Channel Tuneup: Developing a Successful Channel Strategy

This Channel Tuneup looks at creating an effective channel strategy. There are more than 100 ways to skin this cat so pick what works for you and fine-tune where necessary. The answer to what's going to work in your case is: "It depends." For this article I'm going to draw on 20+ years experience working with a variety of channels, countries and industries (business productivity software, printed circuit board assembly equipment, professional audio visual equipment, mobile wireless accessories, consumer electronics, education technology and the food industry). And, to quote Ken Blanchard, since "all of us are smarter than one of us" I'm inviting channel managers and those who work on the channel side to contribute their comments to the article.

The blocking & tackling
of a good channel program
is providing the incentives
& motivation for channel
partners to want to sell
your offering.

All kinds of companies in all kinds of industries use channels. Even mighty Google, yes the INTERNET company, when launching Google Docs offered VARs a 20% discount to sell its offering to their business accounts. The first lesson I learned about effectively working with channels was taught to me in 1985 by K. Hashimoto, Director of Channel Marketing for IBM Japan at the time: "It comes down to offering the right incentives to channel partners to encourage them to sell our products." (Note: A challenging part of his job was selling IBM's executive team to approve his proposals to support the channel with sufficient margins.) 

Channel management is not rocket science. It's as straightforward as football, where proper attention must be given to fundamentals. The blocking and tackling of channel management is putting together a program that rewards partners for selling your offering. The rewards come in many forms: attractive margin, volume incentive rebates, sales contests, and more. At the end of the day, it must be profitable for the partner to sell your product.

A key principle: With the exception of value-added resellers (VARs) and a handful of enlightened reseller sales reps, most resellers and distributors are order takers who do not sell your product. Sales result from the efforts of your marketing and sales team. An effective channel program should distinguish between VARs that proactively sell your product (and require more margin) and resellers that take passively take orders (who require less margin). 

Definitions:

•“Channel Sales” is the use of well-defined distributors, resellers, VARs, websites, retail stores to transact sales of your branded product/service.

•“Resellers” , “Dealers”and “VARs” sell direct to end-users.

• “Distributors” sell to resellers, not to end-users.

•“Business Development” is selling to a new market where the sales process has not been defined, or creating “new business” through partnerships with companies to sell through their channels, including OEM, Private Label, M&A (mergers & acquisitions).

Why Use Channels?

* Accelerate sales growth.

* Extend your marketing: Reach buyers or segments not adequately served online or by your sales reps.

* Make it more convenient for your customers to purchase (and remove obstacles ).

* Cost effective alternative to hiring your own sales force.

* To enter international markets.

Considerations To Start Your Planning

•SWOT: As you would with any strategic planning exercise use a SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis to help you draft your channel program. Answer the question: why is a channel program strategic to the success of your business? Clearly define your goals, objectives and tactics for achieving them.

•C-Level Support: Effectively implementing a channel program will require support from the executive management team. How does the channel program impact the company's profit objectives, margin, retail pricing, resource allocation, cash flow and credit polices?

•Operations: What changes to operations are required to support a new channel program? Will you need a channel sales team, sales support staff, increased marketing support, increased technical support? What additional expenses will be required to create and maintain an effective channel program?

•Value Proposition: What is your value proposition for channel partners? Why should a channel partner want to do business with you? Why should a channel sales rep want to sell your offering?

•Ideal Partner Profile: What are the key attributes and criteria a channel partner must have to be successful with your offering? Define the ideal partner profile and use it to measure candidates (refining as necessary) as you recruit channel partners.

•Research. What is the ideal program for your offering? Talk to potential channel partners before finalizing your program. They will provide you with valuable feedback about what elements of a channel program are important to them.

Treat the Channel Strategy
as you would any
corporate strategy. Start
with a SWOT analysis
followed by an action plan.

Channel Recruitment Process

What steps are you going to use to contact channel partners, evaluate them, sign them, train them, manage  them and reward them? Define the process. Click here for a sample channel recruitment process.

Comprehensive Channel Program

To develop a comprehensive channel program, start with the 4-P's of marketing: Product, Place, Price, Promotion.

•Pricing Considerations:

–Do you want to segment channel partners into categories with different pricing according to that category? Should VARs who promote your product receive the same price as resellers who are order takers? Should every channel partner receive the same discount?

–Do you want a complicated reseller model with multiple levels of dealers, or a simple model of selling to a distributor (or distributors) and let them handle the reseller pricing? Will you loose control of your retail price selling through distributors?

–How do you feel about  “Deal Registration” programs that encourage resellers to proactively sell an offering by providing additional discount to resellers who register opportunities?

–How does your company feel about retail retail price maintenance and MAP (minimum advertised price)?

–Should there be discounts for prepayment or quick payment?

•Place:

          – In a territory, how many channel partners do you require? Do you require different kinds of channel partners for different offerings (for example, a specialized channel to focus on SMBs and another channel for enterprise sales?)

Product -- What changes do you need to make to the product for different distribution partners or to reach new end-users serviced by the new channel? Will changing a product feature and SKU for a consumer products superstore avoid channel conflict with a similar product sold by your education channel? What localization is required by international channel partners?

Promotion

-- What plans will you develop with channel partners to introduce your offering to their customers? Will you offer a marketing Co-op Program or a Marketing Development Fund program? Will you require channel partners to share in the cost of promotions? Will your in-house marketing programs develop leads or pull-through for channel partners? How will leads be handled and tracked? How will you reward partners who meet or exceed sales targets? Volume incentive rebates?

Channel Sales Team

     –What does the organization chart of your channel sales team look like? Will inside reps support the channel? Do you require technical sales consultants to support the sales effort? Will outside sales reps call on and support channel partners in the field? Will you use commissioned independent sales reps or agents?

Your Contract 

     -- Will there be exclusive or sole source territories? What is your policy for returns by channel partners, price protection, stock rotation. How are terminations to be handled?

After the contract has been signed, what next?

Congratulations: You've just signed Best Buy who's placed an opening order for 4,000 of your widgets, which you ship. What's going to happen if you don't have demand generation programs that "pull" that inventory through the channel? It's going to be returned to you. Signing the contract is just the beginning of the channel partnership. How are you going to make it successful? Here are things to consider:

•In House Resources & Support

–Who will provide training, answer questions, provide sales assistance and manage the accounts? If 90% of life is showing up, who will visit and work with the partners?

•Training Program

What training will you offer to new partners (and their sales reps) to ensure they are capable and qualified to effectively sell your offering? How will the partner roll-out your offering to their reps?

–Recorded webinars, videos, and screen casts (with incentive for watching them)

–Training guide, PDFs, online tests to become certified

–Live training over web or in person (lunch & learns)

•Business Planning. Develop territory sales & marketing plan with key partners. State planned activities clearly, with outcomes and objectives. Manage to the plan and intervene when objectives and sales goals are not met.

Marketing Support for Channel Partners:

         Consider the following tools as part of your marketing tactics to support channel partners. Ask, what tools does the partner need to effectively roll-out your offering to its customer base.

•Online Marketing Kit for new partners containing resources your partners need to promote your offering (PDF data sheets, logos, product images, other artwork, case studies, selling guide, price sheets).

•Demo Pricing. If your offering requires a demonstration, how will you make samples, demo units or trial versions available? If a consumer can afford your offering, consider a Friends & Family special. If a reseller sales rep likes your offering and is also a user, s/he will recommend it. If your offering is software, consider providing Not For Resale (NFR) licenses free of charge to channel partners and their sales reps.

•Samples. To sell through consumer channels, you will be expected to offer floor samples and point of sale displays and end cap displays (if you negotiate for that space).

•Leads. How will you handle leads that come into your company? Sell direct or forward to channel partners? VAR sales reps appreciate receiving qualified leads from vendors. 

•MDF. Will you proactively work with  partners to generate leads? Will you provide channel partners with Market Development Funds (MDF) or co-op advertising dollars? Will you require preapproval of marketing activities, so that you have a say in the execution? Will you require the partner to co-invest in the proposed marketing activity, so they have "skin in the game"? (That's insurance the partners will propose activities they believe will be successful.)  I've seen MDF programs that offer anywhere from 1% - 5% of reseller revenue (depending on the profitability of the offering). Some channel partners may ask you to "pay to play" -- they expect (some even demand) you to purchase from them a menu of marketing activities for them to carry your product.

           • Sample Pay to Play Activities include:

–Pay to be in their print catalog

–Pay for banner ads on their website

–Pay for a pay-per-click campaign on their website

–Pay to participate in lunch & learns

–Pay to walk their sales floor and engage their inside sales reps

–Pay to participate in their vendor summit

–Pay to participate in their showcase to end users

–Pay to do direct snail mail or e-mail to their customer list

–Pay to participate in their trade shows

–Pay to support a funded head (where you pay the salary, or part of the cost, for an employee of the channel partner to focus on your product)

You will need to examine the payback of each proposed activity and analyze what's effective for your offering and compatible with your company's marketing tactics.

•SPIFFs.  These are incentives offered to channel sales reps to push your product (for example, you'll pay $100 to a sales rep for selling X amount of your offering). If your offering is truly unique, you shouldn't need a SPIFF, but it might help if you compete in a red ocean with many competitors. Watch out for unintended consequences such as margin erosion, when reps reduce the sales price of your offering and earn their pay from the SPIFF. 

•VIR. Many VAR owners and other channel partners respond favorably to Volume Incentive Rebates. Make sure to structure a program with specific goals in mind.

Using Channels To Expand Overseas

Using channel partners is an effective way to enter international markets. When developing an international channel strategy much of what's stated above comes into play. Issues to examine during the planning process include:

•Which are the largest, strategic markets?

•Where is the low hanging fruit?

•What are the regulatory requirements? Electrical, safety, power, radio frequency?

•Protecting your intellectual property

•Localization requirements (product, language, manuals, marketing)

•Exclusivity or territory protection. If exclusivity is offered beyond a limited trial period, the selection of the "right" channel partner becomes very important. Do your due diligence.

•Pricing: should you price higher, lower, the same?

There's much that could be written about an international channel strategy. Let's save that for a future article.

Lessons Learned

Here are lessons learned over the years. Take them to heart. Much of these lessons apply to VARs, Value Added Distributors and the enlightened reps who really "sell" your offering.

•Channel sales reps respond to your enthusiasm & the opportunity to make money.

•Channel partners appreciate responsiveness. Respond to inquires and questions promptly.

•Channel reps appreciate it when you, as the vendor, make money for them (give them leads, support, joint sales calls)

•When working with channel partners, it's not about: “It’s the end of the quarter and you need to place an order.” It's about making money for your partners.

•For channel managers, watch the accounts receivable, and proactively intervene if an account you manage is late making payment. Credit is a privilege, not a right. Your company is not a bank. 

•Avoid end of month, end of quarter “specials.” It lowers your profitability.

•Be wary of large, special price “deals” – low priced deals may eventually cause channel conflict (as unsold product gets dumped), and margin erosion. It certainly hurts your profitability.

•Avoid exclusive contracts. If you must offer exclusivity for a limited start-up period, draft & manage to specific goals. Require an opening stocking order to demonstrate commitment from the channel partner.

•If you’re trying to build a VAR channel, be careful about setting up too much competition between VARs, or your offering will lose its appeal.

•The 80-20 rule applies. 20% of your channel partners will likely produce most of the business. 20% of the channel sales reps (or less some would say) are good and will be motivated to sell your offering.

•Channel reps & channel partners respect honesty, even when the news is not good. Screw them, lose them. Don't

–Take an account direct

–Mislead / Lie (about a deal, about exclusivity for a territory, any important issue)

I've seen what can happen when channels are mismanaged. I've witnessed what can happen when a CEO concludes "the channel is worthless --  let's sell direct."  When this occurred the companies' sales stagnated while their competitors, with an effective channel strategy, grew well beyond their reach. Your approach to channels is strategic. In winemaking, there's an old saying: "You can't make good wine with bad grapes."  When it comes to channel sales, you can't maximize market share with bad channels. With the right offering, manage channels well and profitable growth will follow.

If you manage your company's channel partners, what works for you? What lessons have you learned? If you're on the channel side, what channel programs do you like to see?

Channel Tuneup: Are Dealers Distributing?

Are some of your dealers reselling your offering to other dealers? If so, is this helping or hurting? If there are dealers selling to other dealers, you may be sending mixed signals to channel partners and leaving profit on the table.

I make a clear distinction between resellers and dealers (who sell to end users) and distributors (who sell to resellers and dealers). When dealers resell your offering to other dealers you are giving up margin and may be damaging the channel you're working so hard to nurture.

Resellers selling to other dealers
can reduce your profit and damage
your channel program.

Sure, there may be special cases where it makes sense to have a reseller sell to other resellers; for example,  when you're just starting out and glad to have anyone sell your offering. Or, you've granted a reseller an exclusive territory and the reseller appoints sub-dealers to expand its sales reach. In the case of a newly emerging company you might save the expenses of hiring a channel manager and the administration costs of processing orders for a network of dealers. But there comes a time as revenue increases when it's foolish (and costly) to have a reseller distributing your products. Why not have a clear, clean reseller strategy from the beginning?

I recall the case of an entrepreneurial manufacturer that relied on the Internet and one dealer to sell its products as it started. The dealer received permission to sell to friends with dealerships in other states. Sales grew, but the manufacturer had no idea who was selling its products. (The default criteria for becoming a dealer was being "friends" of the first dealer, instead of a specific profile with key dealer success attributes.) By restructuring the go-to-market channel from a single reseller functioning as a distributor to a network of authorized resellers working directly with the manufacturer, within one year the company was able to:

* Increase revenue 10 X
* Raise it's average selling price to the channel by 25%
* Diversify its channel risk from relying on one company to a network of 40+ resellers

By working directly with a network of resellers, the company also benefited from developing sales and promotional plans with each reseller. The result was acceleration of sales and gross profit.

Resellers functioning as a distributor raise a number of other issues:

* Does the reseller have the bandwidth and knowledge to effectively support a network of resellers?
* Is there a conflict of interest between the "master" reseller's goals and the manufacturer's?
* How do other resellers feel about purchasing from a "master" reseller who at the end of the day could be a competitor?
* Dealers selling to unauthorized dealers can cause painful channel conflicts with authorized dealers.

It is not unusual to find resellers and distributors who want to have their cake and eat it too. For example, to avoid the conflict of interest of having resellers distribute products, I have seen resellers in Asia, Europe and the U.S. establish separate corporate entities that function as a "distributor" and vice versa.  The goal of such dual personality channel entities is to expand their business by increasing sales through a network of dealers, while at the same time enjoy higher reseller margins for their direct sales.  Channel managers are advised to evaluate such organizations on their merits. My advice is to keep the channel clean: dealers should sell to end users. Distributors should sell to dealers. They are Apples and Oranges. When dealers attempt to distribute (and when distributors sell to end users), results from mixing these apples and oranges may not be savory. In your reseller contracts, consider a clause preventing resellers from selling to other dealers, without express written consent.

Channel Tuneup: What's Your Process For Effectively Recruiting New Partners?

Do you have an organized process for recruiting new channel partners? Have you defined the specific attributes a partner must have to be successful with your offering? Can you clearly state a compelling value proposition to prospective partners that moves them to sign up with you? What processes do you have for training new partners and creating joint business plans to effectively sell and market your offering? Do you periodically review plans with your partners? What do you do when objectives are not met? What rewards do you provide partners for achieving goals?

If you don't have a process for recruiting, launching and managing partnerships once an agreement is signed this might be a good time for a Channel Tuneup. The flow chart shows a sample process for recruiting and managing a partner. How about your own experience working with channel partners? What works for you when signing up new partners? What processes do you use for effectively recruiting and managing partners?

Channel Tuneup: How Do You Handle Requests for Exclusivity?

When receiving inquires from overseas distributors, the question of exclusivity is inevitable. With some markets in North America, it is a common request as well, especially in the K-12 education market where customers (schools) and territories (school districts or states) are clearly defined.

From an international value added distributors' perspective, they prefer investing in developing a territory for a vendor when they will be offered protection in the form of exclusivity. They don't see it in their interest to invest in developing a brand and then, once sales pick up, for the vendor to appoint another distributor.

Expect distribution partners in Asia to
 ask for exclusive distribution rights.
 What's your policy for handling exclusivity?

For the vendor entering a new territory, it may make sense initially to limit distribution of an offering to one partner, to ensure that the partner invests the necessary resources to sell the offering effectively. However, there often reaches a point where a single partner is not able to cover a whole market and additional channels should be added (albeit carefully) to maximize revenue and profits. Multiple channels, when managed  correctly, are like a rising tide that raise sales for all the channel partners.

This is not quite the Catch 22 it might appear to be. I've found over the years working with a number of emerging companies that a straightforward, honest approach is in the interest of both vendor and distribution partner.

As a general rule, I avoid exclusive contracts and any contract language that contains the words exclusive or sole, unless the word is "non-exclusive." This is clear and straight forward.  On the other hand, depending on the offering, for companies entering a new market having one partner per country may make sense in the beginning, depending on the offering and the market. (In fragmented or large markets -- China, for example -- it may be impossible for one partner to come close to providing reasonable market coverage and from the git-go multiple partners are required. Do your homework and figure out the best approach for your company.) Or, if you're offering a telecommunications product and your channels are the telcos of each country, you would naturally approach each telco as a partner.

If your approach is to appoint a single distributor, I always insist on a sales plan to cover the entire country, a marketing plan with clearly stated objectives, a sales forecast and placing an initial, significant, stocking order worthy of the size of the territory. I make it clear from the beginning that if the distributor wishes to remain the only distributor it must achieve the stated objectives. A key element in this sales process is the prepaid opening stocking order, because that demonstrates real commitment from the distributor. If your offering is really as good as you believe it to be and your would be "exclusive" distributor is unwilling to commit to two months (or more) of inventory with an initial prepaid order (or back the purchase order with an irrevocable, confirmed letter of credit), this is a warning sign.  Is your distributor under capitalized? Is the distributor really going to push your product? Does the distributor really have the capability to sell your offering effectively? Or, is your would-be partner simply negotiating for exclusive rights as a tactic to lock you out of the market by not selling your product? (Yes, this is attempted all the time.)

The stocking order consummates the marriage, but, as with a joyous wedding night, this is just the beginning. Maintaining that special relationship requires achieving objectives of the plan. This demands effort from both sides: the vendor must support the distributor with training and its know-how. If plans and objectives are not met, both sides need to evaluate the situation to see what adjustments can be made to get progress back on track. And if, within a reasonable period of time the situation is not rectified another distributor needs to be appointed.  This should not be a surprise to the distribution partner if conditions were stated clearly in the beginning.

Beware of distributors requesting exclusive distribution rights across several countries, for example, the Singapore-based distributor requesting exclusivity in Singapore, Malaysia and Indonesia, or the Swedish distributor demanding exclusivity in Scandinavia. Do your due diligence and make sure the distributor is capable of effectively selling your offering in each country.

Many times, when stocking orders and significant commitments have not been made, the distribution relationship just doesn't get off the ground. Although the odds of failure are lessened with the mutual commitment of the stocking order, success is not guaranteed and the relationship must be nurtured and closely managed.

If your policy is to appoint multiple distributors from the beginning, state that clearly, and consider offering marketing and/or product launch funds to the partner. At the end of the day, if it's going to be very profitable for a distributor to sell your product, even on a non-exclusive basis, how can they say no to an offer they can't refuse?

Channel Tuneup: How Does Your Margin Motivate Channel Partners?

Does the margin of your product or service motivate your channel partners to sell more or less of your offering?

Balancing a vendor's desire to maximize profitability by not offering excessive margins to channel partners is countered by the desire to see those same partners increase the company's sales and profitability. Finding the right balance is an art, but not rocket science.

Vendors prepare for BETT 2012, world's
 largest education technology exposition
held in London.  If your company markets
 to schools, BETT is a must attend
trade show.

On a trip to the UK in January  I met with several distributors and VARs attending BETT, the world's largest education technology exposition. One of them was Sigma Software Distribution, a value added distributor (VAD) of software.  By VAD, I mean more than just a "box mover," a distribution partner that develops markets for their suppliers' offerings. As such, VAD's, because of their higher operating costs promoting products and creating markets, require a higher margin than mainstream distributors such as Ingram Micro, Tech Data and Computer 2000. Sigma recounted the story of one vendor that offers 5% margin on its line of software products. Sigma, which likes the software in question because it offers real benefits to endusers, reluctantly decided to represent that product line as a "loss leader" to service its reseller accounts, "but could you imagine how much we could sell if they provided us a better margin and we pushed it?" they ask. They don't push it (which requires investment). They only fulfill orders when asked.

On the one hand, a software publisher can marginally increase its revenue and profitability in the short term raising a distributor price and lowering distributor margins to 5%.  On the other hand, how much is the publisher foregoing by not providing its international value added distributors with margins that would motivate them to proactively push its software?

Finding the right margin may be an art, but not an impossible task. From my observation of this case, given the genuine interest of the UK distributor, the software publisher could significantly increase its revenue by giving its reseller strategy a tuneup and to provide margins that motivate channel partners to proactively sell.