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Understanding The Distribution Channels

Indirect sales (distribution) channel is least understood part of the hi-tech industry by the business executives. There are many reasons for this. Here are some of the most prominent ones:

  • Complexity of the channel types and structure
  • Diversity and disparity of the channel players - many no name resellers with unknown expertise, coverage, customer profiles.
  • Varying business models and operating characteristics
  • Different mode of operations in different countries and regions

For a vendor who is trying to build a business or to establish a product's distribution channels, one should consider the following parameters:

  • Match the stage of the product category in the market adoption cycle with the type of channel
  • Match the stage of the business with the channel type
  • Match the complexity of the product with the capability of the channel
  • Match the price of the product with the distribution channel
  • Match the coverage objectives of the revenue growth with the proper channels of distribution

Different channels exhibit different characteristics, understanding their mode of operation is key to selecting the right channel partners at a specific stage of the product life cycle. For example, SIs (system integrators) is suitable for complex, one of a kind, custom implementation. They view themselves as highly skilled consultants and loathe to be treated like a "channel". Because of their high touch, low volume, long sales cycle, long engagement duration, and custom implementation, it is suitable for complex, early stage products or large custom projects.

On the other end of the spectrum, retailers are high volume, low margin, fulfillment channel that have minimal technical support capabilities and do not create demand. There is a price ceiling of about $10,000 above which a product is not suitable for the retail channel. Vendors have to assume inventory risk, weather cutthroat pricing, and provide marketing development funds to help generate traffic to the retail stores. Given that a retail store may carry thousands of SKUs, this is not a play for small and inadequately funded companies.

In the middle is the VARs (Value Added Resellers) or what we'd call the Vast Anonymous Resellers. They vary greatly in size, technical capabilities, marketing and sales skills, geographical coverage, industry expertise, customer profile, and financial viability. A typical VAR has limited resources both in capacity and marketing and sales skills. Once they have enough projects that fill their capacity, they stop selling until they work off those projects. Therefore, VARs tend to curtail their own momentum.

The challenges for vendors are:

  • Market coverage model
  • Selecting the right partners
  • Account control and deal visibility
  • Lead management, distribution and follow-up
  • Channel productivity and partner stratification
  • Channel conflict reduction and deal registration

The keys to a successful channel strategy are:

  • Help them make money
  • Keep it simple easy to deploy product, easy to follow partner program, and
  • Reward them with the right behavior

The IPO Group can help you to architect a channel structure that matches your business needs and product stages and build a productive channel that increase your overall competitive advantage and win market leadership.

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