Do you have a channel strategy in place? You may have channel partners as part of your go-to-market strategy, but do you have a strategy that includes how you will support your partners’ success?
I’ve worked with many companies who sell through the channel and complain that their channel partners aren’t selling enough.
For channel sales to be successful, your team must understand how the potential partners will make money with the product or service you want them to sell. It’s not up to the partners to figure it out; it’s up to you.
My guest today is Bruce Stuart, a partner at CHANNELCORP and a 30+ year veteran helping companies develop profitable channel strategies.
Show Me the Money
Alice: Welcome, Bruce. I know our audience is excited to hear how to create or improve their channel program.
What is the first step any company should take in designing a channel strategy?
Bruce: Excellent question, and a good place to start. It all starts with the money.
This is a conversation about money, more specifically transaction yields.
It’s very common to have 1% or 2% of your transactions generate 70 to 80% of your revenue.
Unless you’re doing something really wrong, the gross margin dollar yield in these transactions is in excess of the transaction cost, even when you include the cost of your direct sales force.
Margin Decreases as Deal Size Shrinks
As you move down the list of transactions, the deal size is decreasing, and we start to move into what I call a no man’s land. Eventually, you hit a transaction size where the cost of a direct sales force is greater than the gross margin.
These transaction sizes are not actually profitable.
Alice: So, if I understand your model, most companies use average margins to determine if gross sales are profitable. This means that larger transactions with better margins are subsidizing the smaller ones.
Bruce: Exactly. As a CEO, it’s time to look at a different cost curve for these low or negative margin transaction sizes.
And that’s what channels are all about.
Channels are all about contracting out things that are needed to close deals that you previously did in-house. This usually includes prospecting, demos, quotes, and sales management.
Contracting out those functions to capable channel partners turns fixed costs into variable costs. This is how you reduce the cost curve associated with smaller deals.
Calculating What You Can Afford
It all starts with mathematics and answering the question: what can you afford?
Factors to consider in this equation include your company size, whether you are selling products, or recurring revenue. These variables will yield different mathematics.
It all comes down to the money: your cost per order dollar.
Access to a Partner’s Customer list Is the Goal, Right?
Alice: Most organizations that I talk to think a channel strategy is about getting access to the partner’s customer list and making lead generation easier.
Tell us why that might be a pitfall.
Bruce: You are right; it is a pitfall. The relationships that your potential channel partners have with their end customers are the biggest asset they have.
There has to be a viable business proposition for a channel partner to give up to a vendor or manufacturer access to that asset.
If you want to rent access to my customers, which is the way a channel partner sees it, they only look at three things.
- How much do they have to invest to sell your product
- How long will it take to make that back
- What is the eventual rate of return
So if you can’t have a conversation with the channel partner about these questions, you are wasting your time and the potential partner’s time.
Alice: This is so important, and I see this mistake being made all the time. A company decides, on incorrect data, that it should develop a channel.
They haven’t done the numbers. They can’t get anybody interested and come back, and I say, “Well, what do you have to offer them?”
They usually give a product-centric answer – ‘I have a great product for them to sell.’
And even if you get lucky and sign up a partner, you eventually disappoint them by not providing the right sales training and sales support material to get them to revenue fast enough.
What else should we take into account when trying to find channel partners?
Bruce: There’s a ton of products out there. You have to make the assumption that there are at least three or four products or services out there that are identical to yours.
In order to be a complete offering from a vendor or a manufacturer to a channel partner, there needs to be a viable, feasible, scalable, replicable product or service.
Time to Payback
Alice: So product maturity is a major consideration?
Bruce: Plus, there needs to be a business proposition wrapped around it so that if I spend a dollar investing in your program, I will generate what I need.
The reality is that if a channel partner can’t get their money back in 18 to 24 months and can’t generate a return on invested capital of three to five times the prime rate, they’re not interested.
And it’s not up to the channel partner to run the numbers.
It’s not up to the channel partner to write checks, get people trained, hire people, or buy inventory.
Bruce: I tell my clients to look at how franchises are packaged. That’s how good your package has to be. Go to a franchise show this weekend.
If your channel program is not complete, don’t waste your time looking for partners.
Alice: So let’s say we’ve figured out the business model and have the package ready. What should we do next?
Bruce: The first thing you want to do is actually profile the channel partners that you’re looking for.
Some things to include in your profile:
- How big do they have to be?
- What capabilities do they need – Marketing, sales, technical, finance?
- What is the quality of their sales and support?
Once you have determined these variables, the fastest way to find a partner is to go to your target customer and ask them if they buy from or know any suppliers that fit your profile.
Another way to find a potential partner is to look at your Closed: Lost sales pipeline to find out if you lost to a partner.
What Potential Partners Have Won Bids Against You?
Alice: So build the partner criteria, and then you make your short list of potential partners.
The easiest way to make this list is to ask potential customers what partners they have bought from.
I love your idea about checking your lost sales records to see if those deals went to channel partners versus direct competitors.
Okay, we’ve built a short list of potential partners. Do we just sign them up and start selling?
Bruce: Well, we missed a step.
Rewind, You Missed a Step
Alice: Okay. Rewind.
Bruce: You need to operationalize the business proposition within your channel marketing group.
This starts with making sure your organization knows how the partner is going to make money. Your team needs to know how to count!
They need to know the difference between an income statement and a balance sheet, and they need to understand how the offering that you have is going to transform into cash flow for the channel partner.
Once we understand that, We are ready to talk to the channel partner.
Alice: Let’s say I’m a $20 to $50 million company, and I’m going to build this channel, but I don’t have a channel manager and don’t have a channel marketing group. So how do we get that part done?
Bruce: This is a CEO initiative. If you’re going to build a new building, you get an architect in, put plans together, and figure out how you are going to finance the project.
This is no different. We’re building infrastructure in order to increase the size of the company.
It’s an Investment Treated as an Expense
So this is not a tail-on-the-dog type hobby. If you’re serious about building a channel, it’s going to have an impact on your balance sheet.
You need to think of this as investing in an asset even though it is treated as an expense.
You may need someone, either internally or externally, who has the experience and skill set to set the program up.
Channel Strategy: Program Components
Alice: I couldn’t agree more.
So let’s talk about successful onboarding. We’ve got six months to make the partnership successful, right?
So we’ve got to help them understand, of course, the way of our company, our culture, our products, and really provide them with
everything they need. So what should that onboarding look like?
Bruce: As I said earlier, It should look like a franchise package that establishes your expectations of what we are looking for from the partner and how we can help you succeed.
Clearly, there will be a marketing component. This is how demand is generated for the product. You need to explain what your marketing deliverables are and how they use them properly.
There is a sales component. You need to define the characteristics of a salesperson and the courses that they are required to pass to get certified.
These are the operational issues. As outlined in our discussion, the financial plan that the partner group has created needs to be clearly communicated to the partner.
What are the income statement, balance sheet, and cash flow going to look like?
Equally as important, what does their time commitment look like?
These are table stakes in order to bring on a partner.
Alice: I totally agree. I just see it go awry so many times. And it’s often a 2-way street, the vendor hasn’t done their preparation, and the partner doesn’t know what to ask for before committing.
You can’t leave it to the partner to tell you what they need, right?
Bruce: Maybe 20 years ago, but not anymore.
6 Steps to Create a Channel Partner Program
Alice: So, to summarize, here are the steps needed to decide on and create a channel program:
- Understand the margin on the sales from largest to smallest
- Are the margins on smaller sales covering your direct sales cost?
- Can an economic case be made for a partner to make a return on those deals?
- Provide sales training, support, and certification
- Provide a marketing program
- Implement a reporting system
Alice: Once that machine is going, how often should we take a look to decide which partners to keep and which ones to let go, not to mention making needed adjustments?
Bruce: Well, I think it’s constantly a work in progress. And the reason is threefold:
- The business models of your partners are forever changing, which can affect the partnership model.
- The strategies and resources of your competitors are always changing.
- Your people and objectives for the organization are always changing.
So it’s one of those things that you want to be thinking about constantly. The organization has to be prepared to move very, very quickly.
Specifically, you need to look at your channel strategy when:
- There is a merger or an acquisition in your industry
- Anytime a new product or a new technology has been thrown into your industry;
- And anytime you are introducing a new product or a new service when there is consolidation within your channel partners,
So these are external red flags that signal that you need to do your homework.
Alice: Great advice,
Well, on that note, Bruce, thank you so much. This talk has been very informative. It’s something I know that’s on everyone’s mind, especially right now, coming into some uncertain economic times.
People are thinking of laying people off, including laying off salespeople, and thinking, well, maybe we should go through the channel, so they should listen to this first absolutely before they do that.
I can’t thank you enough for your time.
Bruce: Alice, my goal is to take a year or two out of the learning curve for any company that needs to set up a channel strategy.
You can access the entire Channelcorp Business Model Transformation Series Here.
The Business Model Transformation Series is a trio of prescriptive, issues-focused documents that tell reseller, vendor, and distributor management precisely what they need to do to execute the transformation from a product-driven, transactions-centric business model to a service-driven recurring revenue-centric business model. The BMT Series provides insights into the channel and partner management issues that all players should have as their basic competency for being in their roles.