VAR vs. Retail Distribution in Software and Technology Markets

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


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

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

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

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

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

Is one of these channel types "better" than another?

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

When you should use the VAR channel

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

When you should use the Retail channel

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

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

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

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

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

Steve Jobs, the iPhone and Apple Strategy - have we seen this story before?

Apple computer and its red-hot iPhone have dominated the business news recently. By all accounts, with good reason. I haven't had the opportunity to play around with an iPhone yet, but the early reviews have been very positive. Initial interest demand has been high, especially given the usual amount of mystery and intrigue woven by Mr. Jobs and the folks at Apple.

For a first-time entry in to a large, competitive business such as cell phones--you've got to be impressed. Yet I've got this vague feeling of familiarity when it comes to this story--I somehow feel that I've seen it and heard it all before….

THE RETURN OF JOBS

Apple Computer since the return of Steve Jobs from the hinterlands has felt a lot like the Apple from Jobs initial run at Apple. He's restored the company's attitude, and dominates publicity, product direction and what feels like nearly every little detail about the company. Not bad for what is roughly a $20B company. It speaks to how strong and impressive Mr. Jobs' personality and skill set really is. He has done a tremendous job bringing Apple back from the brink, and it appears that they may be headed to heights that weren't even approach in his first tenure at the company.

There are many reasons that Apple and Steve Jobs, over a long period of time, have proved to be an interesting story. There are the breakthrough products, invention of new categories, tremendous highs and lows in financial results, strong, eccentric personalities, and boardroom intrigue--all multiplied when Jobs is factored in.

But the thing that I've always found most interesting about Apple has been its corporate strategy.

APPLE CORPORATE STRATEGY

Lets first give Steve Jobs and his strategies their due; he's done a whole bunch of things right. It's hard to imagine where this company would be if they hadn't brought him back for his second tour. But like most strong personalities, along with his myriad strengths--he's got a few quirks as well. Some might argue these quirks are actually weaknesses. I've always thought that his biggest weakness was being a "control freak". Some might argue that this is actually reflective of strength, indicative of a strong leader who is forcing a change in the status quo to his vision. At times it appears so.

For example, the original Mac was a great triumph at first. It set a new standard for PC usability and industrial design, and was a huge seller in the beginning. But in creating the Mac, Apple also:

1) Didn't use standard (Intel) chips, but more expensive ones from weaker competitors
2) Was a relatively "closed" system
3) Couldn't be upgraded much at all
4) Kept Prices and margins high, unsustainably so with hindsight

A SUSPECT BUSINESS MODEL?

Maybe most interesting of all from a strategic perspective, is Apple's choice of a business model. Apple has always been an innovator in software, with most of its differentiation coming in this area. (At least this is true since the Mac was introduced--the original Apple hit product, the Apple II, was pure hardward innovation.) Yet the company has always tried to make its margin selling hardware devices, bundling in its software with its hardware, mostly for free. I believe that this closed, single vendor, hardware/software bundled system approach can be the right strategy in creating a new market. It allows a pioneer to control the user experience, while realizing larger margins and profits in the short run to support innovation. But as markets grow big, that approach which works so well in the beginning often becomes an albatross as other players enter a larger market, and figure out how to take cost out of the system. These strategic choices (flaws?) were some of reasons that ultimately led the Mac platform to be a distant also-ran in the PC races (although one with a rabid core following), even though it had a large advantage in technology and a healthy market share initially.

iTUNES AND THE iPOD

Interestingly, Jobs followed a similar basic strategy with iTunes and the iPod. He innovated with cool, hip industrial design, a classically simple but elegant user interface, and (maybe most importantly) broke the logjam with the Record labels on downloadable songs--for the first time creating a site with a truly wide selection of mainstream songs, downloadable without hassle. He once again has kept this a pretty closed system, not allowing other devices to download to iTunes, or other music sites to feed the iPod--although he has shown signs of opening this up recently. Once again, pricing is pretty high, relative to competitive "systems". Apple has so far been able to keep a comfortable lead in the online music space--but using a timeline which is required to measure markets of this scope--one must remember, it is still very early in the game.

My feeling about this "closed system approach" that Jobs favors, is that in consumer electronics and computing, it often works very well for a while--but then backfires as the market grows and matures. Technology commoditizes, and markets eventually lean toward openness--which provides greater choice and lower costs to users. Jobs waited way too long with the Mac, and retreated on the strategy when Apple belately tried to open up the platform, just as he returned for his second run with the company. Apple may be headed toward open PC computing again with the new MacTel platform, but in my opinion, that ship has likely sailed long ago. It would be a long hard pull for the Mac to once again compete as a mainstream PC platform. Of course Steve Jobs is nothing if not audacious, so I wouldn't put it past him to try.

iPHONE STRATEGY - GOOD & BAD

This brings us to the iPhone. Apple has been up and down during it's corporate life, more often than a cat with nine lives. Right now, Apple is definitely riding on a high. When you take a look at this iPhone recent introduction, there is a whole bunch of familiar Apple/Jobs strategy going on. You see the innovation pointed at a major market that is populated by major players, but a relatively poor user experience. In this case it's the poor user experience of the cell phone industry, just like PCs and downloadable music, which were frustrating to consumers when Apple innovated in those markets. The innovation is out of the old Apple playbook: led by cool industrial design, and a breakthrough, simple but elegant user interface. All of this, along with typically brilliant Apple PR, has led to the iPhone "mania" that is reminiscent of past Apple introductions. The iPhone sure looks like a big hit at this point, and no doubt will be in the short run.

But will Apple and Jobs be able to sustain the iPhone momentum, like they have with the iPod/iTunes to date, or will the initial success fade like it did with the Mac? While Jobs is now a more seasoned, and even more successful electronics industry icon, I would argue that there still may be a few of the old flaws in his game. The price point Apple introduced the iPhone at is very high, relative to most cell phones with a similar level of capabilities. The phone was introduced with a battery that can't be upgraded by the user, something that has been standard in the cell phone market (and most portable consumer electronics) for many years. iPhone owners will have to send the product away to get the battery changed--who can go days without their phone? This is an incomprehensible mistake in strategy, in my opinion.

And finally, and most importantly, Apple chose the most "closed system" approach of all--the iPhone with only be available on one Cell Phone network, AT&T, for at least 5 years. I find this part of the strategy astounding. First of all, it seems to me to be completely unnecessary and yielding few benefits to the company. It appears that Apple did this to have leverage in their cell phone partner negotiations, allowing them to retain control on some items, and keeping their prices high. I think Apple is being penny-wise and pound foolish here. The have a hot product; now is the time to establish the Apple brand as the preferred high end supplier of smart phones. But they can now accomplish this in only a segment of the huge cellular audience, for completely artificial reasons. Shutting out the bulk of the market in this fleeting time of major advantage, for bit higher margins and control on a few areas that most cell phone manufacturers do without? It's hardly worth in my opinion.

Also, the Cellular Network Operator partner they have chosen is very suspect. While AT&T is the biggest wireless operator in the US market and a fine company, they are behind in the game technologically in the wireless Internet part of the cellular market--the very aspect in which the iPhone shines as a mobile device. So the wonderful new features brought to wireless web access by the iPhone will slow to a crawl on the inferior AT&T data network. It may be like running a great graphical user interface over a dial up modem--frustrating. If all you do is sit and wait for the network, it won't matter much how slick or intuitive the device UI is.

FLAWS IN APPLE'S iPHONE GAMEPLAN?

My feeling is that there may again be some major flaws in this most recent Apple strategy. This may again cause the company to give up an early lead, in a market in which they've contributed true innovation. I'm not privy to all of the information that Apple management is, of course. And it's always easy to second-guess from a distance, after the fact. So it's quite possible that I'm just missing something, and dead wrong in my take. Plus, the whole picture of Apple's market entry hasn't been revealed yet. For example, I haven't seen or heard anything about Apple's partnering strategy with Cellular operators outside the US, but I am very interested to see how this compares to the US strategy. Will the strategy be similar or very different internationally?

Steve Jobs has contributed greatly to the development of the worldwide computer and electronics business. He has had many great successes, and also fallen a few times. He is an iconic figure who isn't afraid to take a stand. Apple has ridden Job's strategies to great heights several times; and also to great depths a time or two as well. Along the way Steve Jobs has provided a wealth of controversial material for columnists, writers, commentators and anyone else with an opinion. I am fascinated to watch as his strategy for this latest chapter, the iPhone, plays out in the marketplace.

So there you have it--that's my take. Post a comment and let me know what your own thoughts are on Mr. Jobs, Apple and the iPhone.

Phil Morettini
PJM Consulting
www.pjmconsult.com