Tuesday, October 25, 2005

GYAN:: the business of channels

channel sales seems to be the new mantra nowadays. Every software (and hardware) company seems to be adopting a similar channel driven strategy. What does it mean and take to be channel driven?

First why take a channel approach anyhow. You have a killer product. You're pretty sure that once you get it in front of a customer he will buy the same, why enrich someone else in the first place? If you can do 1bn USd in sales and make 100mn in profits why employ a channel and bring that down to 750mn in sales and 75mn in profits.

The answer lies in two points - margin and Cost of Sales. Margin is the final contribution to profits from every 100$ in revenue while Cost of Sales is the upfront investment required in order to achive 100$ in revenue. building a successful start-up means balancing the Margin cum cost of Sale objectives in order to conserve equity. Thats right conserve equity and not cash. By virtue of being a start-up and thus inherently risky the possible options to raise capital end up being equity or else debt through soft sources i.e. credit cards, family and friends etc. As a Start-up CEO you really want to GO FOR THE EASY MONEY while spending as little capital as possible. There will also be opportunities to make more money later but at the present moment, its worth it to close your eyes to some business and focus just on that which is easily addressable and predictable. Remember, minor miscalculations and even missing a quarterly revenue target can prove fatal for a start-up.

The second important aspect that needs to be considered is the Cost of Sales. What really is the cost of sales in a start-up. Its in my opinion 60% of the entire cost structure of the company. More than just being an unimaginably huge amount to fund based on unproven technology, it also exposes early stage companies to the execution risks involved with going from a 50 person 1mn USd revenue company to one with 1000 people and hence 150mn USD in revenues.

Now that I've stated the two complexities, you might ask, OK. What have we learnt -

1. My revenues in steady state are probably gonna be lesser than what they could be in a non-channel approach
2. My margins would probably go up and my risk would go down.
3. Most importantly a strategic insight would be that the economics of the channel approach are derived from the moving of the responsibility and hence the onus of funding certain activities from the start-up who has per se no expertise or track record as an organization with sales to a Reseller with specific vertical or geographical expertise and hence the ability to raise capital at better terms to fund the exercise.

Having said this - what does it take to run a channel friendly business ? While it might be a bit inelegant for readers, I just have to put these down in points

1. It's a must must must to have clearly positioned products with comprehensive collateral material etc. to ensure that the channel is saying what you want them to say and have NO ROOM to innovate or to insert distortions into the entire product messaging.
2. Pricing and Discounts need to be worked carefully. Here its helpful to start off by looking at your experiences with your own direct sales force. Specifically metrics like Average selling price, Length of sales cycle, customer wins by vertical and key buying reasons need to be quantified. Having done this its important to put in place a list price SLIGHTLY HIGHER that the average selling price and provide a discount band for the partners to ensure they make reasonable amounts of money if they were to sell at the present average selling price. While this means that your own revenue yield would be lower, you will benefit from the dramatic reduction in cost of sales and should take this as a way to enable that.
3. Committed relationships are the way to go. Be firm in your own committments and that of your partners. Ensure you have the budget and the human resources to support the partners and demand that they dedicate the same to ensure success of your products.
4. Manage with software. The channel today has to be software driven otherwise your budget for experienced channel managers will have to be doubled if not tripled.
5. This is a marathon. Be prepared for it. Spurts of energy and activity will only serve to disorient and frighten partners. Consistency is the main reason to adopt a channel approach. Practice it yourself and demand the same from all partners.
6. Think international. Make it easy for global partners to do business with you. Structure your products so they look feel and appeal to global audiences.
7. Invest in lead generation activities. By these i mean most importantly online activities which generate qualified leads. You just cannot rely on partners to prospect accounts alone and cold calling is the most expensive way to qualify accounts. You have to focus on doing stuff that will make customers come to you!!

Good for today?

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