Indirect sales account for more than 70% of global business. It was once thought that the internet would drive intermediaries out of business as direct distance-selling with low transactional costs rendered indirect channels obsolete. For some commodity sales where the company’s brand was strong, this did come to pass. But otherwise, the internet and ecommerce provided a low cost route to market for the very intermediaries that we once thought would put out of business by it. In fact, the internet is largely responsible for an explosive growth in indirect channels created specifically as “etailers” or for conventional resellers; supplementing their offline business with an online channel to market of their own. Amazon doesn’t write, produce or publish books. They’re an aggregator and an indirect channel and have followed their success in books and physical-media music with the sale of downloadable media and many other products. Most importantly, like many other indirect channels before them, they now own the customer and consequently they are far more powerful than any one of the vendors, content creators and publishers they represent – the tail that wags many dogs!
Far from heralding the end of indirect channels as we thought it might back in the dotcom era, the internet has in fact provided a global network for indirect sales and a platform for the promotion of their added value. The internet became merely a conduit for marketing and commerce for those channels willing and able to adapt. Once again, Amazon provides us with a prime example as it has itself become a virtual marketplace for many thousands of other indirect channels.
More recently, the advent of Cloud services seemed once again to ring the death knell for indirect channels in the hi-tech industry. I have spoken with countless software industry executives in recent years who have again predicted the demise of the software channel because they simply cannot envisage a role for intermediaries in the marketing and support of a service that is sold, delivered, managed and maintained by the company who also produces it. After all, products sold as a service that are simple to buy and easy to own suit an entirely direct go to market strategy. When more complex products are sold to large corporate accounts, again, direct makes sense, so far, so good. But complex products, direct selling and support and SMB’s don’t mix well. In every case throughout the history of commerce, these circumstances call for indirect channels and what companies must do is to develop a thorough understanding of the value chain, roles and responsibilities, rules of engagement and resolve the new challenges posed by the new business model. Such transitions from old to new business models have always accelerated evolution and adaptation among indirect channel ecosystems while spawning new ones.
Why Sell Through an Indirect Channel?
So what’s so great about indirect selling and why do companies inevitably turn to an indirect go to market model at some point? The simple answer is that most companies have no choice if they want to keep on growing. Marketing and selling to customers and then supporting them directly just doesn’t scale well and costs spiral out of control. Here are the main reasons for companies choosing an indirect model:
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- Whether you’re looking to expand into the next town, the next country or the next continent, indirect channels give you the most immediate and lowest cost route to market
- They provide feet on the street that know the local market and speak the local language
- Indirect channels may just resell your products but it’s more likely that they add additional value
- They may market, deploy and support your products
- They may sell other complementary products and services that make your collective value proposition stronger than yours alone
- An indirect channel gives you instant sales, marketing and other resources in your chosen market with no incorporation fees, no start-up costs and no need for recruiting personnel
- What’s more, they’re cheap to run and your overhead is predictable because they entail mainly point of sale discounts and modest support costs
Challenges Posed by an Indirect Channel Model
Ubiquitous, appealing and successful as indirect selling is, it brings with it inherent management challenges for those companies who adopt an indirect go-to-market strategy. If you sell direct, things are relatively straightforward. You own the sales resources, and you control the message. When you introduce single or multi-tier indirect channel things start to get complicated. Those sales and marketing resources don’t belong to you, most of the time you don’t even know who they are. You don’t pay them and you don’t task them. And you neither determine nor control the messages they deliver to your customers. Nor do you directly benefit from the feedback your mutual customers provide.
Knowledge is Power
Direct selling success is fundamentally based upon telling people what they need to know, telling them what to do and managing them doing it.
The question of knowledge and intimacy is critical. Direct selling success is fundamentally based upon telling people what they need to know, telling them what to do and managing them doing it. But if you don’t know who is doing your selling, don’t know how to communicate with them and don’t know how to motivate them and influence their behavior even if you did, you have a big problem.
Very often when we engage with a new customer, they scarcely have one named contact per channel organization. Even fewer of these have valid contact information – email address, social ID or telephone number appended to their contact data. If you don’t know who’s out there selling or how to communicate with them, you can’t talk to them and if you can’t talk to them, you can’t influence their behavior or effectively enable them to do what you want them to do. And performance management is of course out of the question.
The Pareto Principle
This in turn generates the second problem – a cycle of increased investment (of time, effort and resource) in and dependency upon a very small number or proportion of the indirect channel base for the vast majority of a company’s revenue. Most companies surround themselves with a hard-core of volume sellers – indirect channel organizations who consistently sell the most. As the channel grows while channel management resources continue to dwindle, channel management becomes increasingly difficult and we see the Pareto principle taking effect:
The Pareto principle (also known as the 80–20 rule, the law of the vital few, and the principle of factor sparsity) states that, for many events, roughly 80% of the effects come from 20% of the causes.
This distribution is claimed to appear in several different aspects relevant to business managers. For example:
- 80% of your profits come from 20% of your customers
- 80% of your complaints come from 20% of your customers
- 80% of your profits come from 20% of the time you spend
- 80% of your sales come from 20% of your products
- 80% of your direct sales are made by 20% of your direct sales staff
- 80% of your indirect sales are made by 20% of your indirect channels
In practice we regularly see over 50% of all indirect channel revenues coming from 5% or less of the base. Shocked? Before you judge others, go and check your own sales data – I’ll be equally shocked if your story is any better.
The Pareto effect typically worsens because more revenue generated by the fewest number of accounts leads to greater consolidation in investment by the company in those same accounts. These intermediaries typically offer limited opportunity for growth and yet they demand the best pricing, the deepest discounts and the greatest amount of effort to maintain. Without the means to cost effectively develop and monetize the potential that exists within the remaining indirect channels, our customers often reach a growth “glass ceiling” – a revenue threshold beyond which they cannot go with their top tier of intermediaries – a point beyond which they cannot go without investing in systems, tools, processes and best practices to exploit the latent potential that exists.
The Nature of the Relationship
The third challenge relates to the relationship lifecycle that exists between a company and its indirect channels. Any sales and marketing professional is familiar with the customer lifecycle – targeting, acquisition, nurturing and repurchase or resale. But the nature of a company’s relationship with their indirect channel is infinitely more complex and difficult to manage. This is because the objective is not merely to generate a sale by creating a desire to buy; it is to create a need and desire to sell, market and support on behalf of the company in question.
The Indirect Channel Lifecycle
If the indirect channel model ever looked like the simplistic illustration earlier in this section, it certainly does not resemble this today.
This is a process of winning hearts and minds and requires a sustained, programmatic approach. Many of our customers mistakenly and unsuccessfully attempt to utilize social CRM systems to try to automate the management of this lifecycle but the sales and marketing automation capabilities they offer are wholly inadequate for the task.
Evolution of the Channel into a Demand-Side Ecosystem
If the indirect channel model ever looked like the simplistic illustration earlier in this section, it certainly does not resemble this today. Supply chains and value chains have evolved into sophisticated ecosystems made up out of many companies and individuals each providing products, services and knowledge to customers often acting independently but frequently collaborating to deliver business solutions to the customer. Your product is typically only one (small) part in such a solution. Where effective communication through the value chain was once the primary challenge for companies and one that programs and PRM systems solved in part, collaboration with ecosystems is now the number one challenge facing businesses with indirect go to market strategies.
Finally and very importantly is the significant behavioral shift that has taken place within the target audience for this lifecycle management process. The advent of social networking and the ubiquity of the software and technologies utilized to engage in social networking have transformed the way in which people communicate and otherwise interact. Indeed social media has become the communication medium of choice for the generation of individuals now entering the workplace and is rapidly displacing email for everyone else. Some interesting statistics:
- Social media, communities and blogs are the number one generator of internet traffic
- Instant messaging, activity streams and push updates are replacing email
- Mobile devices will outnumber desktop/laptop computing devices 5:1 by 2015
- One to one communication is giving way to one / many to many communication
- Marketing communications are giving way to collaborative conversations
- Managed relationships are giving way to facilitated communities
- Individuals are more inclined to be influenced by the opinions and expressed consensus of fellow community members than by companies
- Opt-out is giving way to opt-in (Follow, Share, Like) for communication preference setting
The key to success is to realize that you are part of a diverse community of businesses and individuals at the heart of which is your mutual customer.
These are just a few of the manifestations of this change but our customers are really struggling to adapt. Many are only just beginning to implement first-generation Partner Relationship Management (PRM) technologies only to find that their limited collaboration and communication capabilities are unable to address the needs of their audience or to overcome the challenges outlines above. Social CRM and PRM technology fails to address their needs because they enable only some aspects of the sales, marketing and program automation needed. Enterprise collaboration tools are great for facilitating collaboration but enable messaging, file and project-sharing inside a company not beyond it.
Let’s recap on some facts that conspire to create a pretty challenging environment:
- >96% of manufacturers sell through indirect channels to market
- They are almost entirely dependent upon loyalty and goodwill to drive indirect revenue
- Indirect channel lifecycle is inherently complex to manage
- Communication to and throughout the indirect channel community is critical to success
- Social paradigm and mobile technology are revolutionizing communication
- Indirect channel needs, expectations and behaviors are changing
- Social CRM, PRM and enterprise collaboration technology all individually fail to provide a solution
With so many challenges, it would be easy and understandable if businesses gave up selling indirectly altogether. But they can’t and consequently won’t. Instead most tirelessly implement the same flawed strategies they have adopted for years or decades. To do otherwise would require a fundamental change in the way they think about indirect channels, some effort and a little cleverly applied investment.
But for those companies willing to apply themselves, the competitive advantage alone will make it worthwhile.
The key to success is to realize that you are part of a diverse community of businesses and individuals at the heart of which is your mutual customer. Stop trying to manage your indirect channels. You cannot and will not succeed. No-one ever has. Instead collaborate and communicate with them like you’re on the same team, treat them as individuals rather than as an amorphous mass then sit back and watch the revenue roll in.