The Direct v/s Channel Sales Debate

By Sean Wise, Managing Director   of Wise Mentor Capital- http://www.WiseMentorCapital.com and www. SeanWise.com.

There is a famous maxim that says  “The shortest distance between two points is a straight line” and while no doubt a truism, the shortest distance is not always the best   route to take. The same can be said for sales roll- outs with regard to the decision between building an internal sales force, and leveraging a pre-existing group of resellers.

Every entrepreneur dreams of the day when their sales rocket up from  $500,000 to  $35,000,000.  Along the way however, every entrepreneur is faced with a key strategic sales decision: ramping up firm sales by building an internal sales force (the Direct Sales Model), v. leveraging third-party market intermediaries to sell on your behalf (the Channel Sales Model). In   pondering    this decision, founders need to ask themselves several key questions, including:

  • On what criteria should you base that decision? When does one approach beat the other?
  • If I choose one, do I have to stick with it, or does it evolve over time?
  • When do you need to make that decision?

To tackle some of   these issues, I sat down with Les Hansen, Vice-President of Sales & Marketing for Gavel & Gown   Software,  a venture capital-backed   software  firm selling  enterprise  solutions  to the   legal profession. Since joining Gavel & Gown, Les has managed to triple G&G’s customer base to over 20,000 law firms in over 50 countries around the world. G&G have sold more than 250,000 licenses through a well- managed sales and distribution program, which leverages both a small dedicated internal sales team, and a small army of resellers around the globe. Les shared with me “The 5 C’s”  – which he believes entrepreneurs need to consider when pondering the Direct v. Channel sales decision.

 

1: Cost: What’s the best way to spend your money?

The cost of building a direct sales force internally can be daunting.  Not   only do you have to hire, train, and support them, you also have to allocate additional funds for draws, employee benefits, and sales support. In addition, you must do all of this before a single unit of product is sold. Giving up a percentage of future sales revenue in the form of reseller margin may seem cheap in comparison, but “you must think this through,” cautions Hansen.

“You need to first calculate the breakeven point on the direct cost of a sales force vs. the margin cost of the channel,” says this experienced sales   strategist. “Remember that, for the most part, direct sales costs are fixed   (apart from the commission component), and channel costs are variable. This also means that direct sales costs can be leveraged while channel margin costs cannot.”

In this way, you need to be able to look at the long-term picture; seeing not only the short-term sales costs, but also the long-term revenue potential.  You also need   to allocate fixed costs to areas where you can get the highest ROI.

 

2: Customer:  How much customer interaction do you need?

Finding a customer that is willing to buy is hard. Building a relationship that will ensure they continue to buy – much more so. Channel partners provide your venture with a much larger reach, but you need  to balance the  channel’s ability to leverage  pre-existing relationships,  with  your need to   access    direct   customer feedback  –  especially  in  the early    days   of product development and beta  testing, when  customer   feedback  is vital   to ensure long-term viability of the product. However, in the end, you need to weigh the long-term impact of keeping your customers at arms’ length vs the ability to have a larger number of feet on the street hawking your product.

 

3: Calendar: How long do you have?

Building an internal sales force takes time.  Even once you have   them   hired   and trained raring to go, it will take still more time for them to go out, meet customers, qualify targets, build leverageable relationships, and   establish enough customer credibility to actually close a sale. Do you as a start-up have that much time, or do you need to leverage a channel that is already selling similar products to your target audience?

Investors want   scalability (the ability to ramp up revenue fast, and to do so without proportionately ramping up costs) and maximizing scalability often means deploying a channel sales force.

“Without those extra feet on the street, most VC’s will have a lot harder time believing in a venture’s ability to scale up to $35M+  in  3-5  years.  It just takes too long to   scale up internally,       and     without scalability, the VC will have a hard time getting their head around an  investment,” confirms  Phil  Reddon,  a  VP with   Covington   Capital,   a venture capital  fund with more than       $500-million under management.

4: Complexity

The   more   complex    the product is, the harder it will be to   drive   sales    through a channel, or so one might think. “There’s a myth out there that if your product is complex, you have to sell it direct. But that simply isn’t an absolute truth,” says Hansen. “In many cases, when the product is complex, you need channel partners to not only sell the product, but also to integrate the  product into the client’s existing infrastructure, to  service  and update   the   product   on   an ongoing  basis  and  to  provide end-user training on functionality.”

This makes sense to me, as a direct sales force, which just makes commissions on moving sales units, may not focus on after-sale support. “In complex sales, you   may   need   your channel to not only sell your product, but   to    also    sell additional    products and services that, when packaged with your product, create a complete solution offering for the   customer,” Les shares: “This can be a real advantage for you. Many channel resellers will make 5 to 10 times as much money on the consulting services they   sell alongside your product as they do on the margin you give them.  This means   that   they   will   have significant   incentive   to   sell your product, and it can save you margin   dollars.  It also allows you to  focus  on  your core competency. If you are not an integrator you shouldn’t try to be one. You should partner with someone who is.”

 

5: Control: Who  owns the Customer?

Another key sales maxim is: “He who   is   closest   to   the customer owns the customer.” This means that down the road, your channel partners may own your customers and therefore, if they walk, so may some of your customers. So you need to consider the impact of this. Is this a business risk that you can live   with?   While   customer poaching   does happen when internal sales reps switch to a competing firm, the terms of most employment contracts can mitigate    this    significantly. Accept that you will have much less control over your channel partners than you would over a direct sales force, which can be a challenge. Will you be able to exert enough influence over your    channel    partners, to comfortably    achieve     your business objectives? If not, can you live with this?

Control also addresses your ability to make adjustments on the fly and to influence the sales messaging quickly when needed, according to Hansen. “In start-up software sales, you may not get your go to Market plan and message perfect right out of the gate, so you need to be flexible and be   able to respond quickly. It is a lot easier to control your external communication through a sales team that reports directly to you, than through a channel with which you have an arm’s length relationship. Managing a message through a channel can sometimes be a lot like that game  ‘broken telephone’. You need to be concise and clear, or the message may get distorted as it disseminates.”

So, there   you   have   it   – “Hansen’s   5   C’s”   – which outline the key   matters you should consider before choosing a go to market strategy; but  what  about  the timing of the decision?

 

Evolving the Approach

In the venture capital world, where scalability and   rapid growth are   prerequisites for investment, the channel sales model seems to be preferred. “From a VC perspective, I like to see companies which can leverage other people’s sales forces   to   grow.   Yes, your company will give up some points in margin and also lose some   control over customer relationships, but will hopefully make up for  it  in terms of more volume,”  posts Ed Sim, Managing  Director at New York City’s Dawntrender Ventures, in  his  blog BEYOND VC.

Stephen Pollack, CEO of the Toronto based venture backed PlateSpin and an  IT  Veteran with a wealth of  experience in creating        and               delivering software and  software service, agrees  with  Sim: “We found that    establishing a global business model was only possible through   a   channel approach.  That   was a main driver for us along with the desire to  work through trusted sources (that) the customer  can rely on instead of a  ‘startup in some far away  place’. We now have 1000 customers spread all over   the world through our channel model”

Therefore, if you decide on building channels, the question then becomes when to focus on such. Covington’s Reddon comments: “Companies need to land, usually via direct- initiatives, commercial reference-able customers first. Then once they have enough proof of concept installs, they can turn to channelizing the process.”  Mike   Green, President, Greenco Investments Corp. (and former Chair of the Toronto Angel Group who now works   closely   with   several young software companies on issues including sales rollouts), echoes this notion: “There is no point in moving to an  indirect channel until AFTER  you have got  it   right  with  your  own direct  sales  efforts.  Once you understand what it takes to sell, can communicate the typical sales cycle,  your  key  selling points, and …   handle   the standard  sales objections, then you   are  ready  to  give  the indirect   sales   channel    the ammunition  they  need  to  be successful…but not before!”

Tips for Managing Channel Sales:

Once you’ve got the ammunition and   information from those first 20+ reference-able customers, you are ready to start building out your channels. To do this, Les says that the fastest way is to find a group of like-minded individuals who are already in deep with your target customer base. The best way to do that? “Ride someone else’s channel. Never build   when you can borrow,” Hansen comments. “Take a look at the products that your target customers are already buying, and find out who they’re buying them from. Chances are that someone has an    established distribution channel    into    the     market segment you want to get to.” Remember  – if   you have a product and are looking for a channel, somebody out there probably has a channel   and they are looking to push more products through that existing channel.  Even better  – if you can             establish integration between   your   product   and theirs you   can improve the revenue generating capability of a single sales call, allowing the sales reps to  ‘double-dip’ their commissions.

However, channel management does not end here. Once you have the channel, you not only need to maintain it  – you need to motivate it. Hansen gives three pieces of advice    to    future    channel managers:   “Be   fair – your channel partners expect it. Be consistent  – your    channel partners will talk to each other, so accept it.   Be friendly  – relationships go a long way, so invest in them.”

 

The Bottom Line

There are definitely pros and cons on both sides of the Direct v.  Channel debate.  A direct sales force allows you more customer interactivity, but may cost more  (in terms of both time and money). Harnessing a channel sales approach allows you to leverage on pre-existing relationships, but does not offer up as much control.  Neither model is perfect, nor can either be applied in all cases.  The shortest distance between two points may be a straight line, but the shortest distance is not the only route to take – and it certainly is not the best route to pursue under all circumstances.

 

 

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Author: Prajakt Raut

Prajakt Raut is the founder of Applyifi.com, and author of the book for startups - ‘Starting Up & Fund Raising’ Prajakt personal goal in life is to encourage and assist a 100,000 people to become entrepreneurs. _____________ Prajakt is the founder of Applyifi - an online platform that provides startups a 36-point scorecard and assessment report on the venture's investment readiness [www.applyifi.com], and helps them improve their odds of getting funded. Prajakt is also the founding partner of The Growth Labs, a platform where growth-stage companies get sharp, incisive advice from senior professionals and experienced entrepreneurs. [www.thegrowthlabs.in] Before starting Applyifi, Prajakt was the head of operations at IAN, founding member of a leading incubator, and the Asia-Director for TiE (2004 - 2007). Previously Prajakt had co-founded Orange Cross, a healthcare services company, and was part of the founding team member of Idealake Technologies. While in college Prajakt had founded a printing business and has spent over 10 years working in leading advertising agencies. Prajakt’s book, ‘Starting Up & Fund Raising’, helps startups understand an investor’s perspective, and helps them improve their odds of getting funded. The book also helps entrepreneurs understand the building blocks of a business.

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