In a meeting with a startup this week, we discussed the EMEA channel and it got me thinking about what startups should consider when entering a market via the channel and compelled me to write this post.
I’ve always worked for, and with, companies that go to market 100% via a channel. For startups, in particular, a leveraged sales model via a channel (whether single or two tier) is the most effective and expedient way to enter a new market and scale at speed. I’ve always applied the same thinking to channel marketing; leverage your marketing dollars by co-marketing with your engaged channel partners too. However, there are many caveats to that, especially in today’s vendor saturated market. No longer can you just take a product message to either distributors’ target resellers or resellers’ target customers. Solutions that deliver upon customers’ business challenges will garner greater interest versus just a technology message. And, of course, vendor channel programs – margins, rebates, MDF, etc. – need to appeal to resellers as much as the technology before they’ll consider adding you to their portfolio.
Vendors entering a market seriously need to consider whether to implement a single or two tier distribution strategy. The days of true value-add distribution are long gone, mainly due to acquisition and consolidation of distributors. If your product/s is/are run rate and mainstream, then two-tier can make sense. If, however, you’re focused on the enterprise, with a long sales cycle, there are typically far fewer resellers to target. Why, in this scenario, would you engage with a distributor, when you can sign resellers direct and provide a higher margin return for both them and you? One could argue that distribution protects vendors from bad debt risk and provide an operational service. But you can get factoring organisations to conduct this role for less than you have to provide in margin to distribution. Vendors really do need to investigate this alternative in my opinion. However, distribution certainly continues to play a key role for many vendors. The large distributors, at least not in the UK, do not, in my experience, best serve startups that require focus – and that don’t have $100K upfront for a funded head. However, some of these larger distributors do have some exceptional product managers, who are used to bringing new technology to market and continue to have a startup ‘mindset’. These product managers do a sterling job in many instances of grasping how the technology fits into their overall portfolio ‘stack’ and can take the combined message out to the reseller channel. These individuals tend to have their background and heritage in the former VAD that has, ultimately, been acquired. Unfortunately, these are very few and far between.
Most, if not all, the companies I have worked for and with have created demand and sold directly to the customer, with fulfilment via the channel. Depending upon how much ‘skin in the game’ the channel has put, should depend upon their return – blanket discounts just don’t create the right sort of behaviour any longer. Back-end rebates work well to drive the right behaviour by paying for specific KPIs or deliverables. Marketing should always play a part – preferably larger than smaller – of these back-end rebates. For companies that provide a % of revenue for MDF, the control and management of these funds is of paramount importance to the success of implementing these funds. I have seen distributors take the accrued marketing dollars to the bottom line as they’ve ‘expired’ and accounting will not let them utilise the funds due to their financial practices/controls. In an ideal world, channel marketing will work with the vendor channel manager and the distribution/reseller marketing manager to implement a quarterly plan to utilise the funds. The opposite extreme of this is where large vendors expect a plan to be put in place 6 months in advance, which really can only consist of ‘placeholder’ activity that far in advance. The key is to drive utilisation but maintain a level of flexibility – all whilst operating within financial and corporate governance guidelines!
There are still a few VADs out there that continue to help vendors create a market, they’re just harder to find and more selective about whom they add to their portfolio. Remember, for them, investing in you as a start up is a risk – they will invest in your technology with sales and technical support and will spend marketing funds on creating awareness and demand. Then what happens? You get acquired before they’ve had a chance to get a real return on their investment and the acquiring company already has one of the large distributors and so you terminate your VAD, leaving a bad taste in the their mouth.
As with any go to market strategy, you need to identify your key goals and what type of partners will best serve and deliver upon those goals. I am still convinced that a channel GTM strategy will deliver in most cases, it’s just whether your choose single or two tier that will remain a key question for you.