The Channel to Success

Every company wants to expand sales, but not at the expense of profit. A popular way to reduce the cost of sales, and thus increase profit per sale, is to sell products through an indirect channel. It sounds simple: recruit as many channel partners as possible, give them all the brochures you can print, and then relax and watch both revenue and profits grow like gangbusters.

If only it were that easy. A recent study of the software industry – a business where many companies depend heavily upon indirect sales – revealed that even experienced firms frequently bungle when trying to keep their indirect channel partners motivated and productive.

In fact, indirect channels only increase your revenue and profits if you’re willing to spend the time and money to create strong channel relationships. Here’s a sure-fire, six-step process to help ensure success when your firm recruits and motivates channel partners.

STEP ONE: UNDERSTAND THE BUSINESS DYNAMIC

An indirect sales program is doomed from the start if you don’t take the time to understand the basic nature of the relationship. Obviously, the first ground rule is that both you and the channel partner should make a profit through the sale of your product. However, just because you share the same basic goal doesn’t mean that your interests are identical. In fact, while you both want profitability, the ways in which you’re likely to pursue that goal are in direct conflict.

“The supplier is looking to drive down cost of sales by leveraging resources of the channel partner while the channel partner seeks to minimize the cost of ramp-up and reduce the cost of sales,” explains Ed Chapman, managing partner at VizQuest Ventures, a company that helps sales groups launch effective channel programs. In other words, you want your channel partners to spend as much of their time and money as possible selling your product, while they’re looking to you to reduce their cost of sales.

There are other ways you and your partners can end up at loggerheads. For example, you may be hoping that your channel partner will move products that your own direct sales force is having difficulty selling on their own. Chances are, of course, that those particular products aren’t selling because they’re more difficult to sell, in which case your channel partner isn’t likely to be very enthusiastic. Your partners would far prefer to sell whichever product is in the greatest demand. The last thing they want is to become a dumping ground for your excess inventory.

Given the difference in the way that your firm and your channel partner expect to make money, the only effective way to sell through indirect channels is to create a joint venture relationship. Such a relationship takes into account the resources that both companies can bring to bear in order to make the relationship successful. This means that you will need to invest resources in training, marketing, and sales support. Likewise, the channel must commit resources to training and actively promote the solution within its target market.

Treating channel relationships as strategic investments also keeps you from recruiting too many channel partners, according to the flawed reasoning that the more channel partners you have, the more they will sell. According to Chapman, over-recruiting is one of the primary reasons that indirect sales efforts fail. “When there are too many partners, your support budget can be spread too thin, starving partners who with the proper support might otherwise be able to make good sales,” he says. Worse, too many channel partners can crowd a target market, forcing your partners to compete with one another, resulting in margin-killing price wars.

STEP TWO: CREATE A COOPERATIVE
SALES CULTURE

Unless you’re planning to sell all your products through indirect channels, you’ll need to keep your direct sales organization and your channel partners from treading on each other’s toes. A channel strategy can’t just be an afterthought that’s just tacked onto your preexisting direct sales strategy. In that case, the direct sales function and the channel sales function will inevitably overlap, putting the two groups into competition, rather than encouraging cooperation. Put another way, indirect channels will only be effective if your direct sales reps buy into the channel strategy. Failure to achieve that buy-in can easily scuttle an entire channels program.

For example, when PC-based computer networking was first introduced into corporate computer centers, most networking hardware purchases were made through direct sales from two rival companies: Cisco and Cabletron. Cabletron’s direct sales team suffered from a hyper-macho organizational culture (the head of sales once demonstrated their competitive strategy by thrusting a commando knife into a basketball) that tended to look at all outsiders as the “enemy.” When corporate buying habits changed so that most networking hardware was purchased through independent integrators, Cabletron’s direct sales reps fought tooth and nail to keep hold of their customers. This prevented Cabletron from growing into new markets and within five years, Cisco dominated the networking market and Cabletron was fast becoming an industry footnote.

In other words, companies that want to be successful with indirect channels must minimize or eliminate conflicts between direct and indirect sales. One company that’s very good at this is Microsoft. Microsoft’s large corporate customers are constantly asking the software giant to build them solutions that are specific to their unique business needs. Microsoft, however, almost never becomes involved in such engagements because the bulk of their sales come from indirect channels and they don’t want to create channel conflict. “Microsoft is well aware that their value added resellers (VARs) would start proposing alternative technologies, like Linux, if Microsoft set itself up as direct competition,” says Rob Enderle, principal analyst at The Enderle Group.

STEP THREE: SEGMENT YOUR TARGET MARKET

It’s a big mistake to start recruiting channel partners before you know what kind of channel partner is most likely to be successful working with your firm. If you’re going to help other companies be successful selling your product, you’ll need to know exactly where that product is most likely to sell and what kind of person or organization can sell it most successfully. Doing the research ahead of time doesn’t just save you from recruiting inappropriate partners. It also helps ensure that your indirect sales channel focuses on the customers who are most likely to generate revenue and profit for both you and your partner.

Poorly targeted channel programs can be big money losers. For example, you might recruit a set of channel partners that are fully capable of selling your product, but tend to sell to customers who have no use for your product. In this case, you’ll end up spending a lot of money on training and support for the channel and get little or nothing in return. Something of this sort happened about five years ago when computer manufacturers recruited office supply stores to sell handheld computers. Even though the devices were undoubtedly business tools, they had few practical applications in general business situations. Today, the majority of handheld computers are sold by companies that build industry-specific solutions, such as inventory control and the scanning of shipping labels.

Similarly, you might aim your product at the right target customers, but recruit a channel that is either unwilling or unable to sell it. For example, the erstwhile computer giant Digital Equipment Corporation once spent heavily to create a software product that potentially had enormous appeal to IBM’s installed base. However, when Digital recruited IBM as the indirect channel to sell the product, IBM’s reps had no intention of telling their customers about a product from a company that competed against IBM in other segments of the computer business. As a result, Digital sold exactly four licenses, gaining $1,000 in revenue in response to a $1 million investment.

Most channel blunders aren’t so spectacular, of course. What’s more common is a channel strategy that’s poorly timed in the way that it addresses the market. Ideally, you should be cultivating your channels while the market for your product is large enough to justify multiple channels and growing fast enough to open up a wealth of opportunities. Launch the channel program too soon, and there might not be enough business to go around. Launch the channel program when the market is mature, and you’re likely to find that the competition has already recruited the best partners.

Ideally, the target market for indirect sales should consist of potentially profitable customers that your direct sales reps can’t call on, for whatever reason. For example, a channel partner might have specialized knowledge of a particular industry, thereby making them better able to address those opportunities than your generalist sales reps can. Similarly, a channel partner might be deployed in a distant geographical area that’s difficult for your direct sales force to reach.

STEP FOUR: RECRUIT THE RIGHT CHANNEL MANAGER

The success of a channel relationship will depend greatly upon the quality of whomever in your organization is mandated to manage that relationship. Unfortunately, the tendency in many firms is to assign relatively inexperienced new hires, rather than heavy-hitters, to be channel managers. The assumption is that, since the channel will be doing the actual selling, the role of the channel manager consists primarily of making certain the channel has access to the latest and greatest marketing materials.

That’s the exact wrong way to think about a strategic relationship, according to Sam Reese, CEO of Miller Heiman, one of the world’s leading sales training firms. “Not everyone is cut out for managing strategic relationships,” he explains, “The ideal candidate combines patience, business acumen, financial training, and product knowledge.” The channel manager should definitely have skills that can add value to the channel and should be able to help the channel partners plan sales campaigns, target their sales efforts, and ultimately close more business. Ideally, the channel manager should be viewed, by the channel, as part of the channel’s strategic planning team.

Your channel manager will also need clout within your own firm. An inexperienced new hire is unlikely to have the personal authority and business acumen required to work relationship issues, such as channel conflicts and contractual differences. Worst case, an inexperienced channel manager might end up as little more than a “gofer” running errands for the channel partner. That’s a waste of resources that might otherwise go toward helping both your firm, and your channel partners, to become more successful.

The best plan is to bring the channel manager on board at the beginning of the planning process. That way, the channel manager can help define the strategy, and then cultivate and recruit appropriate partners. Of course, if your overall channel strategy calls for a large number of partners, you may need more than one channel manager. However, before you go out and hire a dozen new employees, remember that it’s more profitable to have a small number of highly productive partners than a large number of nonperforming ones.

STEP FIVE: TRAIN YOUR CHANNEL PARTNERS

Don’t even think about skimping on training your channel partners. “The ability to make a channel productive is directly proportional to the amount of effort that you put into quality channel training.” explains Bruce Carocci, senior vice president of marketing and sales at Via Training, a provider of custom training programs.

To be effective, channel sales training must go beyond the sales training that you would normally supply to a direct sales force. Direct sales groups have the advantage of being “plugged in” to your own organization and have the opportunity to absorb useful information from colleagues, engineers, marketers and other internal folk. The channel’s sales personnel do not have that advantage, which means that extra effort must be taken to bring them up to speed.

Your channel partners’ sales reps will also need top quality selling tools, such as competitive data sheets, sales scripts, selling videos, and testimonials, as well as the usual brochures and specification sheets. If the channel partner’s value proposition is to take your product and customize it into an industry-specific solution, the channel training must utilize case studies and real-world implementations inside the target markets. In most cases, you’ll need to do test marketing and test selling into the target markets, prior to the training, in order to gain the necessary experience to make the training useful to the partner.

As you can well imagine, training channel partners is generally more expensive than training direct sales reps. “The channels need applied sales skills that show them, step-by-step, how to sell the solution,” says Carocci. He also notes that the channel will need to be trained on the operational details of your sales process. For example, if your direct sales team uses a CRM system to book and track orders, the channel will need special training on how to manage the parts of that system that apply to them.

STEP SIX: SUPPORT YOUR CHANNEL PARTNERS

An indirect sales channel needs more product support than a direct sales force, because both the channel partner AND the customers of that partner have support needs. The ability to support the channel’s own use of your product is especially important if the channel partners are using your product in new ways, such as customizing it for a particular industry. Because the channel partners are stretching the product to do new things, they’re more likely to bring problems to the surface, thereby creating an additional support burden.

Frequent and ongoing communication is vitally important to the health of a channel relationship. Today, every business moves quickly, so you’ll need to constantly inform your channels what’s going on with your company, the target markets, your installed base, and so forth. Consider implementing a news-feed that provides your channel partners with key information on a weekly or even daily basis.

Sales incentives can help build loyalty to your product within the channel. While your partners’ sales staff may already be well compensated, they’ll be far more likely to sell your product if they feel that there’s “something in it for them.” For example, you might give a channel sales rep credit towards a personal purchase for attending a regional training session. Similarly, you might set up a system where channel sales reps earn points when they sell your product, along with the ability to transform accumulated points into a prize or gift.

Another way to ensure channel loyalty is to help with the channel’s marketing efforts, such as through joint funding of advertisements. Intel, for example, keeps its channel partners (personal computer manufacturers) happy by adding dollars to the PC firms’ marketing war chests, according to Rod Keller, who until late 2003 was the head of Toshiba’s U.S. PC business. “Intel spends millions of dollars to drive demand for your PCs, offsetting any potential savings from going to a lower-cost competitor.” Intel also ensures that channel partners get the money quickly, further enhancing their reputation. “We’d get reimbursed within a few days of running an ad,” says John Harris, former marketing vice president at Panasonic’s U.S. PC division.

Be sure that you measure the effectiveness of the channel relationship on an ongoing basis. “The key to the channel relationship is trust, which means that the partners can be flexible in making adjustments that improve performance,” says Chapman. “The relationship should encompass a common business process, joint reporting, joint forecasting, joint tracking, and the analysis of key performance indicators.”

As you can see, increasing sales by cultivating indirect channels isn’t something that can be done on the cheap. However, if you target the right partners at the right customers, and hire the right people to manage the relationship, there’s no better way to ramp up revenues while lowering the cost of sales. •