Promoting Software and Hardware Products through the VAR Channel

With the exception of some software and hardware vendors who sell super-expensive products to the largest enterprises, a large percentage tech companies uses the Value Added Reseller (VAR) channel, to one extent or another. So how do you best go about doing this successfully? Create a great product, throw it to the channel, and sit back and collect the money?


If only it were so. Unfortunately, many tech companies new to the channel find out the hard way that you will fail by taking the word "seller" in the VAR label too seriously. For those of use with experience in the VAR channel, you know that it is still incumbent upon the vendor to create end user demand for their product. Yes, you need to market to VARs as well. And you will take whatever "push" you can get from the channel. But you must have an active promotional program aimed at end users for a realistic chance at channel success.

So what are the best marketing approaches to support channel sales activities? If depends, of course, on the specifics of your product, market, price point, etc. But let's take a quick look at some popular promotion methods used in conjunction with channel sales. I'll break it down into three basic categories:

End user demand creation

This is first and foremost the most critical activity. It's an unfortunate fact that most new players in the channel don't understand this initially. Many have to learn it through a painful hands-on lesson, which sometimes leads to rejecting use of the channel outright, due to spectacular failure. It may be counter-intuitive, but it doesn't even matter whether you establish end user demand for your products by selling direct or via the channel. The important thing is that with few exceptions there needs to be serious interest in your products at the end user level if you're to successfully sell through VARs. In fact, it's almost always necessary to be successful selling directly to end users, before you can hope to have a successful VAR channel for your products. Almost any end user marketing method that fits with your product type and budget can be used to create this demand, but here are some commonly used promotional types:

• SEO (Search engine optimization)
• PPC (Pay per click) advertising
• Press relations
• White paper marketing
• Targeted online banner advertising
• Direct mail, but traditional and email
• Social media marketing (Blogs, Twitter, Linkedin, Facebook, etc.)
• Trade shows


VAR recruitment

In addition to creating end user demand, you'll also want to market directly to VARs, to get them interested in actively working with you and your products. An important point to remember is that the VAR channel is very large, and generally segmented into many vertical categories. So however you approach them, don't waste time (yours or theirs!) by contacting VARs who aren't doing business in your target end user segments. Here's some common recruitment approaches:

• Direct email through available VAR lists
• Phone campaign using available lists
• Internet research with direct email or phone approach
• Trade Shows (VARs frequent them, and it's a great opportunity for personal contact)
• Have a highly successful product with strong end user pull (VARs will find you!)

Cooperative marketing with the channel

Lastly, once you've created end user demand and recruited enough VARs to have a "program", you need to establish standard methods of working with your new partners to create and fulfill demand. VAR programs come in all shapes and sizes depending upon the market, and I've seen a wide variety of promotional opportunities included in these programs. One of my personal favorite "getting started" methods is to offer to pay for and execute a direct mail campaign (blind to the vendor, if necessary) introducing you and your product family as a new partner of the VAR. Below are some promotional activities that are very commonly included in VAR programs:

• Co-op advertising/promotion with the vendor provides funding for approved VAR-executed promotional programs up to a set percentage (3-6%) of sales of your products
• Free or discounted demo units
• Special pricing for large opportunities
• Co-selling with your in-house sales force
• Deal registration
• Additional discounts for completing product training, certifications or maintaining premium support levels
• Co-branded product literature and other use of the vendor's logo
• Website and catalog listings of authorized or "preferred" VARs
• Rebates for volume sales (not recommended; fraught with danger)
• Vendor-funded introductory direct mail campaign

That's my quick primer on successfully promoting your products for sale through the VAR channel. Many of you have your own experience in this area; post a comment or a question to activate our discussion.

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

Startup Mistakes by Software and Tech Companies

Starting a company, any kind of company is the hardest thing to do in business. Sez me.

It's also one of the most rewarding and fun, if you're built for the startup experience--though not everyone is. Technology startups have their own unique challenges. There are many different ways to drive off the road, some of which I list below. Keep in mind that no startup is perfect, and mistakes will be made. The future can not be forecast, and in a software or tech startup you're often flying nearly blind without a map, because you are trying to do something new and different.

In the end, if you are able to make it through, overcoming your mistakes may be the most satisfying part of the whole startup experience. So keep in mind that it's almost impossible to play a perfect game. On the other hand, it's crucial to steer clear of the mistakes which are often avoidable--because you only get some many chances to recover from errors.

Here are some of the common, often avoidable missteps to be aware of:

Too little capital
Sometimes this is unavoidable--but if you really don't have enough capital maybe you shouldn't start up in the first place. Activities such as software product development are notorious for going way past schedule and over budget. Most products don't move like a knife through butter with the first modest promotional campaign. So build a decent amount of backup money into your plan, because things rarely go as planned. If they do, great, you can use the money to accelerate growth. But when things don't go well, you'll at least give yourself a fighting chance, if you've set aside a bit of money for a rainy day.

Don't try to be a "Big Company" right off the bat
Many startup management teams are jealous of the resources available to their established competitors. These folks can become "Big Company Wannabes", a classic formula for going out of business early. Don't spend your precious time and resources on activities that don't efficiently bring the product out, or market it. Period. Lavish trade show booths, company parties, expensive or large offices, administrative assistants for all the execs, etc., etc. Don't hire a lot of big company people who don't have early stage experience--they are prone to the types of costly waste listed above.

No backup plan
It is a startup and you have to expect little margin for error in reaching success. But that's no excuse for a lack of strategic planning--within the constraints of your resources. A backup plan might be something simple: software companies going to open source if your high-priced commercial strategy meets resistance, a service-oriented revenue strategy with a cheap or free product, using a channel rather than building a full sales force, licensing your technology instead of marketing a full product to end users. It depends on your circumstances, but do try to have some type of a contingency plan going in.

The "Techies know everything" syndrome
This is a common malady in tech startups, because many new software and tech companies are led by management heavy in experience from the engineering or software development side of the business. Usually these folks are very smart, but in some cases also a bit full of themselves, unable to know their own blind spots. Those blind spots often appear in marketing and sales (which every engineer and software developer knows are easy, non-complex activities). The really smart guys quickly figure out those other parts of the business besides the tech stuff is hard as well, and make adjustments through education and bringing in outside expertise.

The "Technology is everything" syndrome
This is a corollary to the bullet point above. The technology and product is crucial in a tech startup, since it is usually the basis for your competitive advantage. But it's not everything, and many a startup has failed despite great technology and an exciting new product.

No marketing budget or in-house expertise
Believe it or not, I see a lot of companies with little or no promotional budget. Its insanity, but they only have enough money to get the product built, apparently thinking "if you build it they will come". This is nearly always a failure mode. If there is someone with marketing expertise among the founders, they usually won't allow this to happen. So secure a marketer on your founding management team, or at least find a close advisor you will listen to, early on.

Under-estimating time to market
This is a very common mistake. By definition, you are trying to do something new, which isn't forecast-able. So don't believe your own pretty Gantt charts--garbage-in equals garbage-out when it comes to schedules. Don't count on making it to the big trade show, commit to costly promotional activities with no recourse, or let the developers all plan to leave for that well-deserved month in Hawaii. Get the product done first. I tell you this with many painful experiences as a teacher, both personally in software and tech companies and through my clients.

Under-estimating time-to-success
Even if you are able to get the product out on time, that doesn't mean version one will hit the ground running. They often crawl, stumble and fall at first. After all, this is your first opportunity at really accurate market research. Even if the product is right on target, finding the marketing mix that works is generally trial and error. Many products don't find success until their second version is released, so have some money in the bank, and some emotional bandwidth available for this possibility.

Introducing a "buggy" product
This is one of my biggest pet peeves, especially for software products. Most products aren't fully stable when the developers think it is ready. They work on it so long and hard, that human nature wants it to be finished near the end--and dangerous shortcuts can be the result. Dedicate as many resources as you can spell to ensure a credible, third party view that the product is as stable as it can be, before the market gets the opportunity to "debug it" for you. You only get one chance to make a first impression. If the situation is bad enough, it can cost you your business.



There are my thoughts on what critical mistakes to avoid in a technology startup. I'm sure many of you have your own lessons and ideas to share. Post a comment to start the discussion! Follow Phil Morettini and Morettini on Management via Twitter, Facebook, RSS, or the PJM Consulting Quarterly Newsletter.

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 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 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. 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 is of course 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 better strongly 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 are two examples of when this might be optimal: 1) Outside reps for Major Accounts, Inside reps for the rest of the territory and 2) 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. 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 practice at PJM Consulting.


SUMMARY
Like any other key structural decision that senior management faces in developing a software or technology 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.

Phil Morettini
PJM Consulting
www.pjmconsult.com

What Happens to Apple after Steve Jobs?

I've written several times on Steve Jobs and Apple, one of the most fascinating companies and executives that we've seen in the history of high technology.

I don't mean to make this a morbid article; the current speculation on Steve Job's health has been well-documented. I hope that Mr. Jobs is fine, and that he has many more years of good health, with a continued long reign at Apple.

But it does raise a slightly different question that is interesting to ponder. There has always be a "cult of personality" surrounding Apple and Steve Jobs. In fact, when Jobs recently announced that his recent weight loss was do to a minor hormone imbalance rather than a reoccurrence of cancer, the stock was up 4% that day. Mr. Jobs is joined at the hip with Apple in the investment community and public's eyes. Jobs will leave Apple at some point, hopefully to go into a happy retirement, as I stated above. Regardless of the circumstances of his leaving, what will become of the company once he is gone?

I can think of no tech company more closely associated with a founder/CEO than Apple and Jobs. Gates and Microsoft certainly are in that league, and I'm sure that you can think of others. But I doubt if you can think of any combination that is clearly more high profile and closely-linked.

Jobs has obviously been a major driver of Apple's current success, and has enriched its many shareholders and other stakeholders. While it may be blasphemy to the Apple faithful, especially in recent times, in my opinion he has also been responsible for some of the company's periodic downturns. Whether viewed strictly as the company's savoir, or also an unstable dictator that has wrought big swings in the company's performance over a long period of time--it's undeniable that an unusual amount of responsibility has laid in Job's hands--especially for a company of Apple's enormous size. He is known to be detailed-oriented and involved (from a positive perspective), and a micro-manager and poor delegator assuming a more negative viewpoint. The basic premise of this article is that once he leaves Apple, there will be a leadership vacuum. This isn't necessarily a prescription for catastrophe--but it is rarely a good thing for a company, at least in the short term. So what are the broader lessons we can glean from this fascinating situation with respect to managing high tech businesses? Apple really isn't a rare case--tech companies cultures are built around their founder/CEO quite often, as I see often in my practice at PJM Consulting. This is a case study that can be instructive for many managers. Let's take a look at a few potential lessons:

Difficult or Odd Corporate Culture
There is obviously much to be admired about Apple's corporate culture, since it is a very successful company. Yet by many it is considered to be somewhat dysfunctional from a management standpoint. Much of this can be attributed to having a leader with a very strong and quirky style. Cultures tend to develop haphazardly as companies grow, even if its leaders have given some thought to the issue. In a corporation, everyone has a boss and other constraints put on them by the company's social structure. This tends to dampen the effects of dysfunctional behavior by people up and down the organizational chart. The exception to this is the Founder/CEO who is the head of the organization. Much like the old story about the "Emperor who has no Clothes", no one in an official capacity will call out the person at the top of the org chart on their bad behavior, decisions and eccentricities. This is dangerous and can lead to a culture and company policies becoming embedded with inappropriate ideas for no good reason, sometimes based on what lower level people BELIEVE the CEO would want. The takeaway is that leaders (especially strong ones) must take care not to have TOO GREAT an influence on the culture of the company simply because of their personal style.

Corporate Succession
Strong leader such as Jobs often tend to run companies in a dictatorial manner. They also have a tendency to have a "self-centric" view of the world, and don't give sufficient thought to planning for the company's future after their tenure. This may work well while they are in charge, but can lead to a company in disarray when they leave. It's not clear that there is a clear successor, or strong group of potential successors, in place to follow Jobs at Apple. For a company of the size and stature of Apple, most people would think that this isn't a good idea. Founding CEOs and Senior Executives with a similar organizational impact need to force themselves to step back from the present, and plan for a future without themselves. This isn't a comfortable thing for many people, but is critically important for the full potential of their legacy to be fulfilled.

Dangerous Concentration of Responsibility in a Single Person
In a startup, the founders often wear many hats, and make all of the important decisions themselves. No doubt that Jobs and Wozniak personally handled nearly everything when Apple was formed. This is a very proper operating model for a startup. As a company grows, at some point it becomes a VERY INAPPROPRIATE model, and can put the company in great jeopardy. What if that leader has a heart attack or is in some other way unable to fulfill their critical role? Chaos can occur, and the company's decision-making can be paralyzed, especially in the short term. In addition, I believe that the old saying of "two heads are better than one" usually holds true. I'm not one to endorse decisions-by-committee, but many corporate situations are complex and inherently risky, and the decision-making in these circumstances can benefit by having several strong viewpoints. CEOs should ensure that important decisions include at least some level of peer discussion and review, to avoid blind spots and major mistakes.

Micro-Management
Strong leaders, especially those who are able to create a company from the ground up like Steve Jobs, are often "type A" personalities and micro-managers. This may be highly efficient when a company is in startup mode. Later on, however, it can lead to a lack of development of people down in the organization, as well as paralyze the organization's ability to make quick decisions. The most effective leaders are those who are able to "let go" much of the decision-making as the company grows, while keeping their fingers on the pulse of what's truly important. This is a very fine line to walk, no doubt, but it imo being able to successfully pull this off is one of the more important attributes of the very best corporate leaders.

Bench Strength - Can Worthy Managers Survive Under A Strong Leader?
Along the same lines as the Succession discussion above, attracting and retaining talented managers lower in the organization is usually critical to a company's current success. If the leadership of the company tends to be dictatorial, micro-managers who hold on to most of the responsibility, lower-level managers may become demoralized. The management team needs to be developed, and feel like they have real responsibility and some control of their own destiny. When the guy at the top is holding on to all the power, strong leaders further down in the organization have a tendency to move on to other companies, where they feel like they are making an impact and have an opportunity to progress. The best leaders ensure that the conditions are in place attract, nurture, develop and retain the management talent required for a company's continued growth and success.


SUMMARY
Apple is a great tech company, and Steve Jobs is one of our industry's legendary entrepreneurs and managers. Yet every company, even highly successful ones like Apple, has holes in its game. There are many strong leaders much like Jobs at the head of software and tech companies. Too often their strength is manifested with a very short term view of the organization. Although difficult to do, the strongest leaders operate with a view on not just optimizing the immediate issues facing them, but also plan ahead so that the company can function well even without their personal involvement. Often this means suppressing some of their own natural tendencies so that the overall organization can more fully develop. The resulting decentralization of power reduces a number of risks that are inherent when too much depends on a single individual. That's my own view--post a comment if you have additional views to add to this discussion.

Phil Morettini
PJM Consulting
www.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 (especially technical folks) 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 at once.

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 a very good 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 were 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 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. Don'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. Be careful that you don't inadvertently make decisions or set up policies that reward or tolerate company politics.

Departmental Social Integration
I recommend planning activities which allow sales and marketing counterparts to get to know each other as "people" outside of their project activities. In many ways a successful outcome is all about relationships, so closely monitor the personal relationship between VP-Marketing and VP-Sales. Also, make sure that the VPs are monitoring the 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 usually the trigger which starts the battle rolling

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 and MBOs to reward the two departments for working together. Also, 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', make sure to pay close attention to the individual departmental activities, which can nevertheless greatly effect the perceived performance of the other department. Optimizing the cooperation between sales and marketing demands an up front look at things such as the corporate structure at the highest levels, the social fabric of the company, compensation structure and use of MBOs, and formal cross-departmental reviews so each department can influence the other department's approaches. All too often in my practice at PJM Consulting, 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 conflict. What has been your experience in this area? Post a comment and begin a discussion.

Phil Morettini
PJM Consulting
www.pjmconsult.com

Structuring Channel Discounts for Software and Technology Companies

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

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

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

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


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

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

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


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

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

Phil Morettini
PJM Consulting
www.pjmconsult.com

Competing with Entrenched Software & Technology Industry Giants

I was reading an article in the business section of our local newspaper recently about a new Search Engine name CUIL (pronounced Cool). I already knew about CUIL, because I had noticed that it had recently indexed the PJM Consulting website. One of their claimed differentiating factors is that they've their search index is twice as large as Google's is. In addition, they believe that they have improved the ranking algorithms, and they also present the results in a different way. The results offer fewer results per page, but more comprehensive information on each site, and often include a photo or other graphic. The premise of the article was that it may have a chance to be a real competitor vs. Google, or at least Yahoo and Microsoft, for market share in the huge search business. The founders have impressive pedigrees and come from Google on the technical side.

The article gives credence to the possibility of CUIL being a potentially serious competitor to Google, Yahoo and MS, while pointing out that quite a few companies have attempted to enter this fray, creating barely a blip in search engine market share to date.

I've taken a quick peek at CUIL--the presentation is definitely different and may be superior for some tastes. But at least at this early stage, in my quick look I wasn't terribly impressed with the relevancy of the search results. No matter how you present the data, the relevancy of the results is paramount in search. I'll be sticking with Google for now, but will keep an eye on CUIL to see how it develops over time.

Will CUIL succeed? It's of course way too early to tell. They're taking on what is arguably the most powerful technology company in the world today, attempting to compete with them in their core area of strength. So you can't say that the odds of success are high, which they rarely are for any startup. But this IS the technology business, so you've got to give them at least a puncher's chance. Like it usually is, the key will likely be how well they execute.

But execution aside, what's the best way to go about competing in the software and technology industries today? Should you just steer clear of the elephants of the industry? Many believe this is prudent, but I think it is not always necessary. After all, it wasn't so very long ago that is was nearly impossible to get a venture capitalist to fund a company that was perceived to compete in a category with Microsoft (which could be viewed as MOST categories of the software business). Yet a short time later, Microsoft is considered in many ways a dinosaur, one that is quite beatable (don't get the impression that I'm writing MS off--I'm not. Redmond may yet rise to dominate again).

If it isn't insane to compete with the giants, what are some best strategic practices that an early stage tech company can adopt to give it the best chance to survive and thrive, when entering market categories with large, entrenched competitors?. Let's take a look at a few ideas:

Make Sure that you can Differentiate - This would seem obvious for any business, but when you are going up against a huge company with a good brand--well, don't even try it without significant differentiating factors. They don't need to be product related, necessarily--it could be free and outstanding support, better price points, exceptional ease-of-use, or many other things. But don't kid yourself--you will need REAL differentiation.

Pick a Niche, any Niche--at least to start - It is important to pick a small enough niche so that you can provide that true differentiation discussed above. Your investors may want you to attack a huge market, but if you don't have that influence pushing you in that direction, pick a small area that you can have a higher chance of dominating when you're new. If you are successful in your initial niche, you can then broaden out into adjacent segments. Down the road, maybe you take on the giant "head-on"; but starting out is NOT the time for this.

Raise more money than you think you will need - Every once in a while a new company will "hit on all cylinders" from the very beginning. But in my consulting practice at PJM Consulting, I rarely see this. In fact, a good part of my practice is helping companies "pick up the pieces" after their initial business plan or execution has gone awry. No one likes to give up more equity than they need to, but things usually take longer to start working than you initially project. There are usually too many things that you don't know, until you really get into the marketplace. Plus, it's generally easier (and cheaper!) to raise a bit more money at first, than it is after that first misstep. A little extra funding in the bank can be a good insurance policy against a capital crisis early on.

DON'T try to be like them - A common mistake that I often see early stage companies make is trying to "be like the giant competitor". Sometimes this comes from an inferiority complex, and sometimes because the founders come from one of the giant companies themselves. The last thing you want to do is create a big company bureaucracy. In most ways, you want to operate VERY DIFFERENTLY from you huge, slow-moving competitor. Resist the urge to create huge amounts of process before your company size dictates it as necessary. Be very careful about hiring away senior executives from you giant competitors, unless you are certain that they also have successfully operated in an early stage company before. Stay as fast and nimble for as long as you can--that is a primary advantage at this stage of a company's development.

Recognize the giant's execution weaknesses and beat them there - Analyze the large competitor's business, and try to create your differentiation where they are weakest. It could be faster customer service, better channel relations, better ease-of-use, etc. If you concentrate your differentiation where they are doing the poorest job, it will accentuate the difference to the marketplace, and you will have a better chance of your advantage being recognized.

Focus, Focus, and Focus - This advice can be viewed as the culmination of the points above. Make sure that you don't try to do any more than you can do EXCEPTIONALLY WELL at this stage. You can always expand your focus later. Remember, there is a good chance we would all be speaking German, if Hitler hadn't prematurely opened up a second front with Russia in World War II. The tech landscape is littered with companies that followed an analogous strategy, with similar disastrous results (Novell and Netscape are two former high-flyers that immediately come to mind).

SUMMARY

As an early stage company entering a market where a major company or two are the known leaders, make sure that you don't "bite off more than you can chew". You can always expand your focus after initial success. Contracting your focus is usually quite a bit more painful, and many companies don't make it through that transition. That's my advice on how to attack a large, entrenched competitor. As usual, I'd be interested in seeing your comments.

Phil Morettini
PJM Consulting
www.pjmconsult.com
pm@pjmconsult.com

The End of Customer Service

No one answers the telephone anymore.

At least, technology companies in the US surely don't. With big companies, you are either presented with an endless phone tree--"press 1 for a company directory"--or the newest innovation in communications technology: the cheerful "automated voice attendant". In many cases these attendants, and several other "innovative" service options, can lead to a great deal of frustration for customers and prospects.

As a consumer and business buyer I've found this frustrating, not to mention an incredible productivity sink. As a High Tech industry executive and consultant with a strong marketing background, I find this practice curious at best--and insane at worst!

Think about it--how many BILLIONS of dollars companies spend trying to get the attention of potential new customers--most of who are going to need to contact the company at some point. Yet it seems that once we've got their interest, or God forbid, they've signed up as an actual customer--we are doing everything possible to keep them away. Doesn't anyone remember the old marketing adage about current customers being your best source of additional business? Management guru Peter Drucker once said "The purpose of business is not to make a sale, but to make and keep a customer." Apparently not many people agree with this, or have forgotten it, because "modern" customer service practices are doing there best to drive these folks away. Let's examine some of the new customer service approaches:

OUTSOURCED CALL CENTERS IN OTHER COUNTRIES

This may be everyone consumer's favorite new "pet peeve"--calling an American company based in Chicago, or Iowa or San Jose--only to be connected to some call center somewhere in India. Often this leads to a very, very frustrating experience. Companies are going this route for support as an expense driven decision--to obtain cheaper labor. But the reps on the end of the line are often poorly trained, probably aren't employees of the company that you are calling, and often don't speak English with an accent that is easy to understand for most Americans. Are there good reps who give great service available in these call centers? Certainly, I have spoken to more than a few. But compared to the "good old days" of local support, the average caller experience has degraded significantly. Add this to the initial frustration that the caller who is dialing has because of a problem with his or her new $1200 PC--and you don't get a prescription for a happy customer.

PHONE TREES

This one has been around a while, but the increasing complexity of the tree, and well as the difficulty of exiting it to get to a live person, has continually made the situation worse. You can literally spend 5-10 minutes just navigating the phone tree these days. Oftentimes, callers just give up--which appears to be what companies want. I'll discuss below why companies shouldn't.

AUTOMATED ATTENDANTS

As I discussed above, this is one of the more recent scourges of the besieged customer with a problem. Ironically, Automated Voice Attendants have been made possible by a really nice leap forward in voice recognition technology. And there is no doubt that these products have come a very long way from the days in which they were first implemented. But talking to a machine is at this point still inherently inferior to speaking with a real human. I endorse the use of these Automated Attendants, but they should be used judiciously. I would still utilize them only at the very beginning of calls, and not require them to take a customer too far down the line of getting their problem addressed. Also, please make it easy to get away from them to a live human. With the high market share of some of the Automated Attendant companies, I am having far too many conversations with the same perky, Stepford Wife-ish-sounding artificial female voice. It's getting a bit creepy. While we're at it, let's talk about my biggest customer support pet peeve. With all of the sophisticated software available today, why is it that I have to give my account number and god knows what else to this robot lady, and then repeat all of the same information to the first live person that I speak with, as well as everyone that they transfer my call to? I understand security concerns, but geez! Hasn't anyone heard of data sharing and company firewalls?

"INTERNET COMPANIES"

The advent of the Internet has allowed for the creation of the ultimate small company: one man or woman, behind an Internet site. These companies invariably list no contact phone number or physical address. You can only email them for support, or if you're really lucky, IM them. Unfortunately, potential customers figured out that this is likely a one man operation long ago. They will be reluctant to buy your product as a result, because they don't believe you are "for real", or at least they won't be able to get good support. If you have the capability of offering real support, I urge you not to present your company in the image of one of these "Internet companies". If you do, it will cost you business.

FEE-ONLY TECH SUPPPORT

I won't deny that is some cases tech support fees are justifiable, and necessary. Even for consumer tech products. But in most cases tech support, and least at some level and for some period of time, really needs to be bundled into the base product offering. This trend came about with the intention of making tech support a "profit center". While I believe that tech support can drive profits, in many cases it shouldn't be done by attempting to extract additional money from customers (especially upfront or on the initial call) for the right to call in to get product issues fixed. There is a standard of care that most customers believe is fair: Help them get the product installed, up and running. Take care of any bugs or product defects. If you don't meet this standard, you will likely pay for it yourself--in reduced customer satisfaction and loyalty.

I want to emphasize that I am not a racist, market protectionist, political isolationist or technophobe. I have nothing against a man or woman working in a call center India, doing their best to do their job. I'm also a tech guy, and certainly love the idea of using technology to increase labor force productivity. But as a marketer, above all else, I believe in the old axiom: THE CUSTOMER IS ALWAYS KING. Customer service today is not treating the customer as King, but like the lowest creature on the food chain. It's possible that we are just undergoing a period of "growing pains", implementation issues, and the new customer service methods discussed here will be the way to go in the long run. Maybe technology maturity and some additional training for the folks in those faraway call centers will correct the current painful situation.

BIG OPPORTUNITY TO GAIN AN ADVANTAGE

But my guess is that those corrective measures are a long way off. In the meantime, there is a big opportunity for savvy software and tech companies to use this "gap" that has occurred in most company's customer service, to gain a strategic advantage in their market segment.

Unfortunately, in my Software and High Tech Practice at PJM Consulting, I find that customer service operations are usually an afterthought to senior management--especially in early stage companies. It's understandable, since it doesn't appear to be part of the strategic core that will mean the difference between success and failure for a young company. But in today's world, used properly, customer and tech support can indeed be a strategic weapon.

Not only can good support cement the relationship with the customer and build long term loyalty, but don't forget that you've got a customer on the line! Remember the old adage I mentioned above about your current customers being the best place for incremental business? Once you've satisfied the caller's concerns, you have an opportunity to educate them about new offerings, present them with a special offer, etc. The possibilities are nearly endless to profit from this customer interaction. This interaction by the way REQUIRED NO INCREMENTAL MARKETING EXPENSES TO INITIATE. Companies don't realize the opportunity that they are leaving on the table, both to increase customer loyalty, and sell incremental offers to existing customers.

DIFFERENTIATION FROM COMMODITIES

Let's talk about a specific example: HP & Dell in the PC business. I'm an old HP alumnus, and until recently, a long time Dell customer. Over a long period of time, customer support, specifically technical support-- has gone from a major strength, to a nightmare for customers of both companies. At various stages of the customer ownership lifecycle, both of these companies throw every obstacle I've discussed in this article at you--Endless phone trees, automated voice attendants, email-only or IM-only tech support, and clueless representatives in foriegn call centers. PCs are as close to a commodity as anything in the High Tech business these days. These two market leaders, along with their competitors, are pretty much slugging it out on price (and brand, which means less and less in a standards-driven market like PCs). This is certainly not the way to achieve high gross margins, let alone customer loyalty.

Personally, I'd pay 10-15% more to buy a computer from a company who guaranteed good, local tech support. I run my business on my PC; when a problem occurs that I can't fix on my own, it is often excruciatingly painful. I'm sure that these companies don't believe that I, or many others, would pay more. But if a PC company put forth a well-developed marketing message touting their emphasis on technical support and customer service--and stuck with it--they would obtain a customer for life. Now, I may not have been willing to pay such a premium 10-15 years ago, before real customer service "ended". I may have gone for the lowest price. But with personal service and support nearly gone the way of the Dodo bird (become extinct), things are different. Since good, personalized tech support has become a scarce commodity--it is therefore an opportunity that some smart company can exploit.

SUMMARY

There's a big opportunity out there for smart technology companies to go against the current trends in customer service and tech support. Make it easy for people to reach you, using whatever method they prefer. I'm suggesting short phone trees, live operators, and an adequate number of representatives to eliminate long waits. Focusing completely on expense control or technology solutions, not personal service, is a mistake for tech companies. Savvy, "forward-thinking" software and tech companies can increase market share and customer loyalty with an "old school" approach--personalized customer service and support.

That's what I have to say about the state of customer and tech support today--what's your opinion? Post a comment if you'd like to discuss this further.

Phil Morettini
PJM Consulting
http://www.pjmconsult.com/

Negotiating and Working with Large Technology OEM Partners

The Holy Grail for many software and technology companies, especially the early stage type, is the big deal. Everyone is looking for the big deal, the one that will fund the company's early activities, provide market credibility and momentum in the marketplace. Of course, if it goes well, there can be nothing better. Many times the big deal takes the form of an OEM partnership with a much larger company. But often when these deals do happen, they end up fitting in the category of "be careful what you wish for".

TARGET YOUR OEM PARTNERS CAREFULLY
This is where it all starts, good or bad. It's important to pick compatible partners. Companies looking for large OEM partners are often blinded by the potential of what the OEM can do FOR their business. They often fail to pay any attention at all to what the OEM might do TO their business!

Can the partner cause severe channel conflict? Will they tie the small company up in endless meetings, procedures and negotiations? Do they have a corporate structure and culture so foreign to your way of doing business, where you end up pulling your hair out from frustration--unable to accomplish even the most simple business objective without moving mountains? Sometimes with large companies, its difficult even figure out who you need to speak with--let alone get a prompt, unambiguous answer.

Get to know your partners well before you sign a deal. It's tempting to rush in before "they change their mind", but the actual relationship is critical to potential success. It's like dating before a marriage--no matter how attractive the partner is, you need to make sure you can live with them later on.


NEGOTIATE FROM STRENGTH
I don't like to do deals with people that are sure they have the upper hand. If they think they can push you around--they almost certainly will. Usually one partner needs the other to a greater extent, but you want to try to avoid dealing with partners where you have no leverage at all. It generally doesn’t' turn out well. Make sure that you negotiate a deal that you can live with. Above all, you need to have a "line in the sand" that you won't cross--and be prepared to walk away if the negotiations cross that line.

This can be a painful and difficult thing to do when you are seeing big "dollar signs" in your eyes--and fear if you stay strong, you might blow the deal. But remember, you have something that the other side wants as well--or they wouldn't be talking to you. If you don't know what your minimum successful deal looks like, and you aren't prepared to walk, you may sign a deal that you will regret. Not to mention tying up your time and resources, which might have been used working with a more compatible partner.


WORK ON EVEN TERMS
Once you've negotiated a deal that you can live with (and hopefully prosper with!), it's time to get to work with your partner. Try to keep things as fair and even as possible in the relationship. Of course, it's important to be accommodating to your partner, and respect the differences in operational procedures. Big OEMs will usually move slower than you, be more process-oriented and structured, and include more people in the relationship. All of this is fine, but it needs to be tempered so that the larger partner doesn't "swallow all of you available resources whole". It can easily happen if you don't guard against it. They have more resources than you (but will always think they are busier!) as well as more process-driven requirements that need to be met. But don't be afraid to draw the line at a reasonable point, and remind them that you have fewer people and resources available. Suggest a phone meeting instead of flying three people across the country--ask that they come to your place, rather than always trekking to their headquarters. Propose that one of there folks spearhead writing that joint position paper, instead of some scarce resource in your company--you get the picture. Sometimes larger companies will smother you without even knowing they are doing it--don't be afraid to remind them that you need to do business a little differently.

KNOW WHEN TO SAY "NO"
If you've tried everything you know, politely, to keep the relationship equitable and reasonable--but it just isn't--don't be afraid to say NO. I meet many smaller company executives in my consulting practice whojust don't feel they can do this with a larger partner. They'll talk tough in internal meetings, but when back in discussions with the partner, the tough talk turns to submission. They just feel like the partner is too important to their business to risk ever offending them in any way. That attitude is a prescription for servitude for your company. I'm not suggesting being unpleasant; in fact, when standing up to a larger partner, it's critical to be calm, polite and non-defensive. But by all means be firm in delivering the message of what your business can, cannot--and won't'--do. If you don't, what could be a profitable relationship can turn very sour.


HAVE REALISTIC EXPECTATIONS
The last point I'd like to convey is that it's important to have reasonable expectations in partnering with large OEMs. Many companies go into these deals believing they will be "company-makers". In my experience, this rarely happens. Understand what the OEM can do for you, and build your business model around the most conservative projections of their performance that's possible.

Companies usually turn to OEM products from partners to fill niches that they don't fully understand, or don't feel would pay back--if they invested in developing it themselves. It is very rare for products licensed or resold from partners to get anywhere near the push that internally-developed products do. Be realistic about this, and you won't be disappointed. If revenue exceeds your conservative expectations, you'll be overjoyed.


SUMMARY
That's my condensed advice on working with the big software and technology OEMs of the world. This is a common activity for many companies--what's been your own experience? Post a comment and let me know your own view.

Phil Morettini
PJM Consulting
www.pjmconsult.com

Channel Pricing Strategy for Software and Hardware Products

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

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

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

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



LIMIT VOLUME DISCOUNTS
If you choose the "more volume=greater discount approach, your multi-channel strategy is a house of cards which will soon collapse around you. One channel will quickly grow to dominate, and the other channel types will soon quit selling on your behalf, and wither away.


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

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

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

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

SUMMARY
Pricing seems pretty simple on the surface--when channels are involved, it's anything but. It's important to fully think through the downstream effects of your pricing policies when multiple distribution channel are involved. Let me know if you have questions, or you own channel pricing stories that you'd like to share.

Phil Morettini
PJM Consulting
http://www.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 month 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 in any product in high tech industries is almost impossible, from an accuracy perspective. Forecasting accurately the performance of NEW PRODUCTS in technology markets is TRULY impossible to do accurately. With 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 new technology product:


TOP DOWN FORECASTING METHOD

The first approach that I usually engage is what I like to call 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. 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 what I call 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 from 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.


SUMMARY

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 this forecasting daunting task. Feel free to shoot me an email with your questions, or leave a comment for discussion.

Phil Morettini
PJM Consulting
www.pjmconsult.com

System Integration vs. Product Development

I've recently engaged on assignments with two new clients. Both of them have businesses selling to large, blue chip customers. Customers of the size that are used to "having it their way"; as a result, getting a deal with them often includes the need for a lot of customization.

The interesting thing about these two clients is how they perceive and approach that need to customize.

A Tale of Two Companies

Company A views customization somewhat as a pain and distraction, something to be controlled--I am assisting them with creating a standard solution offering menu outlining the "Base" offering, with a list of options available at an added cost. They really want to discourage certain customizations, absolutely won't do some things that will be asked, and want to make sure that they charge dearly for items that they find painful. They have the classic mentality of a product company; they want to do the amount of customization necessary to make a large sale to this important customer--but NO more than they have to.

Company B, which also considers itself a product company, has a very different mentality about customization. They welcome it, pride themselves on it, and position themselves to these potential large clients as someone that can quickly bring solutions to the client, customized to their desires. They want their big account reps to be scouring the big accounts for unique pain points or opportunities, which might fall within the company's core capabilities, enabling them to propose a customized solution. In fact, up till now, their product development approach has really been to find out what individual accounts want--and build it for them.

So which of these two business models is the best way for technology companies to go?

System Integration Business Models

Advantages:
*More flexible and able to change with shifts in the marketplace
*Not as capital-intensive due to less "betting" on upfront product development
*Easier to grow business organically with internally-generated capital than in a product business

Disadvantages:
*Less risk due to lower upfront investments
*More competition; System Integration is an "easier-entry" business
*Generally lower operating margins
*Growth is less scalable than a product-oriented company

Product-Focused Business Models

Advantages:
*Provides greater opportunity for strategic advantage and resulting fast growth
*Less competition if a product/brand/technology differential advantage is created
*Can scale much quicker if a hit product is developed
*Higher operating margins if product is successful
*Usually more marketing-driven and less labor-intensive
*If creating a very large company is the goal, much easier to raise outside capital

Disadvantages:
*Much more risk of "crib death", resulting in complete capital loss if first product has problems in development or marketing
*Harder to "get over the hump"; success is harder to come by, and success often happens as a step function after a difficult startup period

First of all, I want to emphasize that there isn't necessarily a "wrong" approach with either of these business models. You can make a lot of money pursuing either model. Both of the companies I have used as models have managed to attract blue chip customer which would be the envy of any company. What we are really talking about here is the difference between a classic product-driven company and a system integrator.

Company A is that classic product-driven company. They customize when they have to, but also have a point where they will say "no".

Company B also self-identifies itself as a product company, and in fact they have built their business around a small number of standard offerings. But as their core strategic advantage they really are utilizing relationships, the ability to customize beyond what standard product companies (especially larger ones) are willing to do, as well as to react very quickly to customer requests. They've built a very nice business doing this, but have some frustrations as well. They are highly dependent upon a small number of major accounts for virtually all of their revenue, and have the major revenue/profit swings that are associated with this type of business--up one year, back down the next. They also are in constant fear that a larger company will come along and "take away" their marketplace, because they've continuously failed to create new products which build upon a core offering which is very dated technologically. The core offering appears long-in-tooth and vulnerable. This company is very account-focused, and the lack of a market focus has kept them from being able to create additional, broadly marketable products which provide them with a strong proprietary advantage (and causes a lack of sleep at night!)

Company A understands who they are and what they want. That doesn't guarantee success, but it makes it much easier to build a plan that everyone agrees on. At that point success or failure usually depends upon execution, unless the plan is awful. If failure ensues in this scenario, more times than not, the problem is in execution. Company B's biggest problem is that they are floating right in the middle between the two business models. They are trying to leverage both of these business models, and struggling with execution, in some ways with both.

SUMMARY
It isn't impossible to combine these two business models successfully. I'm sure that many of you can't point to several examples of such a very successful compromise. In fact, many technology companies combine both of these models to some extent, with good success. But I find that usually, a company identifies itself primarily as a product company first, or a systems integrator. That identification is their strategic focus, and takes precedence when prioritizing the use of always scarce assets.

The secondary business model is usually utilized on an opportunistic basis. Product companies integrate and customize as needed to get a big deal. Integrators create "products" to fill the needs of a big account, and sometimes happily find they are saleable to other accounts. Occasionally, these "products" prove so widely saleable that they are spun off into a separate product company, or the integrator changes its focus into becoming a full-blown product company.

The most important thing, in my opinion, is to understand who you are, and what you are trying to accomplish strategically. It's the company's that are trying to leverage both business models at once, without one model taking the lead, that gets itself in a heap of trouble. That's my opinion--what's yours?

Phil Morettini
PJM Consulting
www.pjmconsult.com

The Future of Wireless Communications

Land Lines are going away, right? Everyone says so. We hire young women, generally in their twenties, to help take care of my son. I can't remember the last time one of their phones had an Area Code associated with the place they are currently living.

That's because they don't use landlines--many people in their twenties and thirties move around a lot, and rely strictly on a cell phone as their sole or primary telephone. If they have a couple of roommates, occasionally they will also have a landline. But the number usually isn't given out, and doesn't appear to be used much.

So does this mean that we are rapidly heading toward the wireless society that pundits have been predicting for a number of years? Or is wireless growth slowing and about to settle into mature market mode, with modest incremental growth in the future? There are a number of factors on both sides of this discussion--let's explore a few.

Factors Pointing Towards Acceleration Of Wireless

Mobility
Society is becoming more and more mobile as time goes on, and everyone is getting used to being able to do things on the go, that used to be done only at home or the office. This trend appears to be one that will only continue--and is a positive thing to most people's thinking. I do think there may be a bit of a backlash in this area--"too much of a good thing"--I'll address this later on.

New Services
The addition of many new services should drive users to utilize wireless as an increasingly greater percentage of their total computing/communications device usage. Trends such as the merging of consumer cameras and music into smartphones create the types of new services that are driving increased wireless usage in the near term. Location-based services could provide another nice pop in growth, if they ever do reach their potential (and they've been "coming" for quite a while). I would note that I don't consider these trends the type of major innovations that will cause a fundamental, "step-function" like shift and a major positive effect on wireless usage. I view these new applications as incremental, something to continue the modest growth we are currently seeing in the wireless market--in the western world, at least. Outside of the developed world, of course, there is some phenomenal growth occurring. In terms of market development, I view rapid wireless growth in developing countries as a "catch up" phenomena.

Cost
This is a bit of a two edged sword. Like any other technology-driven market, the cost of electronics and services are being continually driven down, especially as wireless has scaled into a mass market, with corresponding economies of scale. Up to this point, at least, there has been sufficient competition to drive down the price of services from the wireless carriers. There seems to be some flattening of this price deflation in the US recently, however. On the other hand, as new services have been introduced, the "total bill" that consumers end up paying for ALL of their technology services (wireless, TV, Internet Access, etc.) has been going up. There will be a point where consumers say "enough is enough"; the total tech entertainment and communications bill simply can't rise forever.

Technology Innovation and Competition
I do believe that technological innovations, market scale, and competition will all play a factor in continuing to bring down overall costs in the long run. New technologies such as WIMAX, networked WiFi and in-home pico cell towers will provide technological alternatives for consumers, and therefore increased indirect competition. And there are certainly many exciting developments in research labs which we haven't even heard of yet, that will lead to increased innovation and continuing industry growth. I really believe that the technological aspect of wireless is still in its infancy, and will be the major factor that leads to long growth in wireless markets.


Factors Pointing Towards Slowing Of Wireless


QOS
The biggest issue, in my opinion, that will limit the future growth of wireless, is the lack of sufficient Quality-of-Service. Current cell phone service in the US sucks. There's no other way of putting it. Depending upon your carrier in a given metro area, service can still be spotty, with persistent dropped calls--even after all of these years, and the fact that cell phones are a ubiquitous mass market item. I still have 3 landlines in my house, two for business usage. I sure don't want to talk to a new client on a cell phone connection--if I can help it. I know many business people that don't feel this way, and use their cell phone exclusively--my opinion is hardly universal. But I don't really understand it. Especially inside, in homes and offices, you just can't trust that the call quality to be anywhere near what is demanded by an important business call. Some of this is based upon real issues--mountains in the way of radio waves, etc. But much of the problem is simply the wireless carriers jamming too many calls into too little spectrum, for cost reasons. I'm quite surprised that no one has yet come up with a "business quality" wireless service, which guarantees a higher level of call quality--much like a business or first class airline seat.

Complexity
As new features and services get added, even if they are welcomed, user interfaces and experiences almost always get more complex--at least initially. Complexity is the enemy of mass acceptance. So vendors need to be careful about adding new bells, whistles and new revenue-generating services faster than the market can become comfortable with them

Size
The size of devices, dictated by the need for mobility, works directly against a premium user experience for many functions. The new iPhone is a major step forward, for example, and sets a new standard for browsing the Internet on a truly portable device. Yet anyone that would rather surf the net on an iPhone, rather than any real computer, would have to be classified as insane. As more compelling online services are developed specifically for mobile devices, this may become less of an issue. But the size constraints required to make a good mobile device work against wireless devices for many current applications. Here is where I believe that truly breakthrough technologies--things like speech recognition, holographic displays and virtual keyboards--are needed to make a real dent in this issue.

User experience controlled by Telcos
The wireless carriers have held a stranglehold on the user experience thus far in the life of cell service. Because of this, you have large, conservative telephone companies basically deciding on what users want and should have, in an otherwise technology-driven space. Most of their decisions are driven by their own short term revenue concerns, with little vision on what can grow the market exponentially in the long run. At the most basic level, you can't even take your cell phone and use it on a new carrier network. A few major technology vendors are pushing to open things up, such as Apple and the open browsing experience with the iPhone, and Google's recent attempts to make new wireless spectrum open. But the wireless telcos still have a stranglehold on the market and will keep things as proprietary as possible for as long as possible. They're terrified a being left as just commodity bandwidth providers, like their wired counterparts were in the dialup Internet market. No one on the carrier side wants to see THAT happen again. Because of this, innovation in user experience will continue to be stunted.

It's Just "Too Much"
As I mentioned earlier in this article, we're all becoming instantly accessible no matter where we are. I am an early adopter of many types of gadgets--a real tech guy. I am also an email junkie. I always expected that I'd be one of the first users of a smartphone that provided the proper balance between a cell phone and a computer/data communications device. Certainly these devices have been refined, and exist today. But by the time it happened, I decided that I really didn't need to be quite that accessible. I'm not an emergency room doctor, nor a high level commodities trader that needs instant access to everything. It's rare that I'm not in front of a computer to get email access within a couple of hours. And I can always be reached with a regular call on my cell phone, office phone, or home phone. Do I really need a device that provides instant email, instant messaging and cell phone access? With the convenience of that device comes the penalty of never having a moment's peace that is totally within your control. It's my opinion that as modern life has accelerated to warp speed on a normal basis, more and more folks are going to be rejecting the notion that 24/7, instant access is a necessity--let alone a convenience.

Summary
It is always difficult to forecast how such a huge, important market will develop over time. In many ways wireless communications has already commoditized, and in other ways one can hypothesize that these technologies are in their infancy. If they are truly n their infancy--then forecasting the future is a dangerous game. My own feeling is that we are at a very early stage--a plateau of sorts, which appears much like the steady-state commoditization of mature markets. But I expect that there will be a number of disruptive technological changes coming, separated by a period of years where the negative factors slow growth, over the next couple of decades. Wireless communications will hit plateaus where it appears the market has matured and growth has slowed. Then a breakthrough new technology will appear, changing the game and re-igniting robust growth. What will those technological innovations be--holograms, speech recognition, or large increases in data throughput capacity in the wireless spectrum? That's where the guessing game begins. How do you see this market? What breakthroughs do you see in the coming years? Post a comment and enrich our discussion on this interesting topic.

Phil Morettini
PJM Consulting
www.pjmconsult.com