Sunday, March 4, 2012

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.

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