Channel Partners: Don’t Count Them Out
Posted on May 31, 2013
Current technology trends seem to make direct customer acquisition more palatable than channel partner alternatives. With the movement of information from walled gardens to the cloud, it’s easier than ever to own and manage your relationship with your customer. Lower implementation costs, increased penetration of tools into small enterprises, and generally reduced adoption friction all support going direct. Young entrepreneurs who have never previously worked for large companies or built sales organizations also favor direct models.
However, there are multiple ways to grow a startup. All founders ultimately want to bring in as much revenue as possible; however, few founders take the time to outline their partner strategy in the early days. Most entrepreneurs want to own customer relationships so they can sell directly and ensure satisfaction for each client. Others are willing to find partners and nurture different types of relationships for growth. Learning the difference between direct customer acquisition and channel partner growth, as well as figuring out which is right for your business model, could determine whether your startup ultimately succeeds.
What’s Great about Direct Customer Acquisition
Direct customer acquisition fosters raw, unfiltered growth as your business claims responsibility for sales and customer support. These functions are developed internally or your company may choose to outsource some of the process, but the company owns all relationships with providers and customers. There is no middleman who takes a cut.
Here are some distinct advantages of going direct:
- There is a tighter feedback loop with your customer base that makes it easier to learn from them.
- It’s easier to retain revenue streams from renewals and future purchases.
- It is easier to make immediate adjustments to messaging, positioning, sales collateral, and resource allocation.
- You can shift and retrain staff appropriately as you learn about your business.
- For software-as-a-service (SaaS) companies, it’s faster to implement and push updates if you are in direct contact with your customer.
Startups selling physical products that are easy to visualize, such as designer fashion startups Warby Parker and PLNDR, are increasingly acquiring customers directly since they want to establish an emotional connection with them. The direct ownership of the customer base allows for a streamlined sales process, frequent back-to-base marketing campaigns, and top-notch customer support.
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Why Consider Channel Partners?
Depending on circumstances, sometimes channel partner acquisition makes more sense. Channel partners, including wholesalers, distributors, and resellers, take on some or all of the responsibilities of finding, closing, and supporting customers in return for a cut of the profits. The channel partner may retain the customer relationship, he may transfer ownership of customers to the company, or there may be a sharing arrangement with some form of licensing or revenue split.
Here are some advantages of finding channel partners:
- They handle sales and support so you can focus on other priorities. While you can avoid or defer sinking large costs into building out a sales organization, keep in mind you still need to oversee these relationships and align incentives appropriately to sell your product or service.
- Channel partners may have more success selling into specialized verticals, niches, and segments.
- This may be the most frictionless way to test out a foreign market when facing language and cultural barriers.
- For more physical products, they significantly increase customer exposure and access.
- They are a good fit for licensed software companies, especially if the customers are large and have trusted IT advisors whom they rely on for purchase recommendations.
Self-published books are a great product to distribute through channel partners. Authors care more about achieving scale than owning individual customer relationships. Hugh Howey self-published “Wool” for Amazon’s Kindle, and the wide reception propelled him into sci-fi stardom and a movie deal. Writers will increasingly turn to one-stop shops like Amazon for electronic distribution so they can focus on writing.
Should Your Business Focus on Direct or Channel?
Both strategies can be used in business-to-business (B2B) or business-to-consumer (B2C) contexts and can support a number of product lines. A practical first step is to identify the methods your competitors are using to sell their products or services. What’s working for them might work for you, too. You should also look at your prospective customers and how they make purchase decisions in general for your type of product. Do they research tools on Google? Do they consult with a trusted advisor? Arming yourself with this information gives you a starting-off point.
The practical next step is to conduct a basic bottom-up analysis that estimates revenues and costs to the best of your ability. Initially, direct acquisition seems more cost-effective because you won’t have to share revenue or educate partners. However, the hidden cost is that your startup has to build a large, competent sales and support staff. This can be expensive if you have open questions about your sales process that might require changes later. On the other hand, channel partners can take a chunk of your earnings, and it can be difficult to initially assess the value of partnerships.
Another consideration is to separate out and consider target markets independently. A strategy we initially pursued at LogMeIn was to go with direct acquisition at home but seek channel partnerships in foreign markets. If you use a local partner when growing your business abroad, the partner can apply cultural nuances and find a customer base you might be unaware of. In a similar vein, you may seek channel partners in specialized industries, such as defense or healthcare, where trust is essential and you may not have the relationships on your own.
Finally, don’t overcommit one way or the other until you know you’ve found the right model. For direct customer acquisition, don’t hire too many sales reps before you validate product/market fit or understand how to sell your product. For channel partners, big partners will try to take advantage of you when issuing terms, so don’t be so anxious to get customers that you give up years of exclusivity. If you focus too much on direct growth, you might miss quick opportunities to attract customers through partnerships. On the other hand, if you focus too much on finding channel partners, you could end up needlessly sacrificing revenue and losing touch with your customers. Find the right fit for you, and you’ll see your startup grow.