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?