Let’s define terms first. We refer to “channel” when we are talking about value added resellers, distributors, and system integrators. And we define “product” as any offering whether it’s hardware, software, or services (or a bundle of these). Our advice below is based on what we’ve seen as the principal drivers of channel partner motivation. Consider these three criteria a litmus test for your product’s channel friendliness.

Buying cycle under 90 days

I intentionally used the word “buying” cycle here and not “sales” cycle here. Truth be told, the channel really doesn’t sell as much as fulfill demand. That’s a bit harsh but you’re better off assuming your channel partners are better at responding to demand than at creating it. Remember, they likely carry from 3 to 30 other vendor products so they’ll take the path of least resistance. If two products have an average selling price of $25,000 and one takes 15 days and the other takes 6 months, guess which one gets attention? So be sure your product is simple and compelling enough that your target buyer can buy it quickly.

Gross Margins of at least 25%

Your channel partners do not see themselves as channel partners. They are businesses. That means that they care about profit, revenue growth, and customer satisfaction above all else. Your product is just one potential contribution to a whole portfolio of products/services that will help them attain their business objectives. So align your product offering with your channel partner’s financial objectives. Many channel companies compensate reps on gross margin percentage. So a $25,000 product with a 30% margin will get way more attention than one with same price but only 10% points. So is your product capable of sustaining at least 25% of margin for your channel while still meeting your own margin requirements?

Volume of at least one sale a month per rep

For a channel partner to add your product to their “line card” or portfolio means spending money on sales training, marketing, support, financing, etc. I say “spending” and not “investing” because these are all real expenses that hit their bottom line now. Most VARs, distributors and system integrators are not interested in investing too far ahead of revenue/profit return. So that puts pressure on your product to produce financial returns quickly. A good rule of thumb is to ensure that your channel partner reps that specialize in your product category are making at least one sale a month on your product. That’s the clip you need to maintain their mindshare and have them want to spend more time representing your product to their customer base. Can you see a channel rep doing a deal a month or is your product too hard to sell at that pace?

Leveraged partner revenue

Your channel partner will also prefer products that allow them to sell more products/services. This is leverage. SAP and Cisco are two classic examples. Their systems integrator partners attach three to four dollars of services revenue for every one dollar of software license revenue. Leveraged service includes planning, design, integration, and deployment services. In the security world it includes vulnerability assessments, compliance audits, and architecture consulting. Does your product lend itself to further value-added services or ancillary product sales that will motivate your channel partner to sell more?

Copyright © 2006 Sridhar Ramanathan Pacifica Group

I found the newsletter on channel drivers really helpful. It was eye-opening. I hadn't thought of my product in these terms, but what was said seemed obvious in hind sight. I look forward to your next news letter.

Tom

Posted by: Tom Moore | June 24, 2006 8:24 PM