Tuesday, June 26, 2012

Defending the Channel

I spoke recently to a friend of mine who is the "channel chief" for one of the major suppliers (carrier/cableco) in the industry.  He was going through the exercise of rationalizing the Channel and explaining to executives why it was relevant and worthy of continued investment.  It amazes me that this is a routine conversation and that most suppliers go through this exercise on a somewhat regular basis.  It's a healthy exercise to review all aspects of a business and rationalize their existence but the Partner Channel in the telecom space seems to come under more scrutiny than a standard business review, in fact it seems that the Channel is always fighting for it's life.  

Poor Defenses

I hear a few basic arguments from channel chiefs when they go through this exercise all of which use data to compare sales made through the Partner Channel to sales made through the direct sales channel.  The arguments are as follows:
  1. Low Investment - Partners require no base salary, health insurance or other remuneration so the model is rapidly scaleable for little cost.
  2. Quick Return on Investment - Due to the lower investment, the ROI is very high.
  3. Lower Support Costs - The Partner will assist with support and therefore achieve lower support costs.
  4. Lower Churn Rates - Partner sales tend to have a lower churn rate because Partners sell based on relationship and will continue to service the customer after the direct rep has moved on.
  5. Crossover - Partners are paid a residual commission for the life of the customer and therefore, over time, the sale made through the direct channel becomes more profitable because the direct sales channel is a one-time cost.  This crossover is estimated across the industry to be anywhere from 3 to 7 years depending on the supplier.  
The problem with this line of justification for the Channel is that it compares sales to the direct channel and therefore leads ultimately to the "Crossover".  There are several problems with  most calculations of the Crossover including not considering the longer account life, additive sales over the life of the account, and other factors that normally aren't weighed in, however, the greatest problem with this line of justification is that it pits direct sales against Channel sales.  

Marketing Channels 101

While we often refer to the Partner Channel as "THE channel", there are many channels through which a manufacturer or supplier can market and distribute goods and services.  Marketing channels are "routes to market used to sell every product and service that consumers and business buyers purchase."  Coughlan, Anne T.  Marketing Channels . 7th. Prentice Hall, 2006. 1   This includes distributors, retailers, value added resellers, direct sales teams, specialists and other channels through which a product or service may flow to an end-user.    

The manufacturer or supplier cannot dictate the channel through which it's goods or services will flow.  The end-user will dictate how they will purchase the goods or services and therefore through which channel they will consume those goods or services.  "Only after first understanding the nature of end-users' demands can the channel manager design a well-working channel....[not about] what end-users want to consume but about how end users want to buy and use the products or services being purchased." Coughlan, Anne T.  Marketing Channels . 7th. Prentice Hall, 2006. 41  The "how" end users want to purchase is the channel through which they want to purchase.  This is dictated by the end-user and nobody else. 

The Validity of the Partner Channel

The profitability analysis of the Partner Channel compared to the direct channel is an incorrect approach because it assumes that a supplier can simply reroute customers through the direct side or the Partner Channel at will.  As stated above, customers choose the channel through which they will purchase and suppliers and manufacturers must adjust accordingly.  Customers purchase through both the direct and indirect sides in our industry.  There is occasionally overlap in which a customer could be attracted through either channel.  We call this "channel conflict" and it's a sign of a healthy coverage of the market, however to assume that the supplier can dictate the channel through which all customers will purchase is either arrogant or naive.  

Manufacturers maintain multiple channels for broader coverage of the market.  Amazon sells books online and also through it's partner referral program.  HTC manufactures smartphones under its brand and also as an OEM supplier for other smartphone brands.  Suppliers in our industry sell direct to customers and sell on a wholesale basis to other carriers.  These different channels carry different margins, but these companies do not select one over the other, rather they expand their market coverage by appealing to the way in which end users choose to purchase.  

The next time you're asked to justify the Partner Channel I recommend focusing on the incremental sales the Partner Channel can bring, rather than the "either/or" margin argument against the direct channel.