If you have enough money: Go direct. If you have enough time: Build a channel

Selling to and serving customers through a channel of independent companies (channel partners) can be a succesfull approach to achieve and maintain global market leadership in the software industry. However, experience shows that most Independent Software Vendors are having an extremely hard time building such a channel, not to mention the challenges associated with growing the channel to assume and maintain the global market leadership position.

In this post we will discuss when a channel based [slider title=”GTM”] Go-To-Market [/slider] approach can be successful and when a direct GTM approach is more likely to be the most appropriate approach.

Channel Partner Archetypes

There are several types of channel partners.

The one-tier channel framework

In the one-tier setup we have resellers, value added resellers, system integrators, ISVs, franchisees and agents.

Fig. 1: Partner types in the one-tier model

The two-tier channel framework

In the two-tier setup we have distributors, value added distributors, master franchisees and [slider title=”subsidiaries.”] Subsidiaries serving local partners are normally included in the vendor tier, but we will argue that their role is changing as we move through the stages of market penetration. Very often their role and behavior is closer to the distributor than to the vendor. [/slider]

Fig. 2: Additional partner types in the two-tier model

The definitions provided above are not scientific, but are representative of the most common forms in the software industry.  You will find all sorts of hybrids in the real world.

The DNA difference

The strategic difference between the DNA of an ISV and that of any of the channel partner types mentioned above is substantial. Using the Value Element approach to define Customer Value Propositions we have illustrated the differences between the ISV and the channel partner types in figure 3.

Fig. 3: Customer Value Proposition of a typical ISV and a typical Channel Partner

An ISV using a partner channel for serving customers must have a very strong focus on the product and all aspects around the product itself. As he is not dealing directly with the customers, his customer intimacy value element is low.

Product leadership is the ISV’s leading value element.

A channel partner adds value through his close relationship with his customers and his ability to meet specific customer requirements.

Customer Intimacy is the channel partners’ leading value element.

Operational excellence is seldom a major value element in the software industry, unless you are a [slider title=”distributor.”]  The distributor is neither close to the customer nor close to the product.  His focus is to run a lean operation living off a slim margin. The traditional distributor is a dying breed in the software industry.  Distributors are these days defining services beyond branding and stocking and are rushing to become Value Added Distributors, Virtual Subsidiaries or Master Franchisees.[/slider]

In addition to the difference in Value Proposition, the ISV and the channel partner will also have different growth strategy objectives as illustrated in fig. 4.

Fig. 4: Growth source prioritization

Depending on the market penetration phase, the ISV is typically focused on getting new customers in  [slider title=”new markets.”] Getting your products to new customers in new markets automatically brings you in a “new product” situation. Even if your product is not new, as such, the new customers in the new markets will perceive your product as new.[/slider] The channel partner is focused on serving his existing customers with his existing products and services, finding new customers for  his existing products and services and optimizing his current business. Bringing on new products is seldom a top priority as it is associated with risk and investment – two issues a channel partner does not appreciate.

Management priorities and organizational skills and competencies are fundamentally driven by the Customer Value Proposition and the priority of the sources for growth. Thus ISV’s and channel partners will have very different priorities and skill sets.

To build a successful partner channel the ISV must recognize these fundamental differences in strategy, priorities, ambitions, focus, competencies and skill sets.

The products, the service and the business model

Did you design your product, service and your business model with a partner channel in mind? Or is the partner channel something which was introduced at a later stage?

Some ISVs design their products, services and business model with the partner channel in mind right from the start. They have clear ideas about which parts of the value chain the partner is going to operate and which parts the ISV will operate himself. With this approach the channel partners become an integrated part of the business model (or eco-system) and not just an appendix added at a later stage.

A partner-designed product will typically include a development environment, an SDK toolkit, API’s or other well-documented elements allowing the partners to add value and create “semi-proprietory” solutions. The ISV value proposition to the partner channel will include a fairly comprehensive support environment, which is required to recruit new partners, get them started and support them in their path to becoming self-supporting businesses.

By adding value to the ISV’s base product, a partner can build his own solution, his own position in the market and thereby protect his investment in the ISV’s platform and the market he is developing. A partner solution may for instance, consist of 1/4 ISV content and 3/4 partner content giving the partner a very strong incentive to push the solution.

If your ambition is to become a global leader through a partner channel, then the partner channel must be an integrated part of your product design and your business model.

Which part of the value chain?

Fig. 5: A generic software value chain

We have illustrated a typical yet simple software value chain above.

If you have designed your product and business model around a channel partner model, then you have also considered who should be responsible for what. You will have a channel partner Value Proposition, which motivate partners to sign-up and invest in the learning curve associated with getting the business started with your product.

If your product is not designed with a partner channel in mind, then you must consider which parts of the value chain you will assign to your channel partners, what your channel partner Value Proposition should look like and how your Partner Program should motivate partners to sign-up and invest in the learning curve associated with getting the business started with your product.

Most ISV’s having difficulties with building and motivating a partner channel are those who did not design their product and business model with partners in mind.

The partner channel as an afterthought

The fact that you did not design your product to be taken to the customers through a partner channel doesn’t mean that you cannot do so at a later stage.  In the following we will draw some general guidelines for when a partner channel can be an effective GTM approach and when it is generally not.

Fig. 6: Criteria for channel partner appropriateness

The general rules are:

1. Simple software solutions with little implementation requirements should use a web based/tele-sales business model with no partners in between.
2. Very comprehensive solutions with long sales cycles and substantial customization and implementation requirements should use a business model based on direct representation.
3. Anything in between may be appropriate for a channel partner-based business model.

4 rules of thump

In conclusion, I would like to make four statements, which are worthwhile remembering:

1. There is more software looking for channel partners than there are channel partners looking for software.
2. You need a Partner Value Proposition to win channel partners.
3. You need a Channel Partner Program to make them successful.
4. The discount you offer the reseller on your list price has no impact on his motivation for signing-up nor for investing in your product.

About this series of blog posts on Global growth through a partner channel in the software industry:

An associate of mine once concluded: If you have enough money: Go direct. If you have enough time: Build a channel.

My associate had been spearheading the development of one of the most successful VAR channels in the world. This channel now belongs to Microsoft and is branded Dynamics.

This series of posts will discuss the issues associated with using a channel based Go-To-Market approach on the path to global market leadership for Independent Software Vendors.

Few success stories and numerous failures

Using a channel of independent companies to resell, implement and/or service customers has a long tradition in the history of the software industry. For some software companies, the channel has been a major contributor to global success, but for most software companies making it work is a depressing and constant struggle.

The word “channel” is used in the software industry to describe independent companies that assume various roles and obligations in bringing a software product to the customers.  The definition is rather broad, since the roles and obligations can vary substantially from “simple” reselling to system integration, solution development on top of the software, implementation in terms of consulting, project management, customization, training and support.

The common denominator is the fundamental condition that the individual channel operator is an independent contractor operating in his own name, at his own expense and at his own risk.

Other post in this series

Post #1: For all the wrong reasons
Post #3: The three stages of market penetration
Post #4: Partner Value Proposition (Bootstrapping)
Post #5: Partner Value Proposition (Bridgehead)
Part #6: Partner Value Proposition (Leadership)