While sales are down overall for most companies, we’ve seen a shift toward sales via the web for many products. Given that, why would a company invest in distributor relationships now? In a McKinsey article “Rethinking high-tech distribution”, the authors make several good points I’ll summarize here.

• Distributor revenues in emerging markets have grown 33% annually for the last 5 years,
• Distributors control 42% of all distribution to the SMB market,
• Emerging markets have more SMB than large clients,
• Distributors have strong channel partners (VARs) that know the local market,
• SMB companies often prefer to buy from VARs,
• VARs are better at assessing credit risk than the vendor (this is a big deal in today’s climate),
• Vendors can offer credit to distributors to help them distribute credit where the return is safest

What other reasons do you see for using distributors, especially now?

In a recent discussion with a client, we were talking about how well their recent strategic shift was going towards a new market segment. They told me that at first blush, it looked pretty good. Sales of the product were robust, so SVP of Sales was quite happy.

Since we focus on marketing, we asked the SVP Marketing, why this product was successful. Upon further analysis, the marketing leader revealed that the new products were selling to the existing customer base, not the new market, as was intended. So, we started to drill more deeply.

The products were actually designed for a new market, not the existing one. They were designed by looking at the needs of the new market (bravo). But, there were several things not taken into consideration when creating the product market fit:

1. Did their existing market have a need for this new product?
2. Were they willing to potentially cannibalize sales of old product for sales of this new product, especially when the new product has lower margins?
3. How could they get channel partners to sell to the new market?

Let’s look at each of these issues briefly:

1. Existing market needs. On the one hand, our client didn’t even consider the needs of their installed base when designing this product. Clearly they should have. On the other hand, being opportunistic, they have discovered market demand for their product.
2. Cannibalization. I feel very, very strongly about this point. Either our client is going to cannibalize sales into their installed base with lower margin products or the competition is going to take that business. It is a strategic imperative to ensure you get those revenues, and not pretend that your customers aren’t going to buy the new products anyway. Companies must cannibalize to survive.
3. Channel Partners. Our client admitted two errors. First, they expected their current channel partners to sell to the new market. Ummmm, channel partners will sell where they already know how to sell, not where you want them to. Second, they didn’t recruit new channel partners – the ones who were already selling to their target market for this new product. (for more info on a solution-based approach to channel sales, see “The New Solution-Selling Paradigm” by Allan Adler and Dylan Charles)

How might you have handled this situation differently than our client?

We recently conducted a global Secret Shopper program for one of our clients. The primary objective was to understand how well a particular program was being executed by the channel to small business customers. Our client was both very pleased and somewhat shocked by some of our findings.

Our client had developed a program that would influence how both distributors and resellers marketed and sold a new product (for more information on product launch Best Practices, please see Four Pillars for Product Launch). Our client is quite sophisticated when it comes to channel relationships, so they gathered information from their channel partners, put together clear instructions, and provided training and support. And yet, the Secret Shopper assessment revealed several unexpected key issues that have caused us to take a much closer look at how programs actually manifest through channel partners.

The overall finding was that the new product being offered from our client was either:

1. Not even offered to us (the small business customer buying the product), or
2. Was offered reluctantly when we asked about it, and / or
3. Was presented to us incorrectly.

Why did this happen? In this case, we believe there were three fundamental key issues or root causes behind the underperformance of this channel program – the program was complex, the customer benefit was not clear, and there was a lack of alignment between vendor and channel goals:

Let’s look at this from the perspective of the channel partner:

Program Complexity

• Inertia. The vendor (our client) may have been gearing up for this new product launch for a long time. The channel partner (the person marketing and selling the new product to the small business customer) hadn’t given it a second thought. Now, all of the sudden, our client wants their partner to change? Change extends sales cycles, distracts resources, costs money, requires attention. Good luck.
• Confusion. Exactly how is the new product different from the older one? Has the channel partner (the person selling the new product) achieved a clear understanding of the difference between the old product and the new product? If not, the channel partner is likely to go back to the tried and true. The channel partner is going to sell what he/she understands.

Clear Customer Benefit

• Pride. Exactly what is the benefit of this new product to the user/buyer? Is there a clear value proposition that the channel partner can share with their small business customer to convince this customer that the new product is worth replacing the old product? The channel partner does not want to be accused of not knowing what he/she is talking about. The channel partner wants their clients to come to them because they know what they are talking about and they are recommending what is best to me, the small business customer. The channel partner needs to look good to the small business customer.

Vendor & Channel Goal Alignment

• WIFM (What’s in it for me?). This is often the biggest channel breakdown, the creation of a clear and compelling business proposition for the channel partner to change everything that they are doing to get on board with a vendor’s launch of a new product. If the channel partner thinks it’s easier to sell the old product, and thinks they will get paid the same or spend less with the old product, why bother pushing the new product? Does the channel partner get paid more? Will his/her sales be easier? Will the channel partner’s costs go down with the new product? Will the channel partner be able to sell more of other products as a result? Is there huge demand for this product already? And most importantly, will the channel partner create stronger customer relationships because the small business customer feels that the channel partner is recommending a new product that is truly in the best interest of the small business customers operations?

So, what are the lessons from this?

Our client had already done an outstanding job of evaluating this new product program with an internal team. The client thought that they had a very robust understanding of the issues and challenges from their own perspective and indeed they had. Our client had created a detailed list of challenges with the product launch; the client had prioritized the list of challenges; and the client was actively working to fix these challenges in the order prioritized order of issues.

On the other hand, the client also realized that there were two additional perspectives that were critical to understand to determine the success of the new product launch – the channel partner’s perspective and the target customer’s experience. To fully understand these critical perspectives, we recommend 3 steps:

1. Channel Partner Perspective (to see more about what Channel Partners are thinking, see our recent study on the state of the channel )
   First, understand the channel partner’s list of what they perceive is working with the new program as well as the channel partner’s list of what is not working with the program.
2. Channel Partner Priorities
   Second, understand the channel partner’s prioritization of what are the most important things to fix and what are the items that are working best and why
3. Target Customer’s Experience
   Third, walk a mile in the end customer’s shoes. In this case, acting as a small business customer and buying product through the channel showed our client what it was really like from the perspective of their end customer to try to buy this new product. At times, it was a fantastic customer experience. During other times, it was bewildering or worse for the small business customer.

Do you know what your channel is really doing?

(Glenn Gow and Todd Keleher also contributed to this post).

Reaching the mid-market is a challenge for centralized marketing departments within enterprise software companies. Selling to the mid-market is very different from selling to large, Fortune 100 firms, and enterprise software companies regularly struggle to get it right. Messaging and value propositions that resonate with enterprise customers are frequently misaligned with mid-market customers pain points, and the transition from a direct sales model to selling via channels is quite complex (as Allan Adler explored in Resell vs Co-sell - What’s it all about?). The result is that lots of time and money is wasted from the fundamental lack of understanding of both customer and partner needs.

A marketing vice president at a well-known enterprise software company recently told me that he wastes about $15 million a year in addition to spending a quarter to half of his time re-purposing existing materials so they can be used by partners and the field organization with target customers.

Well, I had to say I understood. In my experience, most centralized marketing departments (in conjunction with their outside consultants) create marketing value propositions towards customers and business propositions towards partners that are aimed at the mid-market, but they never effectively line up with the true segmentation of customers or the true ecosystem of partners that deliver to those customers.

There are 6 reasons why this happens:

1. Failure to correctly define the mid-market
2. Broad and ineffective customer segmentation
3. Inadequate understanding of the partner ecosystem
4. Poorly targeted business propositions
5. Unappealing value propositions
6. Unproductive selling strategies

Over the next few posts, I will discuss each of these potential pitfalls and explore ways that the savvy enterprise software marketer can avoid them.

Right now, every vendor has a channel community, whether they manage it actively or not. In many cases, that community is made up of the vendor’s own employees commenting on public sites about their programs and partners.

Vendors need to actively understand and manage their channel and partner communities, both managed and unmanaged. Key initiatives should include:

• Leverage existing partner communities as a foundation for a community strategy
• Take advantage of existing community market momentum and presence, and augment that momentum efficiently to meet goals
• Focus on sponsorship and nurturing, and only where necessary build out additional capabilities to fill gaps
• Create internal best practices and frameworks for community development and propagate them throughout the organization

It is important to focus beyond the immediate vendor partner portal. More often than not, the true community, and conversation, exists outside of the vendor’s own community/portal, and the mechanisms for influencing that conversation are varied and subtle.

The primary difference between Business-to-Business and Business-to-Consumer eCommerce is that B2C companies tend to view their customers as contacts, whereas B2B companies tend to manage their businesses as accounts. In effective B2B, accounts are essentially larger relationship units, where a back-end CRM system manages multiple contacts, contracts, projects, support cases, purchase history, special pricing, and all the sales and account intelligence that can be stored for effective account management.

There is a significant effort required to treat online customers as accounts rather than as contacts. Contact management is relatively straightforward, but account management requires a committed investment from both parties; the customer needs to trust the seller enough to register in the seller’s systems, and the seller needs to store much more than transactional information about a sale. But B2B companies reap significant rewards through account management: higher conversion, increased impulse buying, increased customer loyalty, and reduced support costs (especially through self-service online solutions).

Extremely successful B2C companies like eBay, NetFlix, and Amazon have implemented account-centric systems for the consumer, because the relationship is critical to their success: each consumer must become a repeat customer. But in order to increase consumer loyalty, B2C companies have also turned to social networking and communities to cement the bond.

Seeing the success that social networking has had in B2C eCommerce, B2B companies are now looking at social networking even in the enterprise, where command-and-control is giving way to participation and collaboration. Today, B2C companies are sponsoring online communities and opening up their doors (their blogs) to customers, resulting in open communications based on transparency and trust.

This movement has long been heralded by John Chambers, Chairman and CEO of Cisco Systems:

“While first-generation Internet developments were driven by enterprises down into the consumer market, the reverse is now true, with consumer technologies such as social networking driving fundamental changes into the business market, Chambers said in an interview with CRN TV.” –“Chambers Advises Partners To Embrace Web 2.0” ChannelWeb Network, April 7 2007)

Crimson is seeing a rise in enterprise community systems among its clients. Hosting a venue for your community—often outsourced to collaboration vendors skilled in moderating and monitoring—comes with all the usual disclaimers and demonstrates, among other virtues, that the B2B enterprise is willing to be more open with its partners and customers.

As the voices of customers and partners begin to be heard alongside the company’s own marketing messages, we’ll see social networking become as important as brand loyalty in the fight to retain customers.

A recent post on eWeek’s Channel Insider detailed Intel’s plan to offer financial enhancements to its marketing program for partners, and also provide enhanced marketing opportunities through a partnership with Google.

It’s great to see that Intel is making it easier for channel partners to mass customize demand generation. Providing Intel Marketing dollars to make that happen is a validation of just how important both the channel and online media have become to big tech business.

Intel seems to be realizing that all too often, partners lack the marketing resources to drive effective demand generation. Smart vendors, like Intel, are addressing this deficiency by helping partners to plug into programs to increase joint sales.aaaa

Ways to effectively manage Solution Providers or VARs continues to be top of mind for vendors. A recent story on Channel Insider and Digg now indicates that its not just vendors and distributors who are driving industry partner networks. Increasingly SPs are forming these communities by themselves!

The key question our clients (large technology vendors) are asking is, “How can our company leverage these networks without managing them or setting terms that hinder engagement?” Finding the solution to that question could be key as the social media approach continues to permeate and drive evolution in traditional business and channel models.

Distributor Ingram Micro Inc. just announced a program to enlist a dozen software developers to participate in a program designed to put VARs together with software makers to increase sales for both in niche application markets.

This is part of a trend that we are seeing where major distys and leading vendors are focusing on leveraging their VARs to help ISVs penetrate markets that the ISVs can’t cover geographically - a movement toward peer-to-peer networking that has been fed by the growth of social media. VARs helping ISVs with feet on the street and ISVs providing VARs with additional customer acquisition and penetration opportunities is at the heart of this P2P trend and everyone is talking about it in the channels.

You can read more about Ingram’s program on Channel Insider or on Digg

I agree with Frank Gens’s most recent post IBM’s “Anti-Commodity” Systems Strategy: From Systems to Solutions that one of the most important announcements IBM is making is around their “Optimizing and Partnering for Solutions”.

The marketplace has always demanded solutions, it’s just that providers of systems (of all types) are generally not good at creating, offering and supporting true solutions. Granted, it is hard, but the rewards are increased market share, and very high barriers to entry.

In fact, most technology vendors don’t understand what a solution is. Let me define it here. A solution exists in the eyes of the customer, and it solves a business problem.

Most technology vendors sell components of solutions, not solutions themselves. Vendors even “stack up” various components and tie them together and say “See, we now have a solution”. Unfortunately, this is not what the customer usually thinks. And if the customer doesn’t think it’s a solution, it’s not.

One reason bringing solutions to market is hard is that it requires significant corporate cooperation. I explain this more in Silo Busting: How to Ensure Solutions Make it to Market.

Another reason solution development is hard is that it takes an ecosystem of partners to deliver it. Note that we are talking about IBM here — one of the few companies in the world that should be able to cobble together everything they need from under their own roof to develop a solution. No, even IBM needs an ecosystem of partners to deliver a solution to a customer.

These partners may include ISVs, IHVs, system integrators, resellers, deep industry specialists, consultants and more. They almost certainly include a partner that has the predominant relationship with the customer – a relationship that exists at the business problem level. Not a relationship based on being a component supplier.

I applaud IBMs efforts and direction. If they execute well, they will be rewarded well. All other technology vendors should sit up and take notice.