Marketing and Selling Technology Products through the Value-Added Reseller (VAR) Channel

Selling through multiple channels is one of my preferred strategies in technology marketing. Done correctly, it allows a company to fully exploit its expensive, hard-earned intellectual property to the maximum extent. One of the most popular channels (and one of my favorites) used to sell B2B software and hardware is the Value-added Reseller or VAR channel.

THE VAR CHANNEL IS THE DISTRIBUTION HOLY GRAIL FOR MANY STARTUP COMPANIES

For a great many startup software and technology companies, building a VAR channel is the first thing they want to do upon releasing their first product. This is especially true when the founding management team primarily comes from a technical background. The thinking goes: “We are technologists who have created a great product. We don’t have a lot of experience selling or marketing. Most of our startup money has gone to and will continue to go to, developing products. Why not just outsource by recruiting a bunch of resellers to market and sell their product for us?” Sounds like a great idea on the surface, doesn’t it?

Unfortunately, there are very few strategies that are more flawed, and which have continuously led to failure than the one described above.

Let’s contrast the realities of the VAR channel, against this simplistic strategy that has been tried again and again. With little success.

WHAT VARS DON’T DO

1. First of all, VARs DON’T market. At least they don’t market YOUR products. They aggressively market their own services, but rarely anyone else products. So the very first flaw in this strategy is that it is based on a gross misconception of what a VAR typically does.
2. VARs don’t create new markets. VARs are great at selling into established markets and further expanding already growing ones. But missionary sales: brand new markets, categories, and products? Not so much.
3. They don’t SELL a wide variety or a large assortment of products. In fact, VARs are focused on actively selling and supporting VERY FEW products. That’s if they are even focused on “selling” any products at all.
4. VARs aren’t really all that motivated by high product margins, although they will never admit it.
5. The individual VAR does not exist to help YOUR company make money.

THE ABOVE LIST MAY SEEM QUITE COUNTER-INTUITIVE

Now if you’re not a sales or marketing professional with experience working with the VAR channel, you’re probably very confused by the list just above. So what is it that VARs actually do? And why is it worth dealing with them at all?!!!

What happens all too often is that a  startup CEO – often a technologist – will pursue the VAR channel as their exclusive distribution channel. They do this without understanding any of the points in the list above. Their effort will fail miserably. They will then scramble to begin selling their product directly, or through some other means. They will swear off the VAR channel forever, and I do mean swear:

“Those !!@#$%^^* resellers are good for nothing. They take a big cut of your margins while adding no value in return. I’ll never deal with them again.”

I can’t tell you how many times I’ve heard some version of the quote above from software and hardware CEOs and other senior executives.

But the VAR channel is a major force in the technology business. If you know what you’re doing, it can provide great leverage for your company. So let’s now take a more realistic look at what VARs CAN DO for your company:

WHAT VARS ACTUALLY DO

1. First and foremost, VARs are in business to sell their own HIGH MARGIN SERVICES. That is why they exist, and how they put bread on the table. If you learn and remember only one thing about the VAR channel, this is it. This revelation may be discouraging to some product vendors. But you must understand and respect this above all if you hope to leverage this channel. The only exception to this is the VAR’s “core” product(s), which will be discussed later in this article.
2. VARs are very interested in all things that apply to their own vertical focus. Although it wasn’t so true many years ago, most successful VARs these days do have a very tight vertical focus.
3. Many VARs act as “thought leaders” for their corporate customers. As a result, they are very interested in “what’s new” in the market. This is so they can stay on top of trends and remain market experts for their clients. So they will sometimes spend a lot of time talking to you about your new product. But even if they sign on as a pattern, often they never find the time to actually “sell” it. This happens even if they usually have the best of intentions going in. In the busy world of the typical small VAR, client demands and selling the core product and services often soak up all available time in the day.
4. VARs are also often used as “aggregators” of purchases by their corporate clients. Large corporations can use a VAR as a single vendor point of contact for their technology purchases. This greatly simplifies their purchasing processes as opposed to dealing with hundreds of vendors. In this way, VARs sometime will “pass through” a large number of different products to a corporate client.  Don’t confuse this will “selling”. This is TOTALLY demand-driven commerce. The corporate client often will also leverage the VAR as an evaluator and validator of new products and technologies. This makes them a very important link in the purchasing chain for many corporations. This is true even if you don’t think they’re “selling” your product.
5. If they put any real effort into “selling” products at all, it is usually into one of a select number of “core” products. These are the products that they have built their main service offerings around. If you aren’t a product that pulls significant high-value service revenue for the VAR, forget about getting “selling mind-share” with the VAR.
6. As I mentioned in 4) above, when it comes to selling “non-core” products, VARs are almost completely driven by the demand they see in their installed customer base. They won’t often add new products to their line card that they don’t see a demand for. The exception is if they are really techie, early adopter types. And these techies types will often excitedly add a product as I mentioned earlier. But quite often, they never find time to actually offer it (let alone SELL it) to their customers. Some VARs will offer ANY non-core product. But again, they really are only filling demand from their customer base.
7. The VAR channel can be EXCELLENT at fulfilling demand for great new products in their existing, installed customer base. If the product pulls VAR service revenue with it, you might even get a bit of push!
8. VARs can also be an excellent proxy for a vendor in installing, configuring, customizing, and offering first-level support. This can enable a vendor to extend its reach and leverage the VAR channel’s existing infrastructure. This can be a valuable alternative to building out a large field service organization. Depending on the product category, building out this service infrastructure may not even be economically feasible.
9. If you are successful in building an active VAR channel, it will likely have a positive impact on your overall business. Not JUST the incremental sales through VARS. This occurs due to having many additional places in the market where your product is available and discussed. This effectively increases your brand presence in your target market.

So given the points outlined above, what are the “best practices” to follow when you are seeking to build and leverage a VAR channel?

VAR CHANNEL BEST PRACTICES

1. Always sell your new product directly in the beginning.  Do this even if you don’t plan to build a large direct sales force and sell a lot of products directly in the long run. It is critical to first establish that the product works, and can be sold successfully. If you can’t sell your own product, no VAR will be able to either. And few smart VARs will be willing to try. De-bug and systematize the sales process, make sure that your end user price points are right and build a small reference account list. Do this at a minimum. Only at this point should you begin to seriously approach VARs to distribute your product.
2. Marketing the product is the vendor’s responsibility. Do not naively think that the VAR will market the product for you. Or believe that since you have VARs to sell, you don’t need to market at all! Remember, VARs are great at fulfilling demand among their existing customers. And very poor at creating it among new customers. The vendor must position its products in the market and create demand for them. Otherwise, your channel efforts will almost certainly fail.
3. Treat VARs like the valued business partners that they are. If you do sell direct, don’t “steal a deal” and take it direct just to make a few more points on one sale. Nothing is more short-sighted. Not only will this VAR not do business with you again. But in any given vertical it’s a small community, and word gets around fast. You risk becoming a pariah to the VAR channel and losing all the hard work you put into building your network. My philosophy is: when in doubt, cut the VAR in on the deal. If you don’t feel he’s adding any value to your business, eliminate him from your network later. But don’t use your low opinion of a particular VAR to convince yourself to cut him out of a deal. This may seem counter-intuitive, but your market reputation is at risk. You do this at the risk of cutting off your own nose to spite your face.
4. Be realistic about what the VAR channel can do for you. If you have a “non-core offering”, be happy that they “make it available” to their customer base in their catalog. Don’t expect them to sell it actively. Don’t try to convince them it’s core to their business if it isn’t. Remember, VARs are key influencers of their clients; just being available to endorse your product as something they offer to a customer is a valuable endorsement.
5. Provide a reasonable margin, but don’t “throw margin away” thinking that it will motivate a VAR to actively push your product–if they otherwise would not. It won’t work, and you’ll just be giving away money for no reason. A better use of this money is to use it creating market demand instead.
6. For most products, make sure that you don’t over-distribute by signing up more VARs than your market will support. Even though greater margins might not make a VAR push your products, the erosion of margins to near zero can cause a VAR to eliminate your product from their portfolio. It’s better to leave a few deals on the table than to risk demotivating your entire reseller network. If there are 6 VAR competitors bidding (with your product) on every deal in a particular area, that’s bad. This will eventually erode EVERYONE’s margins, including yours (see my articles on channel conflict).  The possible exception to this is if you represent a “core” product that pulls significant service revenue. In this case,  you may be able to get away with a lot more stuff. That’s because the product margins are trivial to the VAR compared to the lucrative service revenue derived from a core offering. But in this case, be careful when using your market strength to abuse partners. People have long memories and “what goes around, comes around.” You may not be in such a position of strength forever and you may need those relationships to be very good later. Screw all of your channel partners to squeeze out a couple more sales and they won’t be.

That’s my primer on how to approach, and even more importantly, how NOT to approach doing business with Value-Added Resellers. Post a comment or send me an email to delve into this important topic further.

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