Morettini on Management

General Management and Marketing Advice for Software and Tech Companies

Tag: sales force

How Important is a Strong Rolodex in the Software and Hardware Business?

I get this comment all the time: “We’re looking for a VP-Sales/VP-Business Development/Sales Manager/Sales Rep with a strong Rolodex in the (pick your market segment) market”. But how important is a rolodex in the IT business? In my opinion, not as important as many people seem to think…..

I realize that this is a contrarian viewpoint among those of us in the technology business.  Some may even view it as “stupid”. However, it’s not in any way a spontaneous comment, but an opinion I’ve developed over a long period of time. I’m sure I’ll get a lot of push back on this opinion, since it flies in the face of conventional wisdom. Here’s my argument:

What a rolodex does for you

First of all, of course a strong rolodex in a specific market segment is a good thing. To say otherwise is silly. But what does it really do for you? It may get a phone call returned or a meeting set up faster that it otherwise would. This is of course helpful, but far from critical in my mind, especially compared to other factors I’ll explore below. I should point out there are some market segments that are so closed that they appear almost tribal in nature. In those cases, including one example which is mentioned later in this article, a strong rolodex can move to near the top of the list of critical success factors. But in my experience these situations are rare and far from normal.

Many other things have to line up first

I’ve always maintained that sales reps get too much blame when they fail, and too much credit (and often outsized monetary rewards) when they’re successful. SO many things have to be done well in a company for a rep to have a chance. The executive managers must first capitalize the company adequately, or usually nothing works very well. Product Marketing must properly define a market opportunity that matches well with the company’s intellectual property and technical capabilities. The R&D folks must create a product which makes a contribution to the marketplace, offering a differential advantage over competitive offerings. Maybe all of this seems obvious; but none of it is easy. A lot can go wrong, and I believe every one of these activities is more difficult and important than having a pre-existing rolodex in the market. Even it this wasn’t true, it’s really difficult to attract the right sales reps (with or without an strong rolodex in your segment) without evidence that the above activities are going well.

Most important attributes for a technology sales rep

Smart – This may seem obvious, but all too often people looking for a “quick hit” underrate it’s importance or don’t adequately investigate intellect in their new sales hires.

Technology acumen – There are many good sales reps in the world. But regardless of whether we’re talking about hardware, semiconductors, traditional software or SaaS, there are far fewer that have the education, training and ability to quickly absorb complex and fast-moving technology that is fundamental to our business.

Work ethic – While intellect and technical competence are important, selling still isn’t brain surgery. But it’s a really difficult job that takes persistence, hard work and the self-confidence to keep going in the face of a lot of rejection. There is no substitute for a strong work ethic in a consistently high performing sales rep.

Ability to build relationships – this is key- and shouldn’t be confused with having a large rolodex of names and phone numbers. Just because someone knows a lot of people doesn’t mean those prospects necessarily wants to hear from them, or trusts them enough to buy from them. In many cases it’s just the opposite. If you have strong relationship-building skills, you can do it over and over again across any market segment. Give me a strong relationship-builder with no existing contacts in a market segment over a weaker relationship-builder who knows everyone in the segment–any day of the week.

Market segment experience and rolodex – these are beneficial qualities, there is on doubt. But I believe they are down the list in importance relative to those listed above.

An example of where your Rolodex IS CRITICAL

Now just because I don’t think a strong rolodex generally leads the list of important attributes in the software or hardware business, that doesn’t mean I feel that way in every case. The best example of when it’s VERY important is when raising capital from institutional sources, such as venture capitalists. Not only is it important to personally know them (or get an introduction from someone who knows them well) before a fund-raising approach, it’s critical to a bizarre degree. It’s not universal, but if you approach many VCs without leveraging an existing relationship you may in fact have blown any chance with them in the future, no matter how impressive the value proposition of your business. So this is a case where having a strong rolodex in place is paramount–but the details of this is better left for another article.

That’s what I think about the importance of a rolodex in the technology marketplace. I’ve personally moved among many different market segments in my career and don’t consider it all that difficult. The most difficult part is often convincing someone it isn’t all that difficult! While it can be helpful to have a strong rolodex, I believe it is placed way too high in many folks priorities in most cases.  If you disagree–post a comment below and tell us why, or just provide us with the wisdom of your own rolodex-related experiences.

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 December 2, 2012
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Should Your Sales Reps Cold Call?

In this article we’ll take a look at arguments on both sides, and recommend when and how much cold-calling makes sense.

This is an age-old question in sales. Some would say that’s what sales people should be doing. Others believe that if sales reps have to cold call, it’s an indication of poor marketing and very inefficient. I often refer to cold-calling as DOOR-TO-DOOR marketing, because you’re really combining the introductory marketing and sales functions in one phone call or visit. The question: is this a good or bad thing?

Many factors come into play when deciding how much cold-calling is appropriate for a particular rep/company/product/market combination:

Ease of Prospect Identification

This is a crucial factor when deciding whether or not to include a lot of cold-calling in your sales mix. If prospects are easily identifiable, it makes much more sense to start contacting them than if your reps have to dig for hours to find an appropriate prospect.

Commodity vs. Complex/Missionary Sale

It’s very difficult to cold-call prospects when selling technology products or services which are very new or difficult to grasp quickly. Prospects are all busy trying to do their jobs, are overwhelmed with offers via every media and contact method, and tend to tune out cold calls that aren’t of obvious use to them. In these cases, using marketing methods to educate and identify prospects first tends to work a lot better than strict cold-calling. For commodity items that people know they need, a timely cold call can lead to an immediate sale that a competitor might have otherwise gotten.

Cost Per Lead

How to divide your investments in marketing and sales is often driven by the relative costs of each. How effective are your outbound and inbound marketing programs? If your marketing cost per lead is very high, in some cases it might make sense to skip the lead gathering altogether and get right to the sales call. I caution that this usually isn’t the case, but it’s possible. Also, whether this makes sense also depends on many other factors such as those discussed here, notably the ease of prospect identification.

Market Size

This factor is most relevant with respect to cold-calling for tiny niche markets. For example, if you have a software product with a multi-million dollar price tag aimed at 100 or less total prospects. In this case, it doesn’t make sense to put much money into outbound or inbound marketing programs if these prospects are easily identifiable. Time to call them up or pay them a visit, as soon as possible!

Time of the Day/Week/Month/Quarter

If it’s the end of the day (literally or figuratively) and all the leads have been followed up on, it’s DEFINITELY time to cold-call. Every sales organization or individual rep should have a game plan on how to prospect on their own, when all the warm leads have been exhausted. It’s either that or it’s time to head to the golf course (which happens too often, and tends to not raise sales much!).

Big Ticket vs. Low Price

In general, sales forces are costly. If you have a product with low revenue per sale, it’s suicidal to rely strictly on cold-calling. Unless your reps are working on a commission-only basis (not recommend, for reasons outlined in other articles), it’s a prescription for a low or even negative margin sale. Low-priced products absolutely require an efficient marketing engine to generate a large amount of low cost leads which lead to easy sales. With a big ticket product, the economics work better and more easily allow a sales-intensive approach.

So what’s my summary view of cold-calling? It’s hard to generalize, as I’ve outlined with some of the factors discussed above. But I believe that there is a place for it in the overall sales plan. I also believe, however, that in most cases if reps are doing 100% cold-calling–or even the majority of their time–then the company is operating at far less than peak efficiency. A 100% cold-calling sales force is usually indicative of an institutional lack of marketing expertise. This usually means less revenue and profits generated for the company than would be with a more balanced sales/marketing approach. Integrated sales and marketing is what works best in the great majority of situations.

With respect to individual reps, if they are forced to cold-call often, you’re probably underutilizing them. But if a particular rep is reluctant or completely unwilling to cold-call when the situation demands it, you may have a rep to consider replacing. There are always exceptions to such generalizations for specific companies and market, but with cold-calling I believe they are few and far between.

I’ve outlined some ideas about when, where and how much cold-calling is appropriate in sales. This is a topic that is much debated–what’s been your experience? Post a comment below so we can have the benefit of your view.

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 April 11, 2011
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Compensating the High Tech Sales Force

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

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

It all depends on your particular situation.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Inside TeleSales versus Outside Sales in Software and High Tech Companies

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

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

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

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

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

PRODUCT PRICING
Product price is another important element in this discussion. All things being equal, higher priced products are more likely to require outside sales, while more modestly priced ones may be able to be sold effectively with only an inside sales force. The higher the price the more “high touch” your sales approach will most likely need to be, especially after you get past departmentally approvable price points and into enterprise-level committee selling. Low price products, unless sold in high volumes, may just not profitably support the use of an outside sales organization.

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

HYBRID SALES STRUCTURE
In some cases a mix of inside telesales and outside reps works best. Here is an example of when this might be optimal:

A product with a low sales price that lends itself to an inside sales force, but the product is something that major accounts can use in great quantities, justifying an outside sales force to call specifically on these accounts.

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

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

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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Structuring a High Tech Sales Force

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

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

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

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

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

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

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

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

SALES REP TYPES

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

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

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

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

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

SALE ORGANIZATION TYPES

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

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

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

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

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

What do you think about the optimal way to organize a tech company sales force? Post a comment with your own advice.

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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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

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4 Comments by admin on January 11, 2006
filed in Business Models, Corporate Strategy, Distribution Channels, Online Marketing, Pricing, Product Marketing/Management, Promotion, Retail, Startup/Early Stage, VARs, enterprise software, sales
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BIG S, little m

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

JUST GO GET THE ORDERS

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

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

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

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

IS TECHNOLOGY ENOUGH?

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

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

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

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

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

IT MIGHT WORK—BUT DON’T BET ON IT

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

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

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

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4 Comments by admin on June 2, 2005
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