Once they get to about $2 million in revenue or 100+ customers, most software companies face a decision: Do we start building an indirect sales channel or staff up our direct sales department?
For a software provider, an indirect channel generally means engaging with a mid-tier, third-party connector. It could be a marketplace like AppSmart or SaaSMaX, a distributor such as Ingram Micro or Tech Data, or a master agent like TBI or Telarus — which avenue you take depends on a number of factors. You might not have heard of these companies, but they have global networks of thousands of agents, managed service providers and systems integrators that can introduce your product to end customers, for a cut of the sale.
Say you make a SaaS application that helps retailers with talent retention. It’s a universal pain point, so the sky’s the limit on revenue potential. But you also have competitors hustling to become the market leader.
How do you scale fast and smart?
Typically, you’d look to an indirect channel and try to identify partners with deep SaaS and retail vertical expertise. However, if you ask your sales lead, I’ll bet the immediate response is that indirect channels are more costly than direct channels. He may even have a spreadsheet showing that hiring additional inside salespeople is always the way to go.
My question for you: When was the last time a simple spreadsheet analysis of a complex cost issue was accurate?
Never. And yet, when it comes to channels of distribution, that simple tallying of commission costs or discount rates for the indirect channel seems to rise to the top of every argument — and in my experience, it is always an incomplete analysis.
Now, channel is my thing. I’m a big believer in the benefits B2B firms get from working with partners. In fact, I’ve spent decades studying what inflates the price tag of an indirect channel and then driving those costs down, both as channel chief at Fortune 500 organizations and with startups as a consultant.
My message to CFOs: Accurately comparing the cost of direct versus indirect sales is a complex process. You need data that will enable you to not only analyze the current cost of both approaches but also predict future indicators.
On the direct side, metrics include basics such as hiring, support, employee turnover, salary and benefits, customer discounting and marketing.
For indirect, think about commissions, hiring a channel chief and potentially regional managers, setting up a portal for functions such as deal registration, adding features important to partners and allocating marketing development funds.
However, these numbers are just the tip of their respective icebergs. Rarely do I see a value attached to the biggest benefit of an indirect channel: customer acquisition and retention.
It’s All About Relationships
Back to our example of talent retention software. The Department of Commerce says the retail industry employs approximately one out of five Americans, about 20 million people. According to the National Retail Federation, independent and privately held retailers account for about 95 percent of the vertical.
That’s a lot of potential customers.
The channel partners that a master agent, marketplace or distributor can expose your product to are deeply connected, particularly with SMB customers, in a way a direct sales force can’t be in today’s complex solution ecosystem sale. A good managed service provider knows its customers: What’s holding the business back from expanding? What opportunities is the CEO excited about? What kind of budget is there for new technology?
Can you afford to hire a sales force to get that inside scoop on even a fraction of these potential customers? Heck, can you even find enough talented salespeople to address that market?
Now, there are benefits to direct sales teams. An employee is going to know and be committed to your product inside and out in a way that a reseller won’t. Partners’ loyalty tends to be with the end customer and, frankly, their commissions. If you and a competitor have a similar offering, and the competitor pays 10% more, guess which product they’ll recommend?
Launching a channel program will mean refereeing some conflict. Even companies that bill themselves as 100% indirect, like Cisco, take a hybrid approach, with reference customers that only direct sales may contact.
With an internal sales force, you maintain full control over messaging. Partners tend to say what they think. A really productive sales pro might cost less on a per-sale basis versus indirect. If your product is extremely specialized or wildly complex, indirect will be more of a challenge.
However, don’t take that spreadsheet at face value. Challenge the assertion that direct is “cheaper” or “better” for your firm, and ask the tough questions about customer acquisition, retention and engagement.
Remember, what sounds great on paper often fails in the real world. With the right analysis, I believe you will find indirect is not more expensive. Then you can focus those sales teams on what really matters — getting more sales and revenue.
Janet Schijns is the CEO of JS Group and a former C-Suite Fortune 500 executive with experience ranging from Verizon to Motorola to Office Depot. Her clients regularly increase their revenues by more than 40 percent and achieve high levels of market-share growth. Areas of expertise include routes to market, channel programs and solution development, and she has worked with vendors, distributors and partners in a wide range of technology areas including services, cloud and advanced solutions.