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A bi-weekly column with timely, relevant and possibly irreverent insight into the BC technology industry.

Something Ventured:
September 21st, 2007

By Brent Holliday
Greenstone Venture Partners

Channels Surfing

“I can see by your eyes friend,

You’re just about gone…

57 channels and nothing’s on.” – Bruce Springsteen, 57 Channels

It is a mantra for small companies looking to increase revenues and grab market share: Utilize indirect sales channels to your market (Also known as Your Channel Strategy).  While it seems so intuitively obvious, it is very, very hard to manage well.  Why should I have someone else sell my stuff?  The reasons are many.

  • Access to far away markets that you can’t place sales people in
  • Access to larger accounts that you don’t have the relationships or credibility to win
  • Faster route to sales vs. starting a sales associate from scratch
  • Become part of a solution sale instead of a single feature

The main reason you don’t like an indirect sales channel is that you give away a chunk of your margin.  In an early stage growth company, with little or no brand recognition in the market, your margin is less important than your ability to grow your customer base.  If that isn’t reason enough to have a Channel Strategy, then the simple fact that a direct sales force is expensive (and, in this tight labour market, hard to put together) should convince you.  When capital raising is hard and/or you are running on a shoestring, adding bodies to your monthly burn makes no sense when a completely variable cost alternative is available.

Put it another way: Your cost of acquiring a dollar of revenue in the early growth stage is probably higher than a dollar when you sell direct.  Do the analysis… you sell the product for $x.  Your gross margin is $y, after commission etc.  Now load in the cost of advertising and marketing, the full cost of the sales people and all of their communication, travel etc. and divide by the units sold.  When you are not selling many units (in the early growth stage), you are likely spending more than a dollar to get a dollar.  Clearly that isn’t sustainable.

The counter argument to direct sales is always this:  I need to get the trophy customer(s), the reference customer(s), by selling them direct and my channel strategy can wait until we have this customer traction.  True, especially when you sell big ticket items and your customer base is very large companies… so there aren’t many of them.  But, an indirect channel should be cultivated from day one and multiple channels should be used.  As tough as it may be when negotiating, try and stay away from “exclusives” so that you can have many channels.

Assuming you know your value proposition and it is easy for others to understand, a channel is relatively easy to get started.  You simply sell them on why the customer is buying your stuff.  Sometimes the indirect channels are obvious, like sales representatives into Asia selling your type of equipment or software, and sometimes you need to be creative.  In my experience, finding the channel and getting them excited is not the problem… It’s the managing of the relationship and getting the channel to work that is the challenge.

OK, fine, so we all need indirect channels. Duh. But just creating them is not the end of the story.  How many stories of woe with channel partners are there?  I have seen or been a part of way too many…

All sales people, whether direct or part of a channel partner, have a personality flaw… they are exuberant to a fault.  The promises of a channel partner are never, repeat, never reached or exceeded because they overestimate their own success of selling your product.  You have to go into the relationship with less than exuberant predictions of success.  Just so you sales people don’t feel bad, many an angel or venture capital investor has based their investment decision largely on the signed MOU with a large, reputable channel partner only to be horribly disappointed when the sales in that channel fail to materialize.  Happens all the time.

Why do they not work?  What happens?  Can you do anything about it?

The main reason for channel failure is the fact that your partner sells other stuff too.  You have dealt with a person or team at the big channel partner.  They agree to sell your stuff and you agree to terms, but no one on that negotiation is “feet on the street”.  Sales people, motivated by greed as they are wont to be, will sell what makes them money.  If they are not getting the $ from your product, either in margin or volume, they won’t sell it.  If they don’t understand HOW to sell your product, they won’t sell it.  If your product is not precisely in their area of expertise (you are selling a related product to their core offering), they will have trouble.  Finally, if being a channel is new to them (big strategic partner offering your product alongside their core offering) they will struggle mightily to sell yours.

Spiffing the channel” is an industry term for making sure your indirect sales people get enough cash or incentive to sell your product over everything else in their bag.  You have to have a dedicated inside employee working with the channel partner to make sure all sales people are trained and happy with your product.  Crystal Decisions was a local shining example of how to develop indirect channels successfully.  They were very successful at having others sell their product.  Some of your best experts in channel management locally worked or are still working there.

Other reasons for channel failure are related to you.  If the product is not ready for launch, not easy to install or generally not available as soon as a booking is submitted, the channel gets upset.  These re-sellers or strategic partners have the attention span of a gnat.  If you are deemed unreliable, you are dropped from their bag very quickly.  You have to be ready to deliver.

Sometimes you just pick the wrong partner altogether.   What looks good on paper does not translate into real sales for a variety of reasons.  Perhaps you picked a slow moving giant, which looks good to investors, but in reality takes years to ramp up and be efficient.  For example, instead of EDS as your first partner, you should have used local or regional systems integrators as your initial channel partners.  Telecom and Wireless companies are notoriously bad channel partners.  They either have way too many companies selling through them such that you are but one of a hundred offerings or they “gum you to death” in the evaluation period.  They tantalize your start-up with stories of riches when their customers get a hold of your product, when in reality they are beating up their incumbent vendors to match your functionality and price so they can toss you aside at the last minute, tanking your company.  Oh, and then there is the Channel Partner Executive Musical Chairs game.  You enter into a relationship with an executive at a big firm with thousands of potential customers and by the time the ink is dry on your MOU, they have moved out of the company or to another group inside.  Another executive comes in and tells you everything will be fine, but is really holding their nose at the deal and will ignore you because it wasn’t their deal to begin with. 

In summary, like everything else in a start-up or early stage growth company, you have to do it, but it’s incredibly hard to do well.  Build indirect sales channels, but learn from other’s mistakes and try to manage it efficiently.  Your best, straightest line to success is to hire someone that has done it all before and could re-write this column with even more insight and examples.  The tough part is finding them and paying them enough to join you…

What Do You Think? Talk Back To Brent Holliday

Something Ventured
is a bi-weekly column designed to supplement the T-Net British Columbia web site with some timely, relevant and possibly irreverent insight into the industry. I hope to share some of the perspective and trends that I see in my role as a VC. The column is always followed by feedback (if its positive or constructive. I'll keep the flames to myself, thanks).

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