The Signal #35: IT and the Channel

From our November 16, 2017 newsletter.  (Want to read them in real-time?  Please sign up!)

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Working in tech, one often hears about “the channel”. As in, we need to develop our channel partners.  Or, we’re dealing with some channel conflict issues. But generally, the channel is an undercovered  area of tech. Equity analysts don’t make their name covering the channel. Tech writers certainly don’t. So here we are to shed some light.

Recently we have done extensive work for a client bringing a networking product to market.  The Internet has radically changed distribution for consumer electronics, but distribution for enterprise electronics is in a much more intermediate stage of change. For any company building a product – hardware or software – for enterprise customers, developing a robust channel strategy can be a make or break proposition.

Broadly speaking, sales through the channel are indirect sales, or sales to some third party who the re-sells your product to the actual end-user. For startups or companies entering a new market indirect sales can be crucial, at the very least as an intermediary stage prior to building out a large (and expensive) direct salesforce. In essence, the startup is borrowing the relationships of the channel partner to address customers it couldn’t normally address as a startup.  In theory, the channel partner, end customer and startup provider all should benefit.

The channel covers a huge variety of partners. These can range from bare-bones distributors who take a point or two for providing basic warehousing and logistics to full-blown, active partnerships handling all sales and customer education. Companies may have more than one channel tier, as shown below.

IT channelMatrix this by territory, market vertical and target buyer size and you can start to see how complex the channel can be.

For companies selling to the enterprise, it is important to think about a channel strategy early. When launching in a new field, companies will need to handle some sales directly to develop demand, get product feedback and build credibility. But soon after that initial phase, the focus will need to shift to broadening customer reach and revenue generation. This can mean deciding on a channel strategy suitable to your end-market. Is your product bought by a large number of small, local customers? This will likely dictate a multi-tier approach with some combination of distributors and re-sellers. Selling large tickets to a small number of customers? This lends itself to partnerships with a few key partners – maybe a white label deal with a larger OEM selling a broader bundle, or a focus on a small number of specialty integrators.

For example selling to schools and hospitals requires work with a huge number of locally-connected but small integrators. In the hospitality market (hotels, casinos, convention centers, etc), there are a few dozen regional players in the US with reach in this market.  (Side note: the hospitality IT market is home to some great inelasticities – broadband or screen needs during events, for example. Then there’s the power traveler who treats the hotel room as a remote office. Who doesn’t want to pay for Wi-Fi as a line item, but won’t stay at a hotel that doesn’t have good Wi-Fi. Leading to customer feedback like this.) CrappyWifi

 

 

 

 

 

It is important to note that the channel itself is in flux. Distributors of IT products are searching for their role in the world of the Internet and  cloud computing. Looking at the networking market, on one end of the spectrum are companies like Ubiquiti Networks which has no salesforce (and has software margins). At the other end are majors like Cisco and Dell/EMC. Both have massive salesforces, but still do much of their revenue through the channel. In many cases, these large incumbents have sewed up distributors through 20+ years of certification, incentive programs and relationships. These are barriers to entry, but these relationships offer leverage points to new entrants as well. Many distribution partners look for alternatives to their large suppliers.

Enterprise IT product companies get a beachhead with their first product, which may not be profitable by itself. The second or third product, though, is where profitability can be achieved, especially with a sound channel strategy.  (And we, of course, are happy to help.)

 

This week’s overheard: Who will fill the gas tanks for the autonomous vehicles?