A question that often arises with early-stage software and hardware companies is “How should we sell our product? Should our technology sales approach be to sell directly, or should we sell through distributors, dealers/retailers, or OEM partners?”
Best Technology Sales Method: It depends
The answer, like most topics discussed in this forum, is rarely as straightforward as the question itself. It depends on a lot of different factors. First of all, if direct, does that mean building an expensive direct sales force? Or using a marketing-driven model with the “direct sales” coming from a website? If indirect through dealers/distributors, does it mean distribution through 11,000 mass retailers at one extreme? Or selling through only a select few, highly specialized, technical Systems Integrators at the other extreme?
So, there are so many different options within the direct vs. indirect argument itself! I have a strong bias toward using multiple channels—both direct and indirect—if at all possible. It’s always been my opinion that this is usually the best way of achieving the highest total return on the high IP investments typical in the technology industry. But that’s a general rule and one that won’t always hold up in individual cases. Let’s take a look at some of the things a company should consider in formulating a direct or indirect sales strategy.
High and medium product complexity
It’s always important to take an inventory of the details of the product when considering any aspect of your sales and marketing strategy. Is the product complex to sell? Is it complicated to install? If a typical installation is highly complex and/or highly customized for the client, there may be a high level of services required. Sometimes these services can only be delivered by specialized experts within the company. If this is the case, a direct model usually works best.
If there is what I would term a “medium” level of complexity to the product, this often lends itself to the utilization of VAR and System Integration partners. This class of partners is attracted to products that allow them to bill high-value configuration, customization, and service hours. This is how high-end channel partners make their money. As a result, they are motivated to sell this type of complex product. to the extent that VARs really will “sell” a product at all, a much longer discussion. The key here is that the product isn’t so complex that the partners can’t be reasonably trained on the product to enable the delivery of these services somewhat independently in the field. They must be able to deliver these services with a minimum level of hand-holding by the vendor after initial training.
Low product complexity
The last case is a product that is quite simple or has a minor level of customization that can be performed by the end-user themselves. This level of product complexity usually lends itself to multiple, broad distribution channels. These may include direct and mass market indirect channels which provide great distribution breadth, but require minimal support. VARs and Integrators may also sell products of this nature, but they won’t put much focus on them, since they don’t drive service revenue. VARs will essentially “take orders” for this type of product as a convenience to their clients. They won’t be a “strategic” channel for this type of product. But there are a LOT of VARs. So VAR channel sales can still add up to a substantial total cumulatively. You shouldn’t ignore VARs if they are appropriate for your product, regardless of product complexity.
How high is the product price?
A high price can lead you in two different directions: Direct-only, or to a VAR/Systems Integration distribution strategy. If you’re selling an Enterprise Software Product into a narrow niche with an average deal size of $2M, you’re probably going to end up selling the product directly. If, however, you are selling a $5K-100K average-sized deal, and the addressable market is a bit larger and less well-defined, the VAR/Integrator channel may provide real leverage.
For products that fit into the $9.95-$5k range, a multi-channel marketing and distribution model may once again be your best bet. Products in this price range usually are very standard or have user-customizable features. They lend themselves to “marketing/sales-intensive” distribution channels, rather than support/customization-intensive channels. This might mean a focused direct marketing approach with a SaaS-based model. Or direct downloaded software sales from a website, possibly with intensive inbound/outbound telesales. In the case of some hardware, maybe sales through mass market stores and websites.
What does the promotion mix look like?
High-priced, directly distributed products tend to have very simple promotion plans. The reason for this is that high-priced products typically have small focused markets. So it’s pretty simple to get your marketing message to the customer. The simplest promotion strategy is what I call “Door to Door marketing.” Door to Door marketing means relying on the salesforce almost exclusively to promote your product. This means little or no investment in traditional marketing programs. Maybe due to limited resources, your promotional budget only allows a monthly Ad in a highly targeted online trade journal or a modest amount of PPC advertising. Door-to-Door marketing isn’t a strategy that I generally recommend. But for very narrow markets, it is occasionally appropriate. Bottom line, simplistic promotional strategies are generally only advisable for direct distribution approaches in small, niche markets.
On the other hand, suppose you have available a large budget and a wide variety of promising promotional programs. This is often successfully coupled with a broad distribution strategy. If you’re promoting in many different places, that may drive demand in a variety of different channels. In general, I recommend using everything available to you when resources and market specifics allow it.
Also, I’m rarely a proponent of selling “indirect only”. In this case, you tend to lose valuable market information without a strong direct link to the customer. You also leave money on the table by giving up margin to channel partners on customers that would prefer to buy direct. But every so often a company is so dependent upon channels that it doesn’t make sense to manage the channel conflict. Channel conflict requires a lot of time and effort attempting to manage the ill will that selling direct can generate with channel partners.
What technology sales channels are available to you?
Oftentimes, the decision on how to sell and distribute is made for you. If your company is in a missionary situation where you are creating a new market, or you are in a very narrow niche, you usually don’t have much choice but to sell direct. If it’s a new market segment, technology sales channels might develop later. But in most cases selling direct when you’re first getting started is highly advisable. This is true whether the market is new or not. Keep in mind that no channel in the world will be able to figure out how to sell a product that the vendor hasn’t figured out how to sell itself.
It’s always good to continuously conduct trial-and-error marketing/sales campaigns directly. Again, this is particularly true when you’re first starting out. You can then transfer that process knowledge you’ve gained to your channels. If you have a product that is broadly attractive to a variety of channels and you have the resources to promote and sell effectively through all of them, go for it!
As I stated early on in this article, I believe that this is the best way to optimize your return on assets. The only caution is to make certain that you have the necessary resources for this approach. Also, you are in a position to support all channels. If not, it’s better to “go slow” and add channels one at a time. If you alienate a channel, they have a very long memory! It will be hard (if not impossible) to get back in their good graces.
OEMs are a special case
One type of technology sales partner we haven’t discussed yet is the OEM manufacturer or developer. In some cases, there may be a large, dominant player in your business that you are tempted to pursue as a channel partner. Occasionally this leads to making the principals of a small company quite rich. However, I’ve found in many cases this ends up being fool’s gold. No one sells your product as well as you do. OEM deals that I see often end up with revenue levels in the range of 5-10% of the small company’s initial forecasted expectations. This can be disastrous in some cases.
OEMs can still be a substantial, important source of revenue. But it becomes a problem if you were building your budget on 100% of the OEM sales forecast. Because of this, I prefer early OEM deals to be non-exclusive, rather than exclusive. The exception is for a product that fits in a different market segment that the OEM addresses, which you don’t plan to participate in directly. But too many times I’ve seen clients “bet the farm” on one major OEM early in their development. More often than not, the company was either killed or severely wounded by the experience. Pursue OEMs if you like, but it is usually best to do so as part of an overall, comprehensive distribution strategy.
Location of the target market
Often it makes sense to develop your distribution strategy geographically. For example, you’ve developed a well-known brand in your home market by selling directly. But you haven’t ventured internationally yet. Because you’ve developed your business in your home market selling directly, you might be inclined to continue this strategy internationally. But this can be very capital-intensive and slow if your situation requires “putting boots on the ground” in each international market. In this case, you might benefit greatly by partnering internationally with a network of focused international distribution partners. By doing this you’ll be able to leverage the brand and existing customer base of each partner in their respective region. This is the type of hybrid technology sales and distribution strategy that results from evaluating what makes the most sense for your particular situation. DO THIS, rather than simply doing what’s familiar and comfortable.
How does the customer want to buy?
Finally, the most important question is “how and where does the customer want to buy”? One of my most closely held beliefs is that maximum revenue comes by offering customers what they want. That means a product is priced in the way they prefer, packaged the way they like, and sold via the channel he/she is most comfortable with. So if your prime prospect is a direct buyer, sell direct. If it’s a diverse audience that has many preferences on where to buy, strive to participate in all of those channels. This may be the most important advice that I can provide on technology sales and distribution.
That’s my review of the Direct vs. Indirect Technology Sales & Marketing decision. I’m sure there are a lot of different experiences out there on this topic. What’s your experience been? Post a comment or contact me directly using the info below. I’d love to hear your thoughts.
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Tim Whelan says
To hell with the product, start with the customer first. If there is no customer (not user) who will you sell it to? Who will use it? How will they use it? What about customer perception and need (this is primary). How will you develop the customer experience beyond the initial sales cycle or during the sales cycle? If they don’t need it they won’t buy it. If you manage to sell it to them anyway I guarantee they won’t be back for seconds. Customers first, know your niche (customer and their needs) and then you sell the product.
It is so typical for IT companies and their assorted sales and marketing people to push product first without first thought to their potential client. This is also the reason why so many companies have miserable product life spans, and are redeveloping on the customer’s dollar for their short sightedness often known as integration fees. I won’t even get into the development end here. The point is consider your client first, respect their opinion, and listen to their needs as they apply to their business processes not as they apply to your IT product. Then apply your skills. You’ll have greater success and a higher percentage of conversions.
Raju Kumar says
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“The point is consider your client first, respect their opinion, and listen to their needs as they apply to their business processes not as they apply to your IT product. Then apply your skills. You’ll have greater success and a higher percentage of conversions.”
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Doug Kessler says
Great review of the issues.
We've found that many tech companies that go exclusively indirect often lose touch with the market and it shows in lots of ways.
Mixing some direct sales into the equation isn't always possible but the dividends in market understanding are valuable.
Anastasios Christidis says
Phil, great article! Let me get this straight:
What you’re saying is that if your product is complex but cheap, then there’s no appropriate sales strategy for it. Indirect can’t work (due to the product’s complexity) and Direct can’t work (due to the high costs associated with this sales method). So… what?… is the product dead in the water? How does one go about this problem? I’m really interested in the equilibrium of “complex but cheap”
Phil Morettini says
Thanks for your comment–you read the article closely:-) Complex and cheap represents in my mind “Bad Product Planning”. Yes, there’s a good chance that your sales, marketing and support costs overwhelm your gross margins. Now, this is the software business and gross margins are very HIGH, so it may still be possible to sell the product at a profit.
But I likely wouldn’t. Depending upon how bad it its, I’d see if I could simplify the product, add value to it to be able to raise the price, “harvest” whatever you can get out if it–or if the situation is bad enough just walk away from it. As you’ve surmised, this represents the worst of both worlds from a price/performance perspective and should be avoided in the product planning/development process at all costs. The only thing worse is a product that completely misses the mark in the intended market.
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