New Zealand ISV Blog

Information and discussion for New Zealand software businesses and innovators.

Plan To Succeed - Going Through Channels

Plan To Succeed - Going Through Channels

  • Comments 1

Why Resellers Don't Sell 

 

Properly structured and supported, indirect channel are often the fastest, most cost-effective way for a company to scale its business overseas.  But, the fact is – most resellers don’t sell.  And the reason they don’t sell has much more to do with you than your technology, the marketplace or the reseller’s business.

 

The prospects of partnering with international resellers and gaining access to new markets is an exciting one for any company.   It can be quite gratifying to have someone from another country share your vision and be willing to make the commitments and investments needed to help expand your business in areas where you don’t have the time and/or resources to establish a direct presence. 

 

Signing contracts with resellers is easy – getting them to actually sell and support your product is more of a challenge

 

The motivations behind a reseller’s interest in your technology will vary.  But, regardless of their motivation, once you have the contracts signed, they are supposed to get to work marketing and selling your technology and you can wait for the international orders to come in.  And you wait … three months, six months, twelve months.  Nothing.  So what happened?  Why didn’t all of those partners go out there and sell?

 

There are many dynamics at play in building a successful channel – the needs of the channel partner, the needs of the end user, and last, and perhaps least, the needs of the vendor.  All of these have to be balanced properly in order for a channel program to succeed. 

 

The purpose of this white paper is to explain some of the fundamental reasons why channels don’t work.  Armed with that understanding you will be in a much better position to build a channel program that does work.

 

Resellers Carry More Products than They Sell

 

 

Resellers actively market and sell only a few of the products they represent.  A typical channel partner selling enterprise software may have as many as 30 products in its portfolio, but in reality 90% of their revenues may come from just two products, their strategic products.  This means that all of their internal business processes are focused on those two products – sales, marketing, tech support, order processing, admin, etc.  Your objective is to either displace one of those two strategic products or become strategic product number three.  And to do that, you have to influence the reseller’s internal business processes.  Anything less, and you become portfolio product number 31, which brings you nothing.

 

 

“So why did they even bother to sign a contract to represent our product if they are not going to actively sell it?”

 

The primary objective for many resellers is to take care of their client base.  Over the past 10-15 years, the resellers that are doing well have survived because they have focused on a specific business area.  This could be:

Many resellers today are specialists with a defined client base, and taking care of their clients is more important than taking care of their vendors.

 


§  a vertical market, e.g., banking & finance, health care or manufacturing

§  a specific operating system, e.g., MVS, AS/400 or Linux

§  certain applications, e.g., database applications, storage or network management

 

As they specialized they built a client base that became the foundation for their business.  These clients generate maintenance and upgrade fees, service revenues, and are prospects for new products in the same area of specialization.  Their clients have come to trust them, and will call them when they have specific requirements.

 

For many resellers their client base is more important than the products they represent.  Vendors will come and go, but as long as they take good care of their clients, they can always introduce new technologies to them.  For this reason resellers will add new products to their portfolio, so that in the event a client asks for something with a specific functionality, they can say, “Yes, we have one of those”.

 


If they don’t have what the client is asking for, they will do a search on the Internet to find a company with the requested technology, contact them, and offer to be their distributor. 

 

 

Influencing the Salesperson

 

 

“But I negotiated directly with the owner, he agreed to a year-end target of $500,000, he promised to put money into a marketing program, and he said he would dedicate a full-time salesperson.  What went wrong?”

 

What very often happens during the recruitment and negotiation process is that a vendor will be dealing with the owner, let’s call him Johan.  Johan really likes the product, and he sincerely believes that it is a good fit with his other strategic products.  So Johan signs the contract, agrees to targets, etc.

 

If your new partner does not start marketing/selling your product within the first 90 days of signing the reseller contract, nothing is likely to happen … ever.

Johan then takes the product to one of his salespeople, Klaus, and says, “Klaus, I really like this product, and I want you to spend 75% of your time building a market for it.”  Klaus sits at his desk, knowing that 90% of the revenues he generates comes from two products he already knows how to sell; 50% of his compensation comes from commissions; and he has a Porsche payment due next week.

 

How motivated is Klaus going to be?  He is more likely to put the product to one side, and go back to doing what he is comfortable with. 

 

This is one of the main reasons you don’t get any sales.  In order for a new product to succeed with a new partner, it has to become part of their internal business processes, including compensation, and it has to happen within 90 days of the contract signing. 

 

Resellers Take Most of the Risk

 

 

“We have spent 60 man-years building our product.  We have risked everything, sweating blood to build the world’s greatest widget.  We have done all the hard work, and now the reseller has the easy part – all he has to do is sell it.”

 

When a company feels this way about the importance of sales and marketing, their attitude is usually quite apparent to a reseller, and although he may be willing to sign an agreement, he is unlikely to invest any resources in it.

 

The truth is that resellers have one of the worst jobs in the food chain and if a vendor doesn’t fully appreciate the difficulties and risks inherent in being a reseller, the relationship will never get off the ground. 

 

Resellers take on three levels of risk:

 

1.   

It is critically important for a vendor to understand and appreciate that they are a risk as well as an opportunity for a reseller.

Sales and marketing.  Resellers are expected to invest in a sales and marketing program with no guarantee of success.  They have to build a pipeline and live with a sales cycle that can be 6-12 months long.  If they have misjudged the market they will have nothing to show for it.  But this is a risk that they accept as part of the business model.  They get a discount from the vendor to justify the investment and risk.

 

2.    Being too successful.  At the point that Johan and Klaus are sending you millions of dollars in payments, one of two things is likely to happen:

 

a.    You decide to set up a subsidiary and terminate the agreement.  If Johan is sending $2-3 million in payments, it means that he is probably keeping the same amount as his margin, and you could use that money to hire a small staff of your own.  Of course, this ignores the fact that Johan has most of the client relationships, and when he is terminated he will find another product to sell to his clients.  Most companies that terminate a reseller in order to set up their own office see a drop-off in revenues, along with the very real likelihood of having to make indemnity payments to the ex-partner for loss of future earnings;

b.    You sell the company to CA, Oracle, Symantec, etc., and they terminate the agreement because they have their own distribution networks.

 

In either case, Johan is left out in the cold.  When signing the contract with you, he knows that this is likely to happen at some point.  In his mind he expects to have a 3-5 year window of opportunity during which he can make money.  During the first year he might break even as he invests in sales and marketing; in years two and three sales ramp up and he sees some profits; in years four and five he has the potential to make a significant return.  But anything beyond that he will not count on.

 

Which brings us to the third level of risk, which is:

 

3.   

You, as the vendor, are the biggest risk for a reseller.  It is his reputation that is on the line when he takes your product to his best clients.

You.  That’s right, you and your company are probably the biggest risk Johan has to evaluate.  When he takes your product to his key accounts such as Deutsche Bank, will he get the support he needs from you?  Your company name is simply a name on a brochure, and probably doesn’t mean much to Deutsche Bank.  They are only looking at your solution because it comes from a trusted source, a reseller that they have been working with for many years.  It is Johan’s relationship and reputation that are on the line, not yours.  The first time he sends an e-mail with a technical query, and doesn’t get the response he needs, you become a greater risk  than an opportunity and  your product ends up on the shelf or out the door.

 

All or Nothing

 

You have two categories of partners – those that sell a lot and those that don’t sell at all.  You want to be a vendor that matters, to be part of your partner’s “survival toolkit”.

The results from your channel partners tend to be binary – either they are selling a lot of your product, or they aren’t selling much at all.  Either you are a strategic product or you are a portfolio product.  By increasing the number of productive partners you will increase your revenues by orders of magnitude

 

 

“How Do I Know if We Are a Strategic Product?”

 

The definition of a strategic product is pretty straight-forward, it is a product that justifies at least one full-time sales resource.  If your channel partner won’t agree to dedicate someone to sell your product, by definition you end up in the “portfolio”, just one more item in their bag of tricks.

If you are a strategic product your partner is likely to generate hundreds of thousands of dollars in sales for you.  How many non-performing partners would it take to produce the same results?

 


Having a full-time salesperson provides the basis for developing a business plan and revenue projections, because your channel partner will have to generate a certain level of sales to cover his costs.  How much margin does he need to break even?  Costs will vary by market and the complexity of the sales cycle, but here is a simple example:

 

Salary & commission                                      $150,000

Overhead and social charges                              50,000

Sales, marketing and support                             50,000

Total costs                                                  $250,000

 

Reseller discount                                                   40%

Revenues required to cover costs                    $625,000

 

 

Knowing that your partner needs to generate $625,000 just to break even, you can determine whether the market segment he is addressing is large enough to produce more than that in sales, and the level of marketing support you are willing to provide to help your partner make his numbers.

 

So, What Is a Vendor to Do?

 

When dealing with a channel you are not selling your product, you are selling your company.   Your company becomes the product.

 

Recruiting a channel partner is a sales process.  You will be asking your partners to invest their time, money and resources in you.  Channel partners have a choice of vendors that they can invest in, why should they invest in you?

 

Having a great technology is not enough - the quality of your channel program will be a key factor.  When you first walk in the door, or speak with Johan on the phone, he will know whether or not you are likely to be a good partner.  Using the direct sales process as a parallel, you have to give your prospect a reason to buy; you have to close the sale (get a commitment); and you have to provide good after-sales support.

 

Professional resellers like to deal with professional vendors.  They have no objection to a rigorous qualification process (in fact, this is usually a good sign for the reseller), as long as it is not a one-way street.  By showing them that you have their best interests at heart with strong marketing programs, structured training, reliable technical support, and a fair and balanced reseller agreement,, they will reciprocate by making your product a success, with growing and sustainable revenues year after year.

Leave a Comment
  • Please add 1 and 3 and type the answer here:
  • Post