I’ve previously discussed selling through VARs as a distribution channel strongly favored (maybe a bit too much!) by many early stage technology and software companies. In this article I’m going to look at another “holy grail” channel that is often misunderstood and misused: The Hardware & Software OEM Channel. This channel can pay big dividends, but more often than not companies aren’t realistic about its potential and what it takes to be successful in this partnering activity.
Let’s look at some important points to consider:
If you approach potential partners too early — without a brand and existing sales — there is no leverage in negotiating with the larger, more established hardware or software OEM prospective partner. In addition, it’s a much harder sale, because your company and product don’t have a track record.
Important–but secondary–revenue source
It’s best to treat OEM business as an important, but secondary revenue source relative to your own brand. This will keep things in perspective and prevent you from putting your company’s future in someone else’s control other than your own. While I’ve seen some companies who have succeeded with an OEM-only or OEM-centric philosophy, I’ve seem many more unsuccessful companies littering the side of the road to success.
Bundle rather than integrate
Once way to take advantage of large hardware and software OEMs without the downside of losing your own identity is to seek simpler bundling deals, rather than private label deals. By doing this you are essentially co-branding, building the power of your brand through affinity with the bigger partner company. This may leave you with greater marketing, selling and support requirements, but in the long run can lead to a larger, more profitable company in the long run.
Address a vertical out of your reach with a software OEM partner
A good way to utilize a software OEM is to fill a key vertical market where your technology has a place, but where you have little or no current presence in that segment. This makes sense when you decide that you currently can’t address this vertical as well with your own brand and have decided that it doesn’t make sense strategically to expend resources to develop a serious presence.
Leverage your IP into a new market
There are also cases where you main technology base can be easily used to create an entirely different type of product, which is intended to serve a completely different market relative to where you are selling under your own brand. In these cases it may make sense to team with an OEM in this disparate segment to market this spin-off product developed from your main technology.
When a company goes about it the right way, OEM business can be an excellent additional revenue source for startups–and any software or hardware company for that matter. As alluded to earlier, where I want to throw out a caution flag is when a company decides they are going to rely on OEMs as its primary–or only–channel of product distribution.
Now this can work, you might say. And you would be right. But in most cases, I believe, it isn’t the best way to proceed. It can work if you have the right type of product and you’ve thought your strategy through very thoroughly. The problem is that with most companies this not the usual scenario. What I find more prevalent is the old, simplistic “let’s make it and we’ll get someone else to sell it for us” approach. As I’ve discussed before, ‘let someone else sell it’ almost never works. This sentiment often occurs with a technology-driven senior team without direct experience in or a good feel for marketing or sales. The natural tendency in these situations is to avoid the current weaknesses in the organization and “let somebody else do it”.
The issue here is that sales and marketing needs to be a core competency in almost EVERY situation, if a technology company to become as successful as possible.
So what are the “bad effects” when an early stage technology company pursues OEM relationships as their sole distribution strategy–or at least “too early” in their company’s development?
EFFECTS OF “BAD” OEM STRATEGY
No development of internal sales & marketing
Companies with OEM-only business models tend to have weak (or nonexistent!) sales and marketing departments. Again, it’s my belief that sales and marketing almost always needs to be a core competency which makes this a bad idea. While you can run a company this way, in most cases the ultimate size and profitability will likely be a fraction of what your technology IP could have otherwise supported.
All push, no pull
Every sales and marketing activity works better if there are “pull” elements in addition to “push”. When selling to the OEM is almost solely a “push” activity with no brand awareness or the effects of your own brand’s market share to help pull the OEM to you — the process is much harder.
All your eggs in one basket
Even if you do well and gain OEM deals with premier partners–success is far from guaranteed. In my experience it isn’t unusual for OEM deals, especially early ones, to yield actual revenues in the 10-15% range of forecasts. That’s because you’re taking a product from a smaller, less developed company and dropping into the much more established distribution channel of a larger, stronger company. Should lead to huge sales, right? But usually it doesn’t, for many reasons. If this happens to you and you’ve built your company around these projections–you’re basically screwed. You risk “crib death” or at least a difficult restart with your own brand, due to the disappointing sales from the OEM relationship(s).
Your OEM swallows you whole
A very common scenario is a much larger OEM that starts treating its smaller, entrepreneurial partner like another department in its bureaucracy. The OEM stunts your overall company development by “tying up” the scarce resources of your smaller company in meetings, special projects, ever-changing product development requirements–and yes–even more meetings.
Given the potential pitfalls, how can I recommend using OEM partners?
THE “RIGHT WAY” TO INCORPORATE AN OEM STRATEGY
Develop your own brand/channels first
Pursue OEM business only AFTER you’ve established products under your own brand. It not only will provide you with a product that will be more stable and attractive to potential OEM partners, but you’ve got your own branded business to sustain you no matter what happens with your partner.
Another smart way to use OEMs is to “harvest” a volume product which may soon be heading for decline and is a product which you don’t intend to continue major investments. If you can get such a deal, it can be great way to maximize end-of-life revenue with minimum incremental investment.
Offer another price point
A strategy that can be used successfully in some cases (but is a bit dangerous) is to use an OEM to offer another price point in the market, one that you choose not to address with your own brand. More often you would do this with your own alternative brand or sub-brand. But there are instances where this investment might not make sense. Special care should be taken if the hardware or software OEM is to fill a lower price point rather than a higher one–extreme care needs to be taken so that your own brand’s share or margins aren’t eroded significantly.
Integration with complementary products
There are some instances in the marketplace where 1+1 does indeed equal 3. In these cases it may make sense to team with a software OEM to gain the advantages of product integration with a key partner product in your market, offering them as a single, integrated solution. Just be very wary of the “integration project from hell” that goes on forever–then under-performs the forecast as discussed above.
The bottom line is that learning to partner with a hardware or software OEM is often a very important part of success in the tech business. I strongly recommend that most everyone pursue this type of business, IF it appears to make sense after a full analysis. However, I recommend you do it only as part of a balanced, overall revenue strategy. Tread carefully and wisely and this may be the distribution channel that makes a break-even, or modestly-profitable business into a big winner. It’s easy to say you want OEM revenue, but like most things in business doing it right is hard–the devil’s always in the details.
That’s how I think OEM strategy best fits into a typical high tech business. Post a comment and let us know how YOU approach hardware and software OEM relationships–I look forward to your opinions.
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