Channel partners can find a wide audience but startups still have to drive sales themselves
What’s wrong with the following business plan?
I’ve developed a network test tool that’s smaller, faster, easier-to-use than existing network test tools, and it costs 1/10 of the price.
There are hundreds of thousands of enterprise IT departments that buy network test tools. And thousands of resellers that have existing relationships with those customers.
The resellers are super excited about introducing my product. So I sign a dozen distribution agreements, announce partnerships, and wait for the orders to roll in.
What just happened?
I’m tempted to think it was a conspiracy to kill my product so they could keep selling the higher priced competitors. But no, to be brutally honest, nobody cares enough about my startup to try to kill it. If that was the goal, they would have bought the company.
I call up a reseller and ask what’s going on. The manager answers, “Sorry, customers aren’t asking for your thingy.”
Wait! Hold on a minute. I thought I was giving the resellers 25% of my gross so they would convince the customers to ask for my product.
The problem with this business plan is me. I didn’t understand how resellers work and how to leverage what they can do.
Resellers are sales people. They’ll sell the customer whatever they want. They’re not even our sales people who have only one goal of finding customers for our product. The reseller might mention our new product and offer them a deal. They might even mention it in an email blast to their customers. But they don’t understand the product and why it’s better. It’s just one more thing on their line card. Until we move the needle on their sales quotas, it’s not going to be a high priority.
Which means it’s still up to me to build the customer demand. It’s up to me to educate the market on why we have a better product. It’s up to me to do the marketing. It’s up to me to build the buzz and drive demand. Then when the customer asks me how to buy it, I can send them to a reseller to close the deal. A deal I’ve already won.
Because that’s really what the reseller wants — us driving new customers to them, not the other way around. My mistake was to think they were going to find customers for us and that didn’t happen. Not for a startup. Not for an unknown product that generates little revenue.
Once a significant chunk of their quota comes from selling my product, then they’ll become my best friends. Then they’ll take me with them to visit to their biggest clients. Then they’ll beg and plead and send me Christmas gifts to convince me to give them a few more points of margin so they can undercut other resellers.
But that’s 3 to 5 years away.
So how do I take advantage now of what resellers can offer?
First: Find Initial Customers
I have to sell the product. But big companies can’t purchase directly from me. The process of setting up a new vendor can take months. Bringing the deal to a reseller that’s already a registered supplier solves a problem for me and shows the reseller a success.
Rinse and repeat for a year, while asking the resellers to introduce me to similar accounts of theirs.
Don’t expect much traction. Early adopters are a rare, special breed that I have to find myself. They’re usually not the people who handle the day-to-day operations and meet with resellers or read their spams about special pricing on PCs and printers.
I have to do the marketing myself. All of it: website, social media, advertising, trade shows, demos, webinars, PR, white papers, case studies, success stories, etc. I have to build buzz around the product. I have to build awareness. I have to get the customers to call their favorite reseller and ask for us by name.
This continues forever. Fundamentally, resellers don’t do marketing. They are sales engines. They can get deals closed. But they’re used to working with giant manufacturers who do all the marketing for them.
Beer distributors don’t advertise their beers — they expect Budweiser and Coors to drive demand. Same for Toyota dealerships. Or Cisco router resellers. Or HVAC contractors. While they have connections to customers, they don’t have the expertise or budget to build demand for me.
As the product manufacturer, marketing will always remain my responsibility.
Third: Channel Sales Management
Once we’ve reached a critical mass of sales and can rely on resellers as our sales organization, I need to manage the reseller network as much as I’d manage my own sales network. I need a team dedicated to channel sales. I need sales people to sell to the resellers, I need sales people to visit the customers with the resellers. I need sales engineers to answer customer questions and help the resellers do demos. I need to give them sales training and bring them to sales conferences and keep pointing them at potential customers.
In the end, I need to budget as much time and money managing the reseller channel as I would setting up my own sales team. So why bother?
What Do Resellers Bring to the Table?
Ordering: Ever tried to become an approved vendor to GE? Or Kroger. Or GM? Don’t bother. It’s not worth dedicating months of your life to chasing paperwork. Tell the end user to buy from their favorite reseller. They can put in an order tomorrow. Whatever margin you have to give up is worth it.
If you’re selling consumer package goods, you won’t have a choice — large grocery chains don’t buy individual products from small producers. Ordering has to go through one of the large distributors who can deliver to warehouses in their trucks along with all the other groceries. Other industries have similar constraints.
Customer contacts: This is the obvious one. They already know the people I’m desperately trying to reach. Once we have success with one of their customers, they can help me (not the other way around) target others.
Reach: Sell products for restaurant or bar use? Or coffee shops. Or florists. Or a million other kinds of small stores. There’s no way you can build an effective sales channel to sell a few dollars of stuff to thousands of different customers. You need to be a SKU in their ordering system, and need to use marketing to build awareness, not one-by-one visits to every mom and pop.
Logistics: For consumer goods or even IT equipment, resellers usually offload the complication of storage, shipping, and the biggest hassle — returns.
Multiple bids: If you’re selling to the government or military, you won’t have a choice. They need 3 competitive bids before they can order. So you’ll need at least 3 resellers. Commercial customers also feel more comfortable if they can compare the price from more than one source.
International sales: This is a whole separate discussion, but there’s no way I can open sales offices in 30 countries. International distributors and resellers have to be my local sales offices.
Pitching the Plan to Investors
As an angel investor, I see a lot of pitches. And many of them list partnerships with one or two big distributors as the entirety of their sales strategy.
If you’re pitching to me, I’ll be skeptical. When we dive into the details, I’ll want to see a 3 year plan for building sales yourself, and a long term plan that budgets everything needed to build a successful channel sales operation.
Distributors and resellers bring a lot to the table in reaching a wide audience. But you can’t outsource the success of your business to a distributor where you’re a rounding error in their sales.
Take advantage of what resellers offer in logistics, ordering, and introductions to customers, but be prepared to drive sales yourself.