You have a wonderful product. It’s innovative, delivers clear and substantial value, and is deeply appreciated by your customers. Trouble is, there just aren’t enough of them – customers, that is. You can hire more sales staff, but hiring, directing, and focusing on new target markets is time consuming. And time is money.
That’s where a channel partner in sales can be very helpful. A channel partner will sell your products alongside their own, which can be a great way to quickly and affordably scale your top line. In return, they’ll get a commission or other compensation, and ideally, your products will be such a good fit with theirs that both companies will benefit. But there are several key issues that you need to consider before taking on a channel partner:
1. Basic economics: If your channel partner is operating like an extended sales force, does your partner’s commission, or revenue share, fit with the business economics of your in-house sales force? If the channel partner can rapidly extend your sales coverage, then you might consider giving your channel partner more in compensation than your internal sales force gets. That only works if you’re still making money after accounting for the cost of goods, installation, and partner payments. Otherwise, it’s tough to make it up on volume unless the lifetime value of new customers is well understood and highly valuable.
2. Whose customer is it? This is a classic source of tension in sales partnerships. Ideally, the new customers remain your customers, whose current and future needs you fulfill. That may make intuitive sense to you, but your channel partner has a legitimate claim as well: They found the customer, they are implicitly guaranteeing the product, and they also want to deepen their relationship with the customer. The economic facts and logic of “whose customer is it?” need to be addressed up front. Generally, you should insist on at least sharing the customer.
3. Is your brand well featured? In all your partner’s sales efforts, your brand must be visible in a light that is consistent with all the careful work that has gone into building your product and reputation. If your channel partner is offering your product alongside its own brands as well as others, you will need to consider the rub-off association. Is it flattering and complementary, or confusing and potentially soiling? You brand will also benefit – or suffer – from the way your channel partner’s team describes and “serves” your product to customers. Agree up front on (1) the positioning within the channel partner’s line up, (2) training, and (3) monitoring of sales and servicing.
4. How will you handle channel conflict? Unless you are using channel partners for the sale and distribution of all of your products, you will inevitably have some channel conflict. Your sales force might be calling on the same prospects that your channel partner is targeting. Direct sales from your website might not be in with the offers made by your channel partner’s sales team. Occasional conflict is hard to eliminate, but should be avoided with conviction. Otherwise, customers will be confused and will be encouraged to “play” the conflict to their advantage.
5. Exclusivity or not? Monogamy in channel partnerships can be very fulfilling if – as in a marriage – you have a strong and rewarding relationship. For exclusivity to work there must be compelling economics for both you and your partner over an extended time period. Here, pre -nuptials are essential. How will you know if the partnership should be renewed? When will you decide this? What are the details of the divorce? After parting ways, who will have principal ownership of the customer?
The opposite strategy is to avoid exclusivity with your channel partner, or to provide exclusivity only within very narrow market segments. The calculus for these choices requires an assessment – in advance—of the long-term prospects for profitable customer development. Either way, the entire relationship and the effort to build it will take an unexpectedly large amount of time. Be sure the partnership can be worth the effort.
In our portfolio we have many examples of productive channel partnerships – all carefully constructed by energetic entrepreneurs, with help from my partners and insight from the successes and bruises experienced by sister firms in our network. Today these partnerships help sell hi-tech equipment to hospitals, patient engagement services to doctors, retirement products to clients of wealth advisors, brand protection services to global marketers, printing services to realtors, and more. All took great care and time to fashion. Make sure you choose and plan wisely!