Channel Marketing

Channel Marketing

Often the question comes up, what is a channel?  A channel to market is the method of getting your product into the customer’s (the end user’s) hand. This can either be through direct sales, or through a reseller. Direct sales can occur in person, via the phone, the web or mail. Indirect, or channel sales typically refers to sales through a reseller. A reseller can order from you direct (one tier between you and the end user), or from a wholesale distributor--you would sell to a wholesale distributor and they in turn would sell to multiple resellers (two tiers between you and the end user (hence the common term “two-tier” distribution)).
Note: some companies or divisions (i.e., Motorola semiconductor, etc.) call the reseller the distributor (or disty)--this is correct, but not in the typical and more common two-tier distribution model. Hence, it is important to get the channel terminology down whenever talking about the channel--or you could be in violent agreement, and not know it.
A marketing channel is a set of practices or activities necessary to transfer the ownership of goods, and to move goods, from the point of production to the point of consumption and, as such, which consists of all the institutions and all the marketing activities in the marketing process. A marketing channel is a useful tool for management.

Which Channel to Use?

The first question to address is whether you should go direct or indirect. Often the answer is both--especially since the popularity of the Internet. The key, however is to avoid most of the channel conflict.
Channel conflict occurs when the vendor (you) and the reseller, or different reseller types (retail, VAR, mail order, Internet) compete for the same business.  I say “most” of the channel conflict, since it is fine to have some conflict--resellers may compete, and there may be some of the business that you can take direct .  For example, you might go direct with massive deals that are too big for a reseller to finance (such as a 1.3 billion deal overseas), or very small deals that don’t require any special training/installation/consulting--hence won’t provide margins for your resellers who make money on their ‘value added’ services.
To minimize conflict you could:

• Segment the products (different products are sold through different reseller types or channels)
• Setup exclusive or limited territories
• Sell direct at a higher price than the average street price
• Setup different promotions for different resellers--rotating so they all have advantages at different times
• Provide MDF/Co-op and let the resellers choose to establish their own competitive advantage
• Setup reseller levels--rewarding higher margins and support for higher authorization (the resellers choose whether they can be competitive)
• Setup a process to determine if a customer has worked with a reseller prior to taking the business direct (so you don’t steal business they cultivated), etc.

There are multiple ways that you can reduce conflict--the key is to be aware that it could exist and of your ramifications (short and long-term), and that you do something about it to keep your reseller and revenue targets satisfied. 
One vendor long gone, Ashton Tate, had a terrible problem with channel conflict (they would sell direct and undercut a prospect the reseller had cultivated)--as a result, their resellers hated them.  They still sold their products since they were so popular (dBase), but were rooting for a competitor to take them out--which happened.
It is also a problem if you have no conflict, since it usually indicates that you don’t have enough sales coverage--there could be parts of the market you are not covering (missing RFQ’s, not knowing about the opportunities, your product is not sold where the customers traffic, etc.).

Direct or Indirect?

The question to go direct, indirect or both is often determined by the following:

1. Ability to recruit resellers. If you cannot get your product into distribution, or find resellers, the answer is simple, you go direct.
2. Product type. If you are selling a product that requires a lot of training, installation and support, you may go direct until you get your resellers trained and certified--or, if you have a large enough sales force, you may stay direct. However, if you have enough sales people to only cover the largest customers (10 sales people to cover top 100 telcos, but not enough to cover the middle 5,000 telcos), you may wish to use resellers to cover the middle market--then segment your product line, one for direct and one for resellers.
3. Market dynamics. As the market technology adoption changes and products that used to require support become easier to use, and customers know what they want--you may go direct (like Dell (it was actually a modest model in the early days, since most users needed more support but became effective
4. Price point. High-end premium quality consumer products (such as expensive cookware, the best vacuums, etc.) are sometimes sold direct (and usually person-to-person) since the benefits (which are real, but not always obvious) must be sold. However, this does not mean that high-priced products can’t be sold via the channel (boats, planes, million dollar SFA products, etc.).
5. Customer requirements. Some customers require mandate a direct relationship with the vendor to ensure their needs are met.  In some cases, when an account insists on going direct, the reseller can still earn a bounty for delivering the qualified, pre-sold lead.
6. Ability to manage resellers. Much of the decision to go direct or indirect is also dependent on the companies ability to understand how the channel functions, come up with a competitive program, and manage the reseller programs and relationships.

The final decision on direct or indirect is based on your business model and how you address the questions above.