Four Tips For Choosing The Right Indirect Channel Distribution Strategy | CGS

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Timothy Gilbert

Published

April 24, 2019
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Four Tips For Choosing The Right Indirect Channel Distribution Strategy

Channel partners play a fundamental role in helping technology vendors successfully enter new markets. But before you get started, taking the time to decide upon the right distribution model can clarify and speed the selection of the right channel partner. There’s one step to take before vetting potential partners, vendors should consider the right distribution model, and ask themselves a question: one-tier or two-tier? In this article, we discuss the nuances between the many types of partners so you can shorten and improve the search for the right engagement.

As a tech brand comes to know its potential in its core market, the idea of new markets and new geographies become very promising. To take that step toward expansion, IT and software companies will seek new distribution models and channel partners. The sense of urgency can become like a fever, and vendors sometimes rush to judge. A very specific partner will come to mind, for instance, and all else follows, including the distribution strategy, pricing, sales and support overhead, and so on.

But by choosing too quickly, the wrong distribution model or an ill-fitting partnership can adversely impact the go-to-market strategy.

In contrast, an incumbent brand wanting to enter a new segment or new market, might have the foreknowledge needed to look at some fundamental differences between distribution models for hardware, software and IT services. Taking the time to fully appreciate the subcategories of channel partners can beneficially narrow the vendor’s search and speed up the selection of the best-fitting partner while improving the likelihood of success.

1. One-Tier vs. Two-Tier Distribution

In one-tier distribution, the vendor engages channel partners who sell to end-users. Two-tier distribution leverages a distributor, who in turn, manages multiple channel partners.

Direct sales is when the vendor sells and supports its end-users directly. For those entering a new market, the direct model is ruled out as impractical before it is ever considered. Imagine a UK-based Platform-as-a-Service (PaaS) wanting to expand into North America. The upstart may lack the capital, it may have no team on the ground in the U.S., and let’s presume it also admits that it does not know how to sell a buyer in North Chicago versus those at home in Nottingham.

This example illustrates why indirect distribution makes the most sense for most tech firms entering new markets like North America.

However, trying to go it alone by sifting through a number of channel partner candidates, can consume tremendous time and energy with no promises of a match. By first understanding your vision and capacities for distribution, the search for a channel partner is beneficially narrowed and sped up.

2. Navigating the Subcategories of Channel Partners

Value-added Reseller (VAR) is a commonly used term across most all kinds of IT channel partners. Unfortunately, VAR has become a generic label applied to most any and every sort of tech channel distribution model and channel partnership.

Imagine one vendor deliberating how to go to market with a SaaS platform versus another vendor with a new 3D printing technology. Immediately, it matters a great deal that each vendor knows the differences between a VAR and the many other acronyms, such as SI, ISV, or MSP. Their product categories are vastly different.

VARs make instant sense for one of these two products. But a VAR may fail to make any dent selling an ERP software platform. Instead, the ERP-maker may maintain a broader scope, considering both a Managed Service Provider (MSP) and a Systems Integrator (SI).

Let’s also suppose the ERP software vendor is in its early stages, lacking sales support beyond its own founders to help a channel partner close each and every deal, 24/7, five time zones away. Perhaps the distribution model itself makes them a candidate for a two-tier distributor, one having a network of independent consultants with specific domain knowledge. In a two-tier model, the founders can deploy a “train-the-trainer” model, educate the distributor and its network, then act as subject experts and executive-level closers. In the age of video conferencing and easy-to-make videos, the founders can continue to act as evangelists, bottling and broadcasting their knowledge. This guards against having to personally handle each and every inquiry, deal, demonstration, and so on.

In contrast, while a one-tier partner seems like a more intimate and controllable option, imagine if the partner was successful in lining up demonstrations with RFPs flowing through the door. If the small VAR’s team is similarly as limited in resources as the vendor, neither may have enough time or talent to go around. Scaling sales and delivery of the vendor’s solutions could corner both parties into a no-win scenario. So, while the two-tier strategy likely reduces the vendor’s margins versus a one-tier partner, the vendor must weigh the value of gaining a foothold in ways that will not drain the life out of its business. 

3. Crawl, walk, run into channel programs

Vendors pursuing indirect channels may begin with one model of distribution, like one tier, and then engage one type of reseller, such as an ISV.

Over time, however, vendors tend to create multiple partner programs. They come to leverage both distribution models, one-tier and two-tier, and they may partner with a range of resellers in order to reach more markets.

These natural evolutions happen over time, and vendors new to channel partnership need not feel pressure to arrive at a perfect, all-encompassing model out of the gate. In fact, too much, too soon may distract from early wins in the go-to-market’s first stages; focus and attention on one or small handful of partners more than likely improves the odds. Re-iteration and evolution of channel programs over time is the norm for brands. Household names like Microsoft, IBM, Oracle, Salesforce, and so on, continually refine, expand and contract their channels, navigating new opportunities and resolving channel conflict.

Salesforce.com, for example, first began as an unusual sidecar application aimed at salespeople. At the time, CRM was not an application every enterprise had installed, and few really perceived it is anything but a glorified contact management-gadget for sales. Salesforce was in an emerging category, delivering its software in an uncommon way: over the internet. Gradually, as the brand took flight, it opened the doors to independent consultants who could configure its application and ensure it remained “sticky.” Today, Salesforce has complex partnerships around the globe with all sizes and shapes of consultants, resellers, and multitudes of other software companies who integrate with Salesforce.

4. Bottom line: which partner is right for you?

The bottom line for those new to decisions around channel strategy comes down to answering two questions:

  • Do we sell via one-tier or two-tier distribution?
  • Do we sell through MSPs, VARs, ISVs, or some combination?

Answering these two questions requires vendors to self-assess and categorize its product or services, and its own ability to support the drive to enter a market. How much capacity do you have available to localize the product, continuously update marketing, and provide intensive sales, engineering and support?

To take full advantage of the chosen distribution model and channel partner, determining the type of distribution—one- or two-tier—is heavily influenced by the traditions of the product category. In North America and globally, there exist long-standing norms in hardware, software and so on; these have stood defined for decades, reinforced by Fortune-level vendors. It has taken an Amazon many years, for instance, to curve and bend the laptop and workstation market.

To answer the more complex question of what type of partner to pick comes down to answering a less-than-simple question: Where can you, as a service provider, add the most value?

  • If the offer is a software product, for instance, that requires configuration and integrations, an SI or a VAR with sales engineers on staff that have domain expertise may be the best fit.
  • If the product involves a long buying cycle—such as enterprise software—customers are more likely to hire an independent consultant or hybrid partner to help with purchasing, implementation and ongoing managed services.
  • When the target is SMBs, MSPs may prove the best ally in winning and properly serving small firms that have small IT teams. However, have a plan to help manage service requests and issues that could prove overwhelming and larger-than-life. The same is true for consumer-oriented products where an MSP is better equipped to satisfy non-technical end-users.
  • Installed applications with sensitive Service Level Agreements (SLAs) or high availability will benefit from 24/7 support provided by an MSP. But you may find while searching that certain ISVs or other specialty firms come equipped with call centers or other assets that make them a hybrid and a good choice.

For vendors aiming to enter North America as a new market, the one rule of thumb that remains constant is that the first channel program will not be the last. What proves most vital is a thoughtful decision by the vendor, given that its first venture’s goal is market entry, gaining credibility, and understanding how to deliver profitably.

Channel partners will help the vendor reach more suspects and prospects more quickly. They add value right off the bat, applying boots-on-the-ground knowledge of the decision-makers and the competition. Well-chosen, the channel partner proves an invaluable trust advisor to executive management on everything from product fit to pricing. By allowing reasonable time to select and fully prepare the right partner, the vendor can expect better answers and results sooner than later.

About CGS 

CGS’s channel partner program is centered on five services:

  1. Partner Recruitment
  2. Partner Engagement
  3. Partner Enablement
  4. Partner Sales Activation and Marketing 
  5. Ongoing Partner Support

We have the ability to drive revenue by identifying partners who align with each vendor’s core markets and solutions, establishing relevant training, accelerating sales ramp-up time with the right mix of sales aids and messaging, and providing ongoing first-, second- and third-level support based on vendor requirements.

We have over 30 years of experience recruiting and supporting over 45,000 partners for IT vendors, including Red Hat, Citrix and IBM. For more details on our industry-recognized approach to channel enablement, contact us at channels@cgsinc.com

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About the Author:

Timothy Gilbert is an author, speaker and consultant to start-ups and technology companies. He led global marketing and sales for brands like IBM, Kaplan and Toyota. He was named Chief Marketing Officer of the Year for his work in educational technology. Gilbert holds degrees from Johns Hopkins University, Regis University, and the University of Wisconsin-Madison.