I’ve had the chance recently to spend time with several channel executives. Let me tell you the story of two different perspectives.
The first story is about a sales executive who has significant experience in managing IT vendor’s channel programs, and has done so for more than 20 years. She believes that competition is fundamentally good. In her experience of managing the channel, she’s found that resellers generally act in their best interest and getting that to align to a vendor’s best interest is not easy. In fact, it’s nearly impossible. As a result, she’s come to see that channel loyalty is almost impossible to manage or to “buy” through an effective program. She sees the problem with resellers discounting away the margins that she and other vendors provide. But she thinks, “Isn’t that their problem?” After all, a vendor can only do so much. So, she does what she can to offer a viable set of his company’s terms to the channel and recognizes that the channel is always going to complain about something, and it’s not the vendor’s role to fix it. Besides, she thinks, does she really know the truth of their economics? And aren’t most channel partners doing influence selling today? Maybe it just doesn’t matter.
The second story is about another sales executive. Like our first, she has had experience at multiple vendors, as well as some experience in the channel. Her credibility has been built over the years by being a caring partner to the channel. (As a result, some view her as soft.) Like the first, she loves competition too, but always keeps in mind that competition is best when it grows the overall pie. She wants her resellers to focus more on competing against the other vendors’ partners than against each other. As long as that is happening, she knows her company will win market share as well as reseller mindshare. She listens to the channel regularly and values their perspective. She uses their discussions to listen for the changing market dynamics and how the channel is adjusting to those situations. She watches the channel discounting and wonders what can be done. She believes being the channel manager for this organization means managing both short-term and long-term growth. And a channel program design is more than managing upfront discounts or allocation of resources; she believes it includes looking at ways to support the ecosystem so that it drives the right set of behaviors by the channel. And the question she poses is, “what can be done?”
Perspectives Shaping Outcomes
These two executives are working for competing companies. Each is chartered with Channel Strategy & Programs. They will have a big impact on how their organization succeeds because of their influence on their company’s Go-To-Market model. Would what you just learned about these executives’ perspectives on the channel shape which company you supported? Or which stock you purchased?
Their perspectives would certainly shape my support of them. The way in which we look at our world forms our philosophy. Our actions are ways in which we live out our philosophies. In the first channel view described, I would characterize it as an “us vs. them” philosophy. Although the vendor and reseller may refer to their relationship as a “partnership”, their actions do not appear to support this perspective. A great deal of channel policies in the1990’s exemplified this worldview.
But there is a more advanced worldview forming. One that says, as channel go-to-market executives, we can win if we can alter the market dynamic to one where the channel players gain when they support our products. This allows us to use a channel in the marketing mix and use the expertise and talent and people of a leveraged model. The second executive believes in this model.
“Channel program design is more than managing discounts, funds, or resources.”
We’ve all heard stories.
Just last week, a client who manages the channel for a big software firm shared a story of a volume reseller “getting the deal” with a large customer at cost minus 1%. One had to question whether it was a good decision for the reseller that “won,” but the other part of the equation is the value partner who put many resources onto selling the customer on the technology solution in the first place. They won nothing. A friend of mine, a reseller in the Northwest, spent two long years working on a large and complex products-and-services deal. Two years and hundreds of man-hours were invested. In the end, they got awarded the integration services only. The product sales were bought from mail order at 2 points above cost. The reseller couldn’t even match the price because of the greater volume discounts mail order entities get from distribution. After driving the customer decision, he wound up lucky to get the services piece. This story is very common. In the long run, all resellers are impacted by this dynamic.
To provide a historical perspective, many consulting operations became technology resellers in the 1990s. That was when the technologies were relatively new and there was a greater need for support. Many of the technologies have matured since then, and with that market shift comes price pushers. It’s predictable.
The economic downshift is certainly part of the problem–hardware and software resellers are bidding for business, any business. The Internet has also played a role, increasing the reach and scale of volume players. In the long run, no value-based shop can afford to win on low margins. Some go out of business; others stop selling product completely and focus on consulting and services.
What Vendors Want and What They Need
Vendors want to view their channel as a sales rep for their products, focused on pushing their boxes, their solutions. This doesn’t reflect the reality in the market. Most value resellers today capable of doing out-bound selling now differentiate themselves by professional services, knowledge, and managed services. A critical aspect of their services tends to be vendor independence. Volume resellers, on the other hand, are limited in their ability to push products.
The implications for the vendor are significant financial impacts:
- There is an ongoing race to the bottom on end-user price, and vendors’ suggested prices are almost ignored. The vendor feels this on direct opportunities, as the customer’s price expectation is no longer the vendor’s list price; it is now the “street price”, set by the volume channel at 15% to 20% below list.
- Many value resellers find they no longer want to resell product. They focus, instead, on custom solutions, training, and professional services. With channel partners dropping out of reselling, vendors lose their “sales force.” These players are still influencers, but they no longer have a vendor relationship based on margin. (Vendors can still affect this “influencer business”, but that’s a topic for a different article.)
- Vendors, no longer able to use the leveraged model to create consideration in their pipeline, have to take on more investment themselves, driving up their direct sales costs.
What to Do?
Is there a way to address the economics of the channel today?
Some companies are recognizing a need to step in and change the way the ecosystem works. The question is how to do so, to avoid creating another issue in the fragile dynamics. If channel partners discount product to win sales, can a vendor bring about behavioral change? The answer is yes. As an innovative technology company, a fundamental goal is keeping in tune with and influencing the evolving go-to-market model. In the case of channel strategies, it’s critical to keep developing new models that lead to an eco-system that works for you. By shaping the rules of the game, vendors can win.
An Agent Model — How Can It Help?
One way to see the problem is to notice that the margin giveaway problem occurs when resellers are forced to differentiate on price. The solution has to address how to remove the “price car” from the channel’s hands to create a more even playing field. And it appears several vendors have found an option.
Many major vendors (HP, Cisco, Symantec, Adobe, Novell, Microsoft, Veritas and others) have been exploring and developing programs to take on more ownership of the market economics.
“It’s critical to keep developing new models that lead to an eco-system that works.”
This idea is simple: pay the channel a set established fee that they get if they don’t negotiate on price. It changes the role for the channel “reselling” to the channel acting as an “agent”‘ for the vendor.
This concept is commonly referred to as an “Agent” program. These programs have been emerging in the past 6-18 months as vendors look for ways to help spur channel sales and maintain strong relation-ships with their most lucrative or strategic channel partners.
How It Works
With an agent program, the vendor agrees to pay a percentage to select, authorized partners
- The partner participates by identifying and working deals. The vendor gets visibility into their pipeline.
- In some cases, if the deal is above a certain level and the vendor participates in co-selling, there is a tiered model of payment based on how much the partner participates.
- In other cases, a % fee is paid regardless of the size and the vendor or distributor carries the paper. This could mean the business transaction is done between the customer and the vendor (with the agent bringing the deal to the vendor and paid a set fee).
- In some situations, the vendor creates an authorization program to allow all channel partners to sell but the product is shipped (and priced) by the vendor.
Could There Really Be A Win-Win?
Resellers can benefit from the Agent model:
- Immediate economic benefit. The agent model fee range we’ve talked with vendors was 3-15%. The average was near 10%. What that means is that resellers who currently get 1-3% on software and 3-5% on hardware have a chance for immediate upside.
- Resellers also want to maintain some “independence” for their customers. By making product recommendations but staying away from reselling the products gives them an air of honesty and objectiveness.
- It also allows channel partners to participate in sales without having to take ownership of the product. Given the financial risk and burden of these transactions, this can often give smaller partners a better set of economics.
- Reward for performance. No longer will deals be worked by one partner but won by another. A good vendor tracking system can help partners to know they’ll always get paid on what they achieve.
Vendors benefit, too:
- By investing resources and managing the pricing in the market, vendors can re-establish a viable economic model in the channel. They can give the channel an incentive to sell their products.
- By leveling the playing ground between small and large players, they can allow both types of channel partners to participate in addressing the market.
- By reducing the market focus on price discounting of their products. If resellers are no longer discounting, it reduces the market pressures for the vendor to do more discounting on their direct business.
- This model allows customers to choose their point-of-purchase based on value.
- Firms up the end-user price in the market. What vendor wouldn’t want that?
When And Why of Establishing an Agent Program
Many of the companies looking at the Agent program and related ideas are considering new ways to make it work for them. As this movement picks up speed, those vendors will have an advantage over their competitors, since they will be able to capture market share and loyalty in the reselling world.
If the “margin giveaway problem” has been causing stress at your firm, then reach for the remedy. Take a look at how an agent program could benefit your product sales, and then whether you want to evaluate a few pilot projects for the year.
If you choose to move forward with a full agent program, remember to manage your risks. Although many vendors create the program specifically to benefit the VAR community, it doesn’t always get interpreted that way.
- Some express concerns about losing customers to the vendor.
- Sharing client lists feels risky to the VAR. It’s a core asset of any business. Asking resellers to share their lists involves a level of trust you have to earn.
- Managing accounts through agents can get trickier — manage who will do billing and collections.
- Resellers get concerned about cash flow in their operations. You’ll want to manage how quickly you, as vendor, provide information on transactions and commissions.
Shape Your World
Sales and channel executives face many challenges — internal pressures to meet the needs of new product launches, those “demanding resellers” who call to discuss lost deals, keeping the current business run-rate high and growing, attending tradeshows to stay on top of events shaping the channel and more. All of this, of course, has to happen as the “day jobs” while thinking of ways to shape the future direction of their company. Not easy.
But then, being a leader is not about things being easy, but how to advance your views and perspective to shape the world around you. As channel executives, we owe it to the people we work with and ask to be our” partner” to help create a viable ecosystem — one that allows the talents and resources of all the participants to come forth.
The leaders who are most likely to enjoy success are those who most enjoy seeking it, even inventing it. These people are able to find satisfaction in the journey, not just at the end of the road.
Changing channel programs each year or two may not always feel like success but our goal is to keep working, keep on that journey that allows us to build better partnerships, better results.