Why the Right Sales Channel Trumps a Better Product

  In this episode, Steve tells you why having a great distribution channel is crucial for your business.

I’m Steve Davis and I want to talk about choosing and managing sales channels for your startup. There’s a quote I normally use, it’s my own, ‘products with a better distribution channel will win over a superior product every time. It’s not fair, it’s not right, but it’s reality’.

Better Distribution Trumps a Better Product

There are several technology products that were far superior from smaller companies that didn’t make it. The main reason is because the other product, the other company, had a much better distribution channel, where people actually saw it and they purchased it. There are several common mistakes that companies make. Confusing themselves with the buyer. Nothing could be further from the truth. You need to understand what the buyers are going to look for. They confuse the end user with the buyer, they may be two different people. If you’re doing corporate sales, typical end-users on products typically don’t make the purchase decisions, typically are not the buyers that you’re going to be dealing with. So you have to understand that. You also have to have an adequate profile on who the buyer is to understand how to find them, how to sell to them, how they want to be engaged. So make sure you do that before you actually start making decisions on how you’re going to sell. Now most companies start off selling over the Internet. What you need to know is, you need to set your pricing correctly from the beginning. Because what will happen is most companies will set the price where they’re making a reasonable margin, and they really like it. But once they decide that they need to move to a distribution channel, they don’t have enough price leeway, where the distribution channel can make money and they can make money as well.

Add Distribution Costs into Your Pricing

So you need to understand where you’re going going from a distribution standpoint, and adding that into your cost structure. First identify who the buyer is, how to find them, but more importantly when it comes to distribution channels, how do they want to engage and how to they want to buy. If you want to deal with certain individuals, you have to be at the distribution channel that they’re going to see you. If you’re not there, they won’t see you and they’re not going to buy you. Is there seasonality involved? You need to understand that with some channels, there will be seasonality; some market segments there will be seasonality or not. That’s going to affect you from a cash flow standpoint. Different channels are going to require different resources, different monetary expenditures on airport, different hand holding, all of that has to be viewed in relation to the capabilities of yourself and your company.

Do You Offer a Whole Product?

Do you offer a whole product? Now, you might say, yeah of course I offer a whole product. But basically, if somebody looks at your product and buys it today, can they immediately start using it? In many cases the answer is no – it might require a different piece of hardware, it might require some other piece of software – if you don’t offer a solution to them, it gives the buyer an opportunity to say no I’m not buying today I need to find out what this component is that I have to buy and I’ll get back to you. But in the meantime, once that happens, they’re out looking at alternatives to you that offer a full solution that you just didn’t offer. So if you don’t offer a whole product, perhaps the distribution channel you pick might be able to meet that need. So for instance, if your customer base requires installation services, if you don’t have the capability of doing that on your own, of installing those products, then you have to have a distribution channel in place that can actually sell it and install it for you. But when you do that, if they’re going to sell it, then they’re going to want to make a margin on the product. So that’s what I mean by you have to have your pricing structure set up to compensate them for upfront.

Develop Your Buyer Package

The other thing to consider is geographic coverage of the channel that you pick. You might pick players or channel partners that work on a regional basis, or a national basis, an international basis. It depends on what the resources and requirements and what your plans are. Before you go out, you have to figure out what the buyer is going to want to know – what is the buyer package going to be? Buyer packages are very different. If you’re dealing with buyers at the corporate level, you have a certain level of package that they’re going to expect to see. If you have a product that deals in retail, you have to have a package that basically has a different level of detail. For them, the buyers at a retail establishment, for them, the package is going to be very very important. It’s going to have a much higher impact on them, than it would be a buyer in a corporation, who doesn’t really care if it has sale appeal, because in a retail outlet, getting somebody to pick up your box is 90% of the battle.

What Are Alternatives to Distribution Channels?

Some alternatives to distribution channels that you have besides the Internet are direct sales, the problem with direct sales for a startup is you you basically have a lot of overhead. That is the most costly distribution channel you could put together. Not only that, but when you bring somebody on board, it’s going to take them about 10 months before they are fully operational and proficient in selling your product. And if you’re a startup, there are only so many people you can bring on board any one time. So that means you’ll have minimal distribution or geographic reach, because you have only what we call feet on the street, very few feet on the street. There are other alternatives for you. Manufacturer reps, which are independent sales organizations that sell across the U.S. and internationally. You have what we call value-added resellers in the computer industry, which offer localized support, installation, customization, software support, they may want want to work through distributors. That’s another tier that you have to work with. Distributors in the U.S. are basically big warehousing operations, and they basically sell to other channel players – retailers, value-added resellers – and they’re also going want a cut. You might decide that there are certain market segments you don’t have any expertise in going after, but your products could sell into them. Well then you might think about private labeling: finding a player in the industry who can utilize your product and sell to that customer base. This way they take all the marketing effort, all the marketing expenditures, customer sales and support efforts, and what you get goes straight to your bottom line. Take a long-term view – sales are not going to happen overnight. Once you set up a distribution channel in place, it could take you up to six months before you see any reasonable payback on your distribution channel or marketing efforts. So you’ve got to take a long-term view. Train them well. People sell effectively the more knowledgeable they are about the product. The more they know, the easier it is for them to sell, the easier it is for them to present, the easier it is to identify what’s unique and comfortable or important to particular buyers. When you’re at a startup, the other thing is everybody’s in sales, because everybody typically gets involved. From the first contact somebody makes, somebody picks up the phone, you need to understand that, the people need to understand that, who’s supposed to do what, how present, how to get the information out, and how to be responsive to the customer. Once all this is in place, it’s not static. You’ll get into trouble if you keep it the same way every year. You need to review your sales strategy on a yearly basis. If it needs to change, change it. If certain channel partners aren’t working out, fire them and bring somebody else on board. Review yearly, and modify it, and adapt as you move on.

About Steve Davis

Stephen Davis, Principal and Founder of The CXO Advisory Group provides interim COO and VP Sales and Marketing services focused on improving the performance and profitability of emerging and established companies. Steve has worked with companies in North America, Europe and Asia to assist them in establishing US market operations, strategic alliances, joint ventures, business development and sales management. He has assisted clients with due diligence and preparation for venture financing.

Steve has more than 30 years experience as a senior executive, including COO and CMO with P&L responsibility in the computer, software, consumer electronics and Internet industries. Steve has successfully built, managed, and restructured numerous sales and marketing organizations. He has successfully developed new markets and has introduced over 300 new products into various industries.

Steve is an industry pioneer whose visionary marketing and sales strategies were instrumental in two of the PC industry milestone products. Among his many successes he was responsible for introducing ATARI’s home computer and Corvus OMNINET, the PC industry’s first local area network.

In 1989, Steve founded the Davis Management Group, a company whose proprietary sales management and marketing methodology promoted growth in client’s revenue and profitability. He is an executive strategist and problem solver who conceives, plans and implements new business practices to produce measurable improvements in market position, revenues and profits. Previously, Steve spent 15 years in senior level positions at major corporations including Qualogy, Corvus Systems, Atari, IBM and GE.

Steve is active with many groups that support entrepreneurs. He is a frequent speaker and prolific writer on marketing and sales topics. Davis has given speeches at some of the leading business and technology forums and his articles have appeared in a variety of engineering and IT business publications.