– The average reading time for this post is 12 minutes –

Summary

Fig. 1: Business Model with environment

This post explains that the challenges of working with channel partners are caused by the need to understand, operate and optimize at least two completely different business models and corresponding environments.

Using an indirect channel to perform some or all of the activities required to find, win, make, keep and grow happy customers introduces third party business models into our own business model, reducing the control we can exercise.

The post recommends a structured and methodical approach in managing this lack of control and explains how to motivate and align the independent channel partners to work towards our objectives.

The Business Model Framework

We all know the term “business model,” but do we have the same definition of what a “business model” actually is?

This post uses the business model definition provided by Alexander Osterwalder and Yves Pigneur in their bestselling book Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers, by Alexander Osterwalder & Yves Pigneur, July 2010 & Value Proposition Design: How to Create Products and Services Customers Want (Strategyzer), by Alexander Osterwalder et al, October 2014.

The Osterwalder/Pigneur business model framework, which is illustrated in fig.1, is comprehensive and easy to understand and in my opinion there is currently no better framework for understanding, describing and optimizing businesses.

While the Osterwalder/Pigneur business model framework includes all the variables that we control ourselves, the so-called business model environment covers those variables that are outside our control.

The Business Model Environment presents opportunities that we can take advantage of as well as threats that we need to predict and deal with.

All companies have a business model and are operating in an environment, but very few have mapped out the elements in a structured and transparent way allowing the discussions with internal and external stakeholders to be correspondingly transparent, structured and methodical.

The Channel Element of the Business Model

Fig. 2: The channel in the business model

One of the nine elements of the business model framework is called “channels.”

Our channels take our value proposition to our chosen customer segments. In the Osterwalder/Pigneur business model framework the channel building block defines how we find, win, make, keep and grow happy customers.

For the business model to be profitable the revenue we generate in the business model must exceed the cost of operating our business model.

For most software companies the channel is the most difficult element of the business model to organize and scale.

Many software companies choose to leave the challenges associated with finding, winning, making, keeping and growing happy customers to independent channel partners.

For some software companies using independent channel partners works really well and releases ecosystem forces propelling market coverage and growth forward. However, for most software companies, leaving the channel obligations to independent channel partners doesn’t work so well and seldom scales at all.

The Business Model in the Business Model

The reason that so many software companies fail in making the independent channel partner approach work can be explained using the business model framework.

The Direct Channel Approach

Let’s imagine that we operate the channel ourselves. We engage the marketing, sales and pre-sales people required to find, win, make, keep and grow happy customers.

Fig. 3: Revenue Generation Model

The activities that we are undertaking and optimizing are illustrated in fig. 3.

Operating the activities and resources ourselves gives us overall control. We can manage all processes and resources in the constant effort of optimizing the performance of the channel (how we find, win, make, keep and grow happy customers). It is entirely within our control to start new initiatives, monitoring progress, taking corrective actions and engaging and dismissing resources.

The Indirect Channel Approach

When we decide to leave the responsibility for some or all of the activities concerned with finding, winning, making, keeping and growing happy customers to independent channel partners, we introduce a layer of substantial complexity.

We are introducing an independent 3rd party business model into our own business model as illustrated in fig. 4. below.

Independent channel partners operate their own business models and have their own perceptions of their business model environment.

Building successful channel partners requires that we understand their business models and manage to align them with our business model.

We cannot expect that all our independent channel partners will have exactly the same business model, thus we need to understand each individual model or at least group them according to their characteristics.

Fig 4. The channel: The business model in the business model

Our independent channel partners operate their own businesses according to their own objectives, skills and resources. We can introduce incentives and offer support programs, but we cannot control how they should run their businesses.

Fig. 5: Typical Value Added Reseller value proposition

This profoundly highlights the difference between our customer value proposition and the value proposition of our independent channel partners. Please see our white paper: The Software Partner Channel and the Customer Value Proposition

Our independent channel partners will typically have a value proposition that is dominated by the customer intimacy value.

The focus of our channel partners is to satisfy the needs of their (our) individual customers. They do so by sourcing products from vendors and adding services that match the needs of the customers in their target market segments.

As a software vendor our customer value proposition is dominated by the product leadership value. We have left the jobs associated with finding, winning, making, keeping and growing individual customers to our independent channel partners. Our value proposition is market driven as opposed to our partners’ value propositions, which are customer driven.

In the business models of our independent channel partners we are (hopefully) a “Key Partner” (the element to the far left in the business model). As opposed to the direct channel approach, in this scenario we have very, very little if any direct control over their operations.

Building Successful Partner Channels

The key to building successful partner channels is in accepting that our business model is completely different than the business models of our independent channel partners. We need to understand the business model of our independent channel partners and the environment in which they operate. Then can we design and implement programs supporting our channel partners’ business models, helping them become successful.

Introducing the Alexander Osterwalder business model framework into our business will enable us to work in a transparent, structured and methodical way when designing and managing our independent channel partner approach. We will need to apply the framework on our own business first and make all our staff members familiar with the terminology and structure.

Then we can apply the framework on our work with the independent channel partners and use this framework for building a common understanding of the joint business we are running and how we can help each other achieve our individual objectives.

The business model framework is very well documented throughout the two books from Alexander Osterwalder and Yves Pigneur.

There are training courses, as well as numerous management consultants, all over the world available to help teach and implement the methodology.

Understanding the business model framework and how to use it in working with independent channel partners will improve your productivity considerably.

This subject is also discussed in my book Building Successful Partner Channels:

The copyright of the business model framework belongs to: https://strategyzer.com/