Know-How Exchange : Strategy

There's a lot written about B2B channel and relationship management. You can pick themes like sales management, account management strategy, relationships in business to business markets. You have ideas like value chain analysis and you can tackle it from a structural financial point of view or a relationship point of view. "Industrial marketing" "Business networks" etc.

Basic questions are what is the value-add by the channel (eg integration, training, services)? What are their service needs (eg order lead time, minimum order quantities, quality of supply)? Who holds the power in the relationship (any good book on purchasing/procurement will cover this). What are the personal factors and how are the financial arrangements made? The internet makes life difficult because of channel conflict and direct vs indirect models which often leads to questions as to what is the end customer actually buying - the service and advice from the reseller or the product from the manufacturer.

Challenges are that the channel is not the end user so the channel's judgement of quality is not the same as the end users - the channel is looking for profitability not end price. There is also the conflict of strategic endeavors. The channel's strategic objective is to increase their sales bandwidth and not normally to sell your product. If the two coincide then they will work well, if not...

So you have to look at structure - role of distribution, VARs, dealers, retailers and system integrators. Coverage. Margin considerations. Push versus Pull ideas. Exclusivity and long term relationship quality. This is such a big topic there is a large amount written about it.

When developing a channel strategy there are several key points that need to be thought through.

What is the purpose of the channel?
Some sell, some service, some add services to the product and sell them as a package

What segment does each channel serve?
There are companies who work geographically, others work in business silos, some provide a specific value. Hardly anybody does all of these well.

What can you do to avoid conflict in the channel?
When different channel partners compete for the same business - it creates friction which results in diminished results and often expensive refereeing.

Are you willing for your channel to also represent your competition?
This is a giant source of wasted energy.

Which business will go direct vs. going through the channel?
If this is not defined, you will never have loyal channel partners.

If you want to talk about this directly, please contact me via my profile.

Dear Maggie

Before I try to answer you I’d just like to add a note about the pitching-pest who posted the spam above. Devine.marcus looks to be posting exactly the same pitch for his company to every question he “answers” I’ve asked Val if she would mind swatting him, in the meanwhile I think that we know what to make of a company which handles marketing it’s wears like that, so I will not be forming a queue at his door trying to buy his services. I bet most other members will be similarly put off.

Now to the real question: Channels and the sales of CAD software

If they could, most software suppliers would rather sell to the end user and secure the value of supplying services and the full value of the software licenses. However, software sales operations are expensive old things and need very sharp sales management to control salespeople who can earn upwards of $250,000 (Is that the salary of “Joe the CAD salesman, Mr Obama!?)

The other bigger reason for needing channels is the geographi9cal layout of the market. It is very difficult to use your own people when the leads come in from every country in the world and every state in the USA. Even America or UK only operations are pretty difficult to run for a software manufacturer if they use their own people. For those reasons, almost all software companies use the partner or distribution channel to sell.

This is far from ideal as the objective of the principal (You) and the objectives of the reseller or VAR (Value Added Reseller) rarely align. It is these stresses and dichotomies which need to be managed, and success in the channel market is to a large extent the ongoing management of differing mutually opposing needs. For example, the cost of the licenses is usually a major factor governing the award of a contract – it shouldn’t be, but it is. The channel partner is therefore desirous of lowering the price he quotes in order that their whole deal will succeed. It is far from uncommon for VAR’s to cut the price of some licences to cost price in order that they will win the lucrative installation, configuration and service fees.

Recognising this dilemma is vital for suppliers to manage their VAR channel. For example, a system with a license cost of £800 would cost the end user £16,000 for 20 licenses and at the average channel discount of 20% would yield a profit of £3,200. That figure rapidly vanishes if the VAR feels that they have to offer a discount to win the deal against the known opposition. If the principal (That’s you) does not share the discount pain, then this profit is almost immaterial to the business of the VAR but it is highly material to the manufacturer because unless they too offer chargeable services, then it is all that they can make a profit from.

On the other hand, the system described above might involve 20 days of services at £1000 / day or £20,000. Our own CRM suppliers often complain that they only get about £2000 profit for say, 20 licenses whilst the channel party happily makes £20,000 for up-front services and another £5,000 for their on site service and support contract

Channel partners therefore need to be motivated to sell your software whilst it is unlikely that your product provides more than about 5% of their profits. The counter to this is that if they didn’t sell your software they wouldn’t be in a position to make oodles of lolly from consultancy and service. I think that the key to this is in Marketing executed by the principal which produces enquiries and leads which can be farmed out to the VAR’s so that they can close them on a sales pitch. Leads are expensive to generate in CAD and you must therefore treat them like gold dust and ensure that the VAR extracts the maximum value from them.

On the other hand, initiating new business development is expensive for the VAR. Their sales people rarely, if ever, receive enough leads to keep them busy, so they need to engage in New Business Development which is great in the long run, but these highly paid by-default telemarketers are not generating service fees or profits from license fees whilst they are rooting out new business on a long lead time.

Perhaps before I go any further, I should ask you to provide some more details. To properly advise you, I need to know the cost of your software per license, the %margin or discount you offer to channel partners and the size of an average system. I would also like to know what the range of service and consultancy fees are in your industry to install, configure, program and support a typical system. We for example work on a software license cost of about £400 at a 20% margin and an average system size of about 10. CRM suppliers charge between £600 - £2000 / day with Oracle at the higher figure and ACT! and Maximizer in the lower range.

Do tell and I’ll try to get back to you.

Best wishes

Steve (Been there, done that!) Alker
Xspirt

Some excellent discussion above.

It seems to me that there are two things one might expect of a channel partner. One might expect them to close sales, and one might expect them to create opportunities.

In the discussions above, it sounds as though our colleagues are focusing on sales rather than creating new opportunities. And I agree wholeheartedly.

In my opinion, the greatest mistake people make when they attempt to set up a channel program is to assume the channel partners will find new deals. It has been my experience that channel partners expect you to find the leads.

The very best of luck to you.

Lots of good content at the Pragmatic Marketing web site, both related to channel marketing and more general issues you may have to deal with:
https://www.pragmaticmarketing.com/resources/sales-process