A indirect selling model has plenty of benefits. Startup companies generally leverage channel partners to get instant scale without inheriting fixed cost. Hiring a direct sales team is expensive. A fledgling company looking for additional capital to bring on headcount is a tall ask for the board. In addition to economies of scale, the channel brings domain expertise and client relationships, two things a small company can benefit from. The channel can expedite growth and allow capital to be allocated into other strategic areas. Building a channel has its pros, but there is also some potential downside.
For a high level set of pros and cons read this article Direct vs Indirect Pros and Cons.
Download the SBI CEO Budgeting Tool to help diagnose where to allocate costs and how the channel organization fits into the overall budget.
For companies that built a channel is there a right time to pivot back to a more direct sales motion?
When Is the Right Time to Modify the Selling Motion?
A number of factors could answer that question. Some are product related. Some are people related. Some are cost related.
- Does the channel understand how to sell my solution now that the company has evolved?
- Is the channel servicing the customer in a way that is maintaining optimal retention rates?
- Is the channel still driving market awareness or is the company’s brand now pervasive?
- Is the company’s field sales enabled and scale is in place?
- How predictable has the channel pipeline been on a quarterly basis?
- Does the channel bring equivalent value to the margin that is paid?
- Can the company afford to pay the margin required to maintain channel loyalty?
- Is an expensive co-selling channel model sustainable?
There is no one size fits all answer. Many factors go into whether a channel is the right selling model based on market positioning and the company’s evolution. Let’s expand on a couple of the points above.
The Sales Model Is in Constant Evolution
Firstly, over time the company expands its product portfolio. The value proposition becomes more difficult and requires additional enablement to properly position. Is the solution still a channel fit or has the complexity outgrown the traditional channel model in place? Is the customer base managed by the channel turning over faster than the customer base managed direct? Retention rates are critical. Is the channel able to properly position the solution to retain the customer? If the answer is no, it may be time to pivot away from a channel sales model.
Drilling down on a second point, a co-sell channel model is expensive. Paying the channel and a direct rep for every deal that runs through the channel may not be sustainable long term. A model that worked to ignite initial growth may not fit as the company continues to evolve and the company strategy changes.
The objectives and the measurements of the company change over time:
- Possible initial benchmarks:
- New logos
- Customer acquisition
- Rate of growth
- Possible future benchmarks:
- Stock valuation
- EBITDA targets
- Cost of sales
- Customer retention
A third, and critical point, is around the predictability of the sales forecast. The channel creates an extra layer of separation from a sales opportunity. Within that extra layer is additional ambiguity and complexity around how to forecast and predict revenue. Companies that rely on a heavy percentage of channel-driven revenue generally struggle with consistent quarterly revenue guidance. Public companies require predictability and are punished by the Street when the guidance is off. As companies mature and have increased commitments to accurate quarterly revenue guidance, the tolerance for channel ambiguity wanes. This could be another potential pivot point and time to move from an indirect to direct sales model.
The role of the channel changes based on the current phase of the company. Where the channel fits into each phase is different. It is not to say that the channel cannot evolve with the company. However, the value the channel brings, and the cost associated needs to be aligned, and that changes over time. Be aware of when to make the pivot.
SBI does several assessments and provides tools to help companies understand when it is time to make the required changes. Utilizing the SBI CEO Budgeting Tool can help diagnose where to allocate costs and how the channel organization fits into the overall budget.
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