Internet Sales vs. Channel Sales

In recent discussions with channel managers and internet marketing managers I've heard divergent points of view I'd like to open to public debate. According to the rules of internet marketing driven by analytics everything must be measured and all marketing expenses must be justified. This is also true for off-line marketing but measurement is not as precise. The beauty of e-marketing is that all internet touches are traceable -- pay per click, on-line ads, e-mail campaigns, downloads -- except when prospects buy your product or service off-line after learning about it from an e-marketing campaign without indicating the source.

Purchasing on-line is convenient for consumers and individual corporate buyers, but what about larger sales? That's where proponents of channel marketing and the direct sales team argue sales agent involvement is necessary for closing enterprise deals. Critics of the channel say reseller sales reps are just order takers that undercut pricing and reduce the company's gross profit margin. Channel defenders argue that the trusted adviser of a good reseller has the ear of technology buyers and can extend the publisher's/manufacturer's reach, assisting the vendor accelerate sales. Does this sound like Republicans and Democrats arguing about public policy?

Below are some questions that arise. What are your thoughts?

* Is it appropriate to keep spending marketing dollars on internet campaigns to the point of negative returns (because the real sales resulting are greater than that measured since some customers purchase off-line)?

* How do you effectively enforce minimum advertised pricing by resellers? How do you enforce MAP pricing if you use distributors? Should resellers' sales prices be higher than the manufacturer's on-line price?

* Is it effective for a manufacturer to state it has the lowest on-line price to encourage customers to purchase direct from its website?

* If you have effective on-line sales, should resellers even be allowed to sell your product on-line? Should customers only be allowed to purchase on-line direct from the manufacturer/publisher?

* What is an appropriate balance between e-marketing and channel marketing?

* If you believe resellers are order takers, what's the lowest acceptable margin you can offer?

* If you believe resellers help you sell your product, what's an appropriate margin to provide to encourage them to sell your product?

* How do you measure the effectiveness of your channel marketing expenditures?

* How do you determine the indirect impact of a manufacturer's e-marketing activities on channel sales?

Of course the first response to all of those questions is, "It depends." In my opinion the internet marketing team, the direct sales team and the channel sales team working together have important roles to play. How does your organization balance the roles and the allocation of marketing resources between the three?

Funded Head Experiment Yields Positive Results

Last year I wrote about the advantages, disadvantages and my skepticism about use of a "funded head" at a distribution/reseller partner. The term "funded head" refers to paying a portion of a sales rep's salary at a partner with that person functioning as a surrogate employee. To review, the advantages are: no employment contract, lower cost than hiring your own person, increased mindshare from the sales partner and a way to incrementally invest in a market with a lower budget. The disadvantages: less control, less loyalty/focus than hiring your own person and less equity accrual to the manufacturer/publisher.

As an experiment, we went ahead and signed a contract with Sigma Software Distribution in the U.K. for a partial funded head. (My client, a software company with a long history as a leading Internet driven sales & marketing company, had never done this before but was interested in selling larger licenses through international channels.) We paid a portion of a sales rep's salary on a quarterly basis and in return the Sigma sales rep focused a commensurate percentage of his time on our software evangelizing resellers and assisting them upsell larger licenses to corporate and government accounts. Because of our investment in Sigma and willingness to put "skin in the game" we gained increased mindshare from Paul Jackson, Sigma's talented and experienced Head of Business Development (who guided the more junior Funded Head) and Sigma's executive management.

The results: although the U.K. saw a double-digit decrease in sales from our client's pay per click on-line sales during the last 12 months, Sigma (with the Funded Head) increased sales of the software by 40%. While the client's on-line sales are mostly to individual end users and consumers, Sigma's growth came primarily from an increase in the number of corporate and government accounts sold to by resellers, and follow-on upsells of larger licenses to accounts the Funded Head penetrated more deeply. The sales increase was approximately 5X the cost of the Funded Head. In other words, the Funded Head's cost was 20% of the increased revenue. No other marketing expenses were paid by the client for Sigma during this time, so growth is attributed primarily to Sigma's and the funded head's activities. Although a cost to revenue ratio below 10% would have been preferred, given the overall decline in the UK market in the last year for software products in general and the client's software, the return on investment was favorable and supported a profitable business model.

Another important "control variable" in this experiment is the client's other U.K. reseller, which received neither support for a funded head nor marketing funds. This reseller was able to maintain its level of sales compared to the previous year, but unable to significantly grow its business.

For anyone using or considering a funded head, I strongly recommend treating the surrogate as you would any other member of your sales team with respect to training, providing sales resources such as WebEx and employing your standard metrics and analytics to measure the sales pipeline and performance.

In conclusion, the investment in funding the partial salary of a distribution partner's sales rep yielded a positive return without cannibalizing or interfering with the client's core on-line business.

What has been your experience?

Evangelizing Business Graphics in Asia-Pacific

On a five nation Asia-Pacific swing in July I met with resellers of SmartDraw’s visual communications software. I found a receptive message to “thinking straight”, “working smarter”, “better presentations”, “raising the level of education” and “making money” at each destination. At this stage in SmartDraw’s development the company doesn’t have an overseas office [yet]. So, we’re working with partners, distributors and resellers to get the message out. Highlights:

China – Cogito Solutions of Hong Kong & Beijing was founded 10 years ago by Jimmy Wong. His youth will give him the energy required to introduce a growing brand to Hong Kong and the explosive China market. Because his company is relatively small, he can provide focus. Cogito distributes SmartDraw through Jardine’s , PCCW, Microware and other channels. (Excitement for the Olympics was building, the Peeking Duck is still delicious and watching the noodle makers spin and weave noodles by hand is hypnotizing.)

Singapore – SmartDraw has been represented for years in Singapore by Infoland, who’s Marketing Director Mee-Leng Poon has introduced SmartDraw to schools. Interestingly, she’s found that SmartDraw can be used as an authoring tool for kids to make fun presentations. For the business market, we began working recently with Efektif, who has already succeeded in introducing SmartDraw to the United Overseas Bank (UOB). Efektif has been a value added reseller of various business graphics solutions for years, such as project scheduling software, and mind map solutions. (We had time after our meetings to sample the famous pepper crab.)

Malaysia – Our distributor Nadi-Ayu Technologies observed a problem in Malaysia’s schools: Many teachers had computers, but weren’t using them. Nadi-Ayu wondered what would happen if teachers had better software? So, they did an experiment with a group of instructors giving them SmartDraw. Their conclusion: teachers with SmartDraw used their computers more. The Ministry of Education agreed with these findings, and awarded Nadi-Ayu different projects to supply more than 30,000 licenses of SmartDraw to instructors and computer labs. During a 5-day visit we met several government ministries in Putrajaya, the new capital area of Malaysia, and also universities. (Awaking each morning to the calls of prayers from a nearby mosque, we had one free moment to sample a Durian, the fruit that scared participants on the TV show “Fear Factor” with its sensuous bouquet.)

Australia – My arrival coincided with the Pope’s visit to Sydney. Dodging the PopeMobile and the PopeBoat I visited SoftwareTime located in a quaint area of Sydney. Software Time has a strong education focus, and manager Chris Marlow expressed interest reselling SmartDraw if we could get the margins right (I assured him we could). Next there was a meeting with Aquion – a distributor, with strong ties to resellers like Insight. Insight is a large reseller to corporate customers – but we need “order makers” not “order takers.” Fitting the “order maker” profile is a reseller called MindSystems of Melbourne, an experienced marketer of business graphics software, who sees an excellent fit with SmartDraw in combination with its other productivity software offerings. Melbourne is also the home of City Software, a traditional software seller who has been offering SmartDraw for a couple of years already, and whose SmartDraw sales have been expanding in line with our world-wide growth. I was impressed with the offices and strategy of Edsoft, which has an education focus. (One of the main features of the office is a glass meeting room with an artistic rendering of the company’s roadmap in vibrant colors on the clear wall. The company is located near a former artist colony – and the influence is apparent.) However, because Edsoft has requested exclusive rights to be the sole reseller for SmartDraw, it is not likely we will be doing business with them at this time. (MindSystems located not far from a vineyard, so after lunch which included Australia’s great oysters, we were able to grab a taste of Melbourne.)

New Zealand: Cold, rainy, at the height of winter ….Met with James Taylor of Metro Business Software, a long-time business partner whose SmartDraw sales have been rising the past two years. I also met with Patrick Baker of Mindlogik, who is in the business of consulting, training and “business mapping”. Patrick sees SmartDraw fitting in beautifully with the consulting services he and his partners offer to New Zealand companies. (James suggested we have lunch on scenic Waiheke Island, just a short ferry ride from Auckland. NZ is not just about “All Blacks” and whites: try the red wine!)

Conclusion: I'm bullish on the growth prospects of "business graphics" and visual communications in Asia-Pacific and throughout the world.

Distributor Funded Head: The Pros and Cons

The “funded head” concept – where a manufacturer or software publisher pays the cost of employing a staff member at a distributor—is raising its head in my current work space and is a worthy topic of discussion.

The question comes down to this: is paying the cost, or the partial cost, of a distributor’s employee an effective and economical way for growing companies to increase sales in new markets?

I’ve seen the situation from both sides. At Mitsubishi Trading Corporation in Japan in the mid-1980s, it was common among U.S. companies looking for access to the Japan market to form a joint venture with us. We would contribute the local staff; the U.S. firm would contribute the technology or the product. In this case, the venture was able to employ local staff quickly. But there was sometimes a question about loyalty – was the staff’s loyalty to the success of the new venture, or to the parent company from which they were on loan?

At Alliance International Trade & Investment Group, Inc. our marketing pitch when recruiting supplier partners to represent in overseas markets was this: “Let us represent and sell your products and you only need to pay us a commission on what we sell.” The appeal of that approach is there’s no risk for the vendor. No sales = no costs.

From the vendor’s perspective, I was always skeptical if a distributor asked us to pay for the costs of a person they wanted to assign to manage our product. Here’s why:

· I'm giving you a large discount (margin) to profitably run your business
· I'm giving you marketing support
· I’m usually giving you exclusivity, to help protect your investment, if your commitment is significant and the market is new for us
· And now you want me to pay for your staff? That’s what the margin is supposed to be for, right?

Give me a break!

I recently met with our partner Sigma Software Distribution in the UK and was presented with a funded head proposal. This one was different. It was focused on ROI, with a return of 5 to 1 for our investment. Now this was a proposal that caught my attention, and is under serious consideration. It represents a way for us to quickly deploy concentrated attention in the U.K. market, without the risks of employing a UK national and the accompanying UK employment regulations.

Then, just a few days ago, I was approached on the same topic for the U.S. market by one of our U.S. distribution partners, considering a plan to offer funded heads from $35K (part time) - $120K (full time). After expressing my initial skepticism, I’ve been giving it a bit of theoretical consideration as a mental exercise.

One selling point which came to mind is location. For small companies based on the West Coast, a funded head strategically placed on the East Coast offers reduced travel costs to East Coast resellers such as SHI, Programmer’s Paradise, PC Connection, PC Mall in Montreal, etc. for working the sales floor and call out days. (As we know, out of sight = out of mind. Those who are in front of resellers are going to get their products sold more often.)

The distributor with a funded head could also hold out access to major resellers as a carrot. For example, their pitch might be: “Sign up for a funded head, and we'll get you into CDW.” Typically, powerful resellers like CDW only deal with large vendors. Access would definitely be a benefit.

Moreover, if the proposed funded head is an experienced sales executive who knows the sales reps at the resellers, that would be a true value added proposition.

Still, it comes down to two issues for me:

· Whose interests does the Funded Head have at heart (mine, or the distributor’s)?

· Why don’t we just hire the person ourselves?