Defending the Channel
By Adam Edwards
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 exercise that most suppliers go through on a somewhat regular basis.
It's always a healthy exercise to periodically review all aspects of a business and rationalize its existence, but the Partner Channel in the telecom space always seems to come under more scrutiny than a standard business review. In fact, it seems that the Channel is always fighting for its life.
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:
- Low Investment - Partners require no base salary, health insurance or other remuneration, so the model is rapidly scaleable at little cost.
- Quick Return on Investment - Due to the lower investment, the ROI is very high.
- Lower Support Costs - The Partner will assist with support and therefore lower support costs.
- Lower Churn Rates - Partner sales tend to have a lower churn rate because Partners sell based on relationships and will continue to service the customer after the direct rep has moved on.
- Crossover - Partners are paid a residual commission for the life of the customer relationship 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 these arguments used for justifying the Channel is, in fact, that they compare sales to the direct channel, ultimately leading to Crossover. There are several problems with most calculations of 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, again, 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. As defined in the book Marketing Channels by Anne T. Coughlan, marketing channels are "routes to market used to sell every product and service that consumers and business buyers purchase." 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 its goods or services will flow. Rather, 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. Coughlan goes on to say that “only after first understanding the nature of end-users' demands, can the channel manager design a well-working channel. It’s not about what end users want to consume but about how end users want to buy and use the products or services being purchased." The "how" end users want to purchase is the channel through which they want to purchase. This is dictated by the end user and no one 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 just noted, customers choose the channel through which they will purchase and suppliers and manufacturers must adjust accordingly. Customers can purchase through both the direct and indirect sides of our industry. There occasionally is overlap in which a customer could be enticed to purchase through one channel over another. We call this "channel conflict" and it's a sign of a healthy coverage of the market, but 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 as well as through its 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 vendors 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 on the "either/or" margin argument against the direct channel.
Adam Edwards is a co-founder and president of Telarus Inc., a telecom master agent.