5) The individual VAR does not exist to help YOUR company make money.
Now if you’re not a sales or marketing professional with experience working with the VAR channel, you’re probably very confused by the list just above. So what is it that VARs actually do? And why is it worth dealing with them at all?!!!
What happens time and time again is that a technologist startup CEO will pursue the VAR channel as their exclusive distribution channel, without understanding any of the points in the list above. Their effort will fail miserably, and they will then scramble to begin selling their product directly, or through some other means. They will swear off the VAR channel forever, and I do mean swear:
“Those !!@#$%^^* resellers are good for nothing. They take a big cut of your margins, while adding no value in return. I’ll never deal with them again.”
I can’t tell you how many times I’ve heard some version of the quote above.
But the VAR channel is a major force in the technology business, and if you know what you’re doing, it can be used to great leverage by your company. So let’s now take a more realistic look at what VARs CAN DO:
WHAT VARS ACTUALLY DO
1) First and foremost, VARs are in business to sell their own HIGH MARGIN SERVICES. That is why they exist, and how they put bread on the table. This revelation may be discouraging to some product vendors, but you must understand and respect this above all, if you hope to leverage this channel. The only exception to this is the “core” product, which will be discussed later in this article.
2) VARs are very interested in things that apply to their own vertical focus. Although it wasn’t so true many years ago, most successful VARs these days have a very tight vertical focus.
3) Many VARs act as “thought leaders” for their corporate customers. So they are very interested in “what’s new” in the market, so they can stay on top of trends and remain market experts for their clients. This means that they will sometimes spend a lot of time talking to you about your new product, but never find the time to actually “sell” it (even if they have the best of intentions). In the busy world of the small VAR, client demands and selling the core product and services usually soak up all excess time.
4) VARs are often used as “aggregators” of purchases by corporate clients. This way, the corporation can use a single vendor point of contact for their technology purchases, greatly simplifying their purchasing process. They can also leverage the VAR as an evaluator/validator of new products and technologies. This makes them a very important part of the purchasing chain for many corporations.
5) If they put any real effort into selling products at all, it is usually into one or two “core” products that they have built their service offerings around. If you aren’t a product that pulls services, forget about getting high mindshare with the VAR.
6) When it comes to selling “non-core” products, VARs are almost completely driven by the demand they see in their installed customer base. They won’t often add in new products to their assortment that they don’t see a demand for, unless they are really techie, early adopter types. And these techies will often add a product, but never find time to actually offer it (let alone sell it) to their customers.
7) The VAR channel is EXCELLENT at fulfilling demand for great new products into their existing, installed customer base.
VARs can be an excellent proxy for a vendor in installing, configuring and offering first level support. This can enable a vendor extend its reach and to leverage the VAR channel’s existing infrastructure rather than building out a large field organization (which depending on the product category, may not even be feasible).
So given the points outlined above, what are the “best practices” to follow when you are seeking to build and leverage a VAR channel?
VAR CHANNEL BEST PRACTICES
*Always sell your new product directly in the beginning. Even if you don’t plan to build a direct sales force and sell directly in the long run, it is critical to establish that the product works, and can be sold successfully. If you can’t sell your own product, no VAR will be able to either (and few smart ones will be willing to try). De-bug and systemize the sales process, make sure that your end user price points are right, and build a small reference account list–at a minimum. Only at this point should you begin to approach VARs to distribute your product.
*Marketing the product is the vendor’s responsibility. Do not naively think that the VAR will market the product for you, or that since you have VARs to sell, you don’t need to market at all. Remember, VARs are great at fulfilling demand among their existing customers–and very poor at creating it among new customers. The vendor must position its products in the market and create demand for them–otherwise your channel efforts will certainly fail
*Treat VARs like the valued business partners they should be. If you do sell direct, don’t “steal a deal” and take it direct just to make a few more points on one sale. Nothing is more short-sighted. Not only will this VAR not do business with you again, in any given vertical it’s a small community–and word gets around fast. You risk becoming a pariah in the VAR channel, and losing all the hard work that you put into building your network. My philosophy is: when in doubt, cut the VAR in on the deal. If you don’t feel he’s adding any value to your business, eliminate him from your network after the deal. But don’t use your low opinion of a particular VAR to convince yourself to cut him out of the deal. You risk cutting off your own nose to spite your face.
*Be realistic in what the VAR channel can do for you. If you have a non-core offering, be happy that they “make it available” to their customer base, rather than expecting them to sell it actively. Remember, VARs are key influencers of their clients; just being available to endorse your product as something they offer, to a customer that hears about the product elsewhere, can be very valuable.
*Provide a reasonable margin, but don’t “throw margin away” thinking that it will motivate a VAR to actively push your product–if they otherwise would not. It won’t work, and you’ll just be giving away money for no reason–that you could use creating demand instead.
*For most products, make sure that you don’t over-distribute by signing up more VARs than your market will support. Even though greater margins might not make a VAR push your products, the erosion of margins to near zero will cause a VAR to eliminate your product from their portfolio. It’s better to leave a few deals on the table than to risk demotivating your entire reseller network, because they are 6 competitors are bidding on every deal in an particular area. The exception to this is if you represent a “core” product that pulls significant service revenue, you can get away with a lot more stuff, because the product margins are trivial to the VAR compared to the lucrative service revenue. But in this case, be careful when using your market strength to abuse partners. People have long memories, and “what goes around, comes around.”
That’s my primer on how to approach, and even more importantly, how NOT to approach doing business with Value-Added Resellers. Post a comment or send me an email to delve into this important topic further.
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
Technology Sales & Marketing-Is a direct or indirect approach best?
A question that often arises when my consulting practice engages with early stage companies is “How should we sell our product? Should we build a sales force, or sell through distributors, dealers or OEM partners?”
The answer, like most topics discussed in this forum, is rarely as simple or straightforward as the question itself. It depends—on a lot of different factors. First of all, if direct, does that mean building an expensive direct sales force, or a marketing driven model with direct sales from a website? If indirect, does it mean distribution through 11,000 mass retailers, or a select few, highly specialized, technical Systems Integrators? There are so many different options within the direct vs. indirect argument. I will tell you upfront that I have a bias toward using multiple channels—direct and indirect—if at all possible. It’s always been my opinion that this is usually the best way of achieving the highest total return from the high product development investments that are typical in the technology industry. But that’s a general rule, and one that won’t always hold up in individual cases. Let’s take a look at some of the things a company should consider in formulating a direct vs. indirect sales and marketing strategy.
How Complex is the Product?
It’s always important to start with the product in considering any aspect of your sales and marketing strategy. Is the product complex to sell? Is it complex to install? If a typical installation is highly complex and customized for the client, there may be a high level of services required that can only be delivered by experts within the company. If this is the case, a direct model usually work best. If there is what I would term a “medium” complexity to the product, this often lends itself to the utilization of VAR and System Integration partners. This class of partners is attracted to products that allow them to bill configuration, customization and service hours, which is really how they make their money. This key here is that the product isn’t so complex that the partners can’t be reasonably trained on the product to deliver these services somewhat independently in the field, with a minimum of hand-holding by the vendor.
The last case is a product which is very simple and standard, or has minimum customization that can be performed by the end user. This level of product complexity usually lends itself to multiple distribution channels, including direct and mass market channels, which provide great distribution breadth, but minimal support. VARs and Integrators may also sell products of this nature, but they won’t put much focus on them, since they don’t drive service revenue. VARs will essentially “take orders” for this type of product as a convenience to their clients. They won’t be a “strategic” channel for this type of product, but since they are a large channel, the sales can still add up to a substantial total—so you shouldn’t ignore them if they are appropriate.
How High is the Product Price?
A high price can lead you in two different directions: Direct-only, or to a VAR/Systems Integration distribution strategy. If you’re selling an Enterprise Software Product into a narrow niche with an average deal size of $2M, you’re probably going to end up selling the product direct. If, however, you selling a $5-100K average sized deal, and the addressable market is a bit larger and more well-defined, it’s very possible that the VAR/Integrator channel may provide real leverage. For products that fit into the $9.95-$995.00 range, a multi-channel marketing and distribution model may once again be your best bet. Products in this price range usually are very standard or have user-customizable features, and lend themselves to “sales-intensive” distribution channels, rather than support/customization intensive. This could mean a focused direct marketing model with a SaaS-based model, direct downloaded software sales from a website, or sales through computer retailers or mass market stores.
What does the Promotion Mix look like?
High priced, directly distributed products tend to have very simple promotion plans. The reason for this is that high priced products typically have small focused markets, so it’s pretty simple to get your marketing message to the customer. The simplest promotion strategy is what I call “Door to Door marketing.” Door to Door marketing means relying on the sales force exclusively to promote your product—with little or no investment in marketing programs. Or maybe due to limited resources, your promotional budget only allows a monthly Ad in a highly targeted trade journal. These aren’t strategies that I generally recommend, but for narrow markets, it is sometime appropriate. Bottom line, simple promotional strategies are generally only advisable for direct distribution approaches and niche markets.
If on the other hand, you have available to you a large budget and a wide variety of promising promotional programs that often is coupled with a broad distribution strategy. If you’re promoting in many different places, that may drive demand in a variety of different channels. In general, I say use them all. I’m also rarely a proponent of selling “indirect only”—you tend to lose valuable information without a direct link to the customer. You will also leave money on the table by giving up margin on customers that would prefer to buy direct. But occasionally companies are so dependent upon channels, that it doesn’t make sense to manage the channel conflict and deflect the ill will that selling direct can generates within a channel.
What Channels are available to you?
Oftentimes, the decision on how to sell is made for you. If your company is in a missionary situation where you are creating a new market, or you are in a very narrow niche, you usually don’t have any choice but to sell direct. If it’s a new market, channels might develop later. But in most cases selling direct initially, either solely or in conjunction with channels, is highly advisable. There is no channel in the world that will be able to figure out how to sell a product—that the company itself hasn’t figure out how to sell itself. It’s always good to conduct trial and error marketing/sales campaigns directly, and then transfer that knowledge gained to your channels. If you have a product that is broadly attractive to a variety of channels, and you have the resources to promote and sell effectively through all of them, I say go for it. As I stated early on in this article, it’s my belief that this is the best way to optimize your return on assets. The only caution is to make certain that you have the necessary resources, and are in a position to support all channels. If not, it’s better to “go slow” and add channels one at time—if you alienate a channel, they have a very long memory and it will be hard to get back in their good graces.
One type of partner we haven’t discussed yet is the OEM. In some cases, there may be a large, dominant player in your business that you are tempted to pursue as an OEM channel partner. While occasionally this leads to making the principals of a small company quite rich, I’ve found in many cases it’s fools gold. No one sells your product like you do. OEM deals that I see often end up with revenue levels in the range of 5-10% of the small company’s initial expectations. This can still be a substantial, important source of revenue. But the message I’ll leave you with is that I prefer early OEM deals to be non-exclusive, rather than exclusive. The exception is for a product that fits in a new market you don’t plan to participate in directly. Too many times I’ve seen clients “bet the farm” on one major OEM early in their development, and the company was either killed or severely wounded by the experiencence. Pursue OEMs, but it is usually best to do so as part of an overall, comprehensive distribution strategy.
How does the customer want to buy?
Finally, the most important question to consider is “how and where does the customer want to buy?” One of my most closely held beliefs is that you maximize revenue by offering the customer a product that is priced, packaged and sold via the channel he is most comfortable with. So if your prime prospect is a direct buyer, sell direct. If it’s a diverse audience that has a number of preferences on where to buy, strive to be in all of those channels. This may be the most important advice that I can provide.
That’s my review of the Direct vs. Indirect Sales & Marketing decision. I’m sure there are a lot of different experiences out there on this topic—what’s your experience been? Post a comment or contact me directly using the info below. I’d love to hear your thoughts.
Follow Phil Morettini and Morettini on Management via Twitter, Facebook, LinkedIn, RSS, or the PJM Consulting Quarterly Newsletter. Contact Phil directly at info@pjmconsult.com
Direct Email–Good or Evil?
One of the most misunderstood tools in the Marketer’s Bag of Tricks is direct email. There’s good reason for it, of course. Everyone hates SPAM! I expect that even the most evil, notorious spammers of the world have SPAM filters on their personal email accounts.
The end result of this universal distaste of SPAM is a belief, held by many, that sending emails to prospects or customers “just isn’t a good thing to do”. Lot’s of potential issues—from alienating your customers and potential users, to having some wacko attack and bring down your website, just because he doesn’t like the message sent to his in-box. So should we just forget about direct email as a legitimate marketing tactic, and spent our time and money focused on other aspects of the marketing mix?
I suggest not.
NOT ALL EMAIL IS CREATED EQUAL
Let’s step back and be rational here. First of all, not all direct email is the same. Let’s start with the “worst of” direct email campaigns:
Scenario #1
Bob’s Computer Stuff, Inc., buys “20 million email addresses for $99” from a SPAM email that they randomly received. Bob’s then fires off an email to the entire list with an offer for its extremely niche-y computer accessory, the “Swiss Army Computer Widget”. This is bad. Bob will be punished in quite a few ways, and probably deserves it.
Now let’s look at the “best of” direct email:
Scenario #2
Distinct Software Corp. has been methodically building a list of customers and prospects obtained using a variety of online and offline marketing methods, not the least of which is visits to the company’s website. The list has been carefully compiled, and in each case the client is either doing business with Distinct or has expressly given permission to receive email. Distinct has decided it would like to launch its new IT software product, with a special offer to targeted prospects. The company mines it’s database for prospects that meet the targeted customer profile for the new product. It supplements it’s own list by renting an opt-in email list from a broker, that was compiled from subscribers to a magazine that covers issues related to the new product. Distinct then puts together a classic direct response offer (discounted product, money-back guarantee, free gift, time-limited). The company crafts a short email message describing the special offer, careful to adhere to the rules of the CAN-SPAM Act, and other applicable state or international laws. The company sends it out its offer to the target list it has compiled, as one component of the marketing mix for its new product launch.
IS IT SPAM?
Do you really think that these two scenarios have anything in common? In actuality, the only thing they have in common is the delivery mechanism—email. Yet it’s very common for these two very different activities to be lumped together in one basket. It’s all SPAM, many people will say.
I beg to differ. One is terrible marketing, the other is classic marketing. BAD, scatter shot marketing is almost always poorly received, and GOOD, targeted marketing will only offend the zealots out there who are offended by ALL forms of marketing. This is true regardless of the delivery mechanism. There are people who hate traditional direct mail, unsolicited phone calls, advertising on TV, people with flyers at the shopping mall, even print ads that take up 2/3 of their favorite magazine. There’s nothing you can do about them. The only way to please these folks is to go out of business, so we don’t worry about them. Don’t let the crazy few stop your business from being successful.
GREAT FOR “OBJECTIVE” MARKETING DECISIONS
There are many reasons NOT to do direct email. One of the most important is that it’s easy to do, so it is a very crowded medium (thus “SPAM). But there’s a lot of great reasons to try it, as well.
One of the best is its ability to add “objectivity” to the marketing process. Marketing, especially to a high tech audience, is both art and science. It’s best when you can tilt toward more science than art, but with new products and offers, it often tends to be primarily art. How are new product prices usually set, for example? Well, a few objective things are usually done, like a quick look at competitors price, but mostly, somebody with decision making power just picks a price out of the air that looks good to them. It may be a good price, it may not be, but there it is.
The beauty of direct marketing is that you can OBJECTIVELY test until you come up with the “right” price. Divide the list up into modules, keep all other elements of the offer static, and use a different price for each module. If you use statistically significant samples, YOU WILL converge on the price that yields the greatest profit. That’s a rare and valuable thing to a marketer in high tech, where things change so fast, and are often so squishy, that it’s sometimes hard to tell which end is up. And you can do this with any elements of your offer, simply by keeping everything but your test element static, and using the “module” approach to test different “sizes” of that element.
Of course you can do this with any direct form of marketing, but direct email adds the important ability to do your testing faster. You can test and revise, test and revise, almost in real time, quickly converging on your optimal offer for the market. This is very powerful, and the results can then used to optimize other marketing activities in the mix. It really enables you to switch from subjective guessing to objective decision-making, which could well mean the difference between success and failure in a competitive market.
IT’S ONLY SPAM IF YOUR AUDIENCE ISN’T INTERESTED
If your offer is targeted at the appropriate people, it provides benefits for them, and you deliver your message in a legal manner, you will have very few problems. The closer it comes to a “one to one” message, and the farther from a mass message, the fewer problems you will have.
IF DONE RIGHT, VERY FEW COMPLAINTS
I have conducted many direct marketing campaigns over the years, including quite a few direct email campaigns. The most telling is a most personal campaign I have used over the years. Prior to starting my consulting practice, I used this technique in job searches, as well as to reach out to potential customers when I worked as an employee. Since I have started my consulting practice, I have used it with great success as well. I send email messages directly to CEOs of target companies. The messages are extremely “one to one”, tailored to the company and person I am sending it to, and the target is always chosen to be a close fit with whatever I my “offer” has been at the time (A potential senior executive, a product that I knew the potential client could use, my consulting services).
I have been using this technique literally since the beginning of commercial use of the Internet. I have had exactly ONE complaint since I started using this approach. The gentleman who complained—I actually knew. I had previously had a personal meeting with him, and he handed me his business card himself! Needless to say, most people thought this guy was a real jerk! A few people over the years have asked that I “take their name off of my list”. I always do—anyone that requests it, never hears from me again. But not many have made this request. A lot of non-responses, a lot of polite no thanks, and many, many requests for meeting that have led to a successful outcome for both the addressee and myself. But literally no complaints save the one “exception that proves the rule.”
THE BOTTOM LINE
My basic message is don’t let fear stop you from using Direct Email effectively as part of your marketing mix. Maybe it makes sense for your particular situation, maybe it doesn’t. But don’t let fear of persecution and alienation rule it out. If done properly, it is often a profitable, efficient, and very effective method of reaching your target audience. Just remember to live by the rules:
DIRECT EMAIL RULES
- Only email to a targeted audience
- Craft an offer that is very appealing to your target list
- Do extensive testing, for objective analysis of each element of your offer
- Always be honest, never deceitful
- Use an opt-in or in-house list only
- Always make it easy for addresses to opt out
- Never send additional messages to those that opt out
- Include your physical address and phone number in all messages
- Don’t overdue it—send messages sparingly, only when you have something important to offer or communicate
- No more than monthly messages in most cases, less frequently is usually better
So that’s it! Email is a controversial and often emotional issue for many people. I look forward to hear what you all have to say–post a comment with your own experience and thoughts…
Follow Phil Morettini and Morettini on Management via Twitter, Facebook, LinkedIn, RSS, or the PJM Consulting Quarterly Newsletter. Contact Phil directly at info@pjmconsult.com
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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