The pros and cons of channel sales for startups

channel

There are two types of B2B sales: direct and indirect. In the direct sales model the company has one or more sales reps who call on customers, to use the antiquated term, either in person or via video conference. (The latter is far less expensive and can actually be preferred by customers, as it is more time efficient.)

The indirect model means the company uses another party or company to sell its product or services to their customers. The typical term for this model is channel sales. 

What are the pros and cons of channel sales for a startup company?

Pros

First, I urge all startups to study channel sales, as all startups are resource-constrained and channel sales reduces the need to add resources, namely one or more sales people. Sales people are typically compensated by a base salary, incentive payments based on how much they sell – termed meeting or exceeding their quota or sales projection- corporate benefits, and equity. A large additional cost for sales people calling on customers in person is T & E, another antiquated term meaning travel and entertainment. Thus sales people can be very expensive. However, if they meet or exceed their quotas they should be a net benefit to the company.

By selling through another company you incur none of these expenses. Nor do you incur the time and possible cost (advertising, recruiters) of hiring a sales person and the responsibility of managing them.

But the biggest pro for channel sales is that your partner already has customers for your product. The channel partner is already in contact with potential customers for your product by dint of having sold them their own product. Here’s a simple example. Let’s say you have invented a new type of high performance tire for sports cars. You could sell directly to owners of sports cars and keep 100% of the sale. But imagine the difficulty and time and effort needed to reach individual sports car owners. It would be much more efficient to offer your new tire to existing tire companies, who already have customers, such as auto repair shops, tire stores, etc. Or you could target a specific car, like the Corvette and try to sell your tires through Corvette dealers.

Time to first revenue can be dramatically shorter by selling through a channel. Your product may be such a good fit with your channel partners that you enhance the sales of their product! That’s truly a win-win.

Finally you typically pay for performance: if the channel partners sells your product, they get a sales commission. No sales, no commission. However, some channel partners may ask for upfront payment to cover their expenses in taking on your product.

Cons

Number one: where do you find a channel partner? How do you determine that they can successfully sell your product? Way back in the last century when I was in the PC software industry there were established channel partners. They were called VARS for Value Added Resellers. Their value might be training, support or even customization of their partners’ products to make them a better fit for the customer. Today consulting companies often act as channel sales partners. The best way to find channel partners is through the customer discovery process. First you define a market you have evidence (beta tests, focus groups, surveys, successful pilots, etc.) your product will fit. You need to add a question to your customer discovery interview: “What products or services do you or your colleagues purchase from a third party rather than directly from the manufacturer or developer?” and the natural follow up is, “Why? Is that the only way to buy the product? or do they provide some service not provided by the manufacturer, like training?”

If you conduct enough interviews you will be able to compile a list of channel partners or resellers. Say you have invented a new medical device for people with sleep apnea. Rather than attempting to find people who have this medical problem and then selling them to them directly you might well try using a channel partner. But what if the channel partners sales reps don’t like your product? They might find it too complicated to explain. Or maybe it’s so inexpensive that the commission they’d gain is very small compared to other products they sell. Or perhaps they perceive there is too much competition for your product so they don’t make an effort.

After finding and contacting potential resellers you need to perform due diligence on the company. What is their reputation? What do their customers say about their sales reps? Are the well informed and helpful? Or bothersome and don’t know much about the products they sell? How does the company handle problems and complaints? How responsive are they? What other companies do they act as a channel for? What do these companies say about the channel’s performance?

Channel partners aren’t cheap. You may need to give up as much as 50% of your net sales price to incentivize them. You will have to train the reps on how to sell your product. Sales people travel constantly, just scheduling a training session can be a huge headache. Turnover at your channel partner may be a problem, resulting in you constantly having to train new reps.

By using a channel you are giving up the vital link to the customer. How will you get feedback on how your customers are using your product? Their ideas on how to improve the product? Even their ideas on complementary products? You will need to hammer out an agreement with your channel partner on how they will gather and share market intelligence. Negotiating a contract with a reseller may be time consuming and expensive (legal fees). Even if they have a standard contract, you may well need modifications.

In Summary

One way to think about channel partners is that they are your customer: you need to find them, qualify them, convince them that your product should be carried by their sales reps, train the reps, provide support, and of course negotiate a price and contract with them. But I urge startups to explore the channel sales option in enterprise sales. Fielding your own sales force can be very expensive and consume a lot of management resources. On the other hand using in-house reps who can sell via video calls can cut that expense.

The two major variables are cost of customer acquisition and the lifetime value of a customer. You need to model that out for direct and channel sales. The other critical item is access to customer data and feedback. How will you get that if a partner is selling your product?

There’s a lot more to channel sales, but hopefully this short post will get you started in exploring you options in bringing your product to market.

Author: Mentorphile

Mentor, coach, and advisor to entrepreneurs, small businesses, and non-profit organizations. General manager with significant experience in both for-profit and non-profit organizations. Focus on media and information. On founding team of four venture-backed companies. Currently Chairman of Popsleuth, Inc., maker of the Endorfyn app for keeping fans updated on new stuff from their favorite artists.

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