This document discusses different sales channel strategies for software companies, specifically comparing direct sales versus indirect/partner channels. It notes that indirect channels can help reach new geographies and customer segments in a more cost-effective manner by spreading sales and support costs across multiple product lines. However, direct sales may be preferable for large deals and customers. The document provides financial models comparing the profitability of different channels and qualitative factors to consider. It also outlines what resellers/partners look for in vendors, how they should be compensated, and keys to a successful partner program like transparency into results and treating partners as extensions of the company.

1. Sales Guerrillas
Increasing Company Value
By
Sales Channel Choices
An introduction to the relative merits of Software
distribution by direct or indirect methodologies
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2. Contents
Which Channel - Introduction
Why Use Indirect Channels
Company Valuations
Revenue, margins, operating
income, gross profit
Basics of Software ‘go to market’
(GTM) models
Financial Comparison of GTM models
Qualitative Comparison of GTM
Models
What do Resellers look for
What do Resellers offer
Reseller Costs
Reseller Compensation
Factors that make a Partner
Channel Successful
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3. Which Channel - Introduction
A direct sales force is not appropriate for every company and certainly isn’t appropriate
for every stage in a company’s evolution. A small company may not be able to afford
it’s own sales force. It may need to utilise an indirect channel until its sales and profits
performance improve enough to afford the fixed expense of a direct sales force in the
field. In addition it would be unprofitable to have your highly paid and efficient direct
sales force spending time on smaller deals, outlying geographies, segments that they
may not know, and so on. Indirect channels can afford to engage in these areas by
selling many other manufacturers product lines too. By doing so they spread the same
cost over several product lines.
When a territory is producing several $m of sales it may be time to think about using a
direct operation, but this is a P&L exercise in justification. Going from an indirect to
direct in a single country may require additional expense of legal, HR, marketing and so
on. It is not just a straight swap.
Most companies at some time conclude that they must pursue indirect
channels to survive and grow
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4. Why use Indirect channels
The benefit of indirect channels is that it is a cost transfer business. Essentially the cost of
doing business in a direct sales model; the sales person, pre sales, pre sales
consultancy, training/implementation, cost of support is borne by the indirect channel.
This is completely cost ineffective in a small channel, as not only do you have the
costs of support, but also the reduced margin because you are giving a percentage to
the reseller. But, when it is scaled up, eventually there is a cross over point when those
resources are spread across many resellers, and even when offset by the margin given
to the channel, result in a higher operating margin than the direct route.
In addition, working with; distant geographies, distinct market segments and smaller
customers, in each area the channel has the solution required by the customer and this
will normally drive vendors to consider channels more seriously.
However, just moving accounts to a channel does not produce the same result.
If the channel is just a lower cost salesforce, this is something the vendor
should not overlook doing directly. When moving accounts in this fashion,
margins should be reduced so that operating margins are not negatively
affected and the channel should be rewarded on increases in business, not
just maintaining the transferred accounts
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5. Why use Indirect channels
Worst Cases
Without the right routes to market, you simply won’t reach your target
market. In a competitive environment , you may find that your route to
market is your only differentiator
Usually your company will have all the figures to model your direct
salesforce. In the same way the
Key Differentiator of the Successful Indirect Vendor
is a laser like intensity on the commercial dynamics of the relationship
based on the understanding the key measures that matter for reseller
and by good visibility of how these measures are performing on a
regular basis
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6. Company Valuations
Company valuations depend on a host of factors and there are many different
methods of calculation. Some of the factors that are taken into account are;
turnover, profit, yield, EPS, return on Equity, Operating margin, Interest cover,
dividend cover, assets, cash flow, free cash flow, return on capital employed and
a hundred other factors and their derivatives.
However, there are some fundamental characteristics that drive the valuations
of software companies and these are the characteristics that stockpickers look
at, to govern their choice of stock. These people are looking for undervalued
companies that have the opportunity to increase in value because other
investors have not noticed their valuations. Whilst again there are numerous
methodologies; takeover targets, merger arbitrage, recovery plays, director
share deals, technical analysis, and more, here we will deal with the
conventional efforts of the sales operation to add value.
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7. Company Valuations
•
Stockpickers are looking for companies that exhibit the following basics
• Increasing revenue qtr by qtr, year on year
• Increasing profits year on year
• Increasing earnings per share year on year
• Growing software companies are unlikely to pay dividends so these are
not looked at
• Low Enterprise Value / EBITDA – this takes out the problem of debt
• High Operating Margins indicating low levels of competition
• High levels of recurring revenues from maintenance or SaaS agreements
Again, these are simplified measures but you can see the importance of
ever increasing revenues and margins, and of course, when these are
projected into the future the stock price increases, based on the
expected earnings per share increasing into the future.
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8. Company Valuations
•
•
Let’s look at a typical example, taking data from Yahoo Finance for a US
software company
The Operating Income is (49,440) and every resource concerned with taking
the product to market comes under either the SG&A row or Cost of Revenue,
so, obviously, affects the Operating Income. With Channels, the net revenue is
included in the total revenue, (so no costs), apart from those supporting the
channel, which again would appear in the SG&A row or Cost of Revenue
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9. Company Valuations
Definition of 'Operating Income'
The amount of profit realized from a business's operations after taking out operating
expenses - such as cost of goods sold (COGS) or wages - and depreciation. Operating
income takes the gross income (revenue minus COGS) and subtracts other operating
expenses and then removes depreciation. These operating expenses are costs which
are incurred from operating activities and include things such as office supplies and
heat and power. Operating Income is typically a synonym for earnings before interest
and taxes (EBIT) and is also commonly referred to as "operating profit" or "recurring
profit.“
In order to increase operating income, we need to; increase revenues
and decrease the other aspects (costs), one method of doing this is by
utilising the optimum route to market. This could be what we know as;
direct sales, indirect sales, inside sales, telesales and their combination
and derivatives (distribution etc).
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10. Basics of GTM Models
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11. Basics of GTM Models
This interactive spreadsheet can be found at …………………….
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12. Financial Comparison of GTM models
This shows the cross over in
gross profit between direct,
agency and channel sales.
The shape and crossover are
dependent on the inputs and,
more relevant is that either route
may find it impossible for a given
market, e.g. Enterprise sales for
indirect, far flung geographies,
activity driven sales and so on.
So often, it is not a choice of
direct or indirect, simply that only
one will be effective, and
therefore, the question is how to
how to make that route efficient
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13. Qualitative Comparison of GTM Models
Direct routes
Give immediate customer insight and can instantly respond
Do not give margin away to a third party
Are usually better trained, more knowledgeable about the market, and possibly a higher calibre
of sales professional, all due to the investment made by the vendor. These staff are more
valuable in high earning accounts – majors, internationals, global, enterprise
You have control of the sales force; where to sell, what to sell, how to sell, pricing, termination,
activities to support company image
You have complete commitment, exclusivity, usually a higher target, usually a better quality
sales person, usually a higher paid salesperson, usually a higher close rate, better subject
matter expertise, you have contract ownership
Indirect routes
Increased reach, could provide; special services, position the product in an established
channel, have immediate access to a defined segment or geography
Require a margin, dilute the sales force, introduce competition, distance the customer
May have a reduced cost of sales if correctly run, reduce your revenue, possibly good for
smaller customers outlying geographies, lower value products, different market segments
Offer; a ‘one stop shop’, credit, tech support, supplier efficiency and cost effectiveness by
leveraging their assets and infrastructure, local service and support, local inventory, Ease of
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doing business – sales, marketing, billing, consultancy etc., Community presence

14. What do Resellers look for
The Reseller wants
A competitive product and money. The only relevance of the product to the reseller is
convincing them that the end customer demand will be higher for that product than your
competitors or hopefully for the other products they sell.
Reseller evaluates
Customer appeal, margin, cost of sales, cost of support, lifecycle, returns, warranty
claims, promotional spend, stocking requirement, add ons, up sell, finance and credit
terms
The vendor wants
Market education, product management, marketing, promotion and sales
We are selling the channel value proposition, NOT selling our product, and this is
exactly how a second rate product can and does win
Successful suppliers understand all this, and all channels respond
positively to the supplier that has invested in understanding their model
(not the vendors!!!)
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15. What do Resellers Offer
Typical Core Offering
Demand generation
Marcomms, segmentation
Telemarketing, telesales
mailings
Lead generation,
exhibitions, seminars
Case studies
Pricing management
MDF and Coop funding
deployment
Sales
Sales staff, promotions
Pricing control, phasing and payment
Supply Fulfilment
Delivery, installation, implementation,
training
1st line technical support
Market Information
Channel, product and customer
feedback
Services
Specialised Offerings
Demand generation
Value based audits
Sales
Global account creation
Services
To vendor and other resellers
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16. Reseller Costs
On the right is a sample
selection of costs that a
reseller has to cover
Marketing
Ensure your value
proposition is better than
their other vendors to ensure
you get ‘mind’ or ‘sales’
share’
In any costing analysis
ensure you are covering the
resellers overhead costs as
well as ensuring they make
an operating profit
Marcomms,
Telemarketing, Inside Sales, Seminars,
Roadshows, Exhibitions
Sales
Sales staff with commissions,
pre sales, post sales, implementers,
discounts
Transactions
SOP
Logistics
Offices, admin staff, cars,
telephones, computing,
delivery
Inventory
Stock holdings, returns, non
payments
Finance
Credit, DSO
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17. Reseller Compensation
Historically set margins we offered or simply a ‘buy’ price but now ‘base’
and variable margins offer a more flexible approach to rewarding good
business practice. However, check with ‘legal’ before you adopt for a
country to ensure you are not breaking local law. Also, before you
implement, ensure that your company processes can quickly calculate
and pay the reseller, if not, don’t even attempt them, there is nothing
worse than not keeping promises
Margin, rebates and back end margin
Rewarding exceptional/over target
performance
Deal registration
Performance ranking and tiers
Forecasting accuracy
Marketing spend and effectivity
Pre sales support
Post sales, implementation support
Reduction in debtor days
Certification
Training attendance
Partner events
Free training/consultancy days
Coop and mdf
Competitive discounts
Exchange rate fluctuations
Free event attendance
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18. Factors that make a Partner Channel
Successful
Think like a Customer and a Partner - In the same way as ‘thinking like a customer’ makes
a direct route successful, think like a partner. What could we do to ‘delight’ the partner?
Ensure that campaigns, policies etc. work for; the customer, the partner, the partner
salesperson and principal, channel management and the vendor.
Work towards a partner community, so that it borrows resource from each other and shares
best practice, if not the partners can be a drain on central resources
Publish results monthly so partners can compare performance, and reward success
publicly (best partner awards)
Ensure that joint funding produces measurable results and really treat the partners as
extensions of the company – would you charge a salesperson to; attend training, attend
kick off etc
Build a relationship on trust, beyond the company contracts. There will always be
problems as the fundamental objectives of the vendor and partner are different, but you need
a person who can do the best they can for the partner community, given the problems that
will arise.
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