Increasing company value by sales channels choices 1.1

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An introduction to the relative merits of Software distribution by direct or indirect methodologies, including topics like; Which Channel – Introduction, Why Use Indirect Channels, Company Valuations …

An introduction to the relative merits of Software distribution by direct or indirect methodologies, including topics like; Which Channel – Introduction, Why Use Indirect Channels, Company Valuations (Revenue, margins, operating income, gross profit), Basics of Software ‘go to market’ (GTM) models, Financial Comparison of GTM models, Qualitative Comparison of GTM Models, What do Resellers look for, What do Resellers offer, Reseller Costs, Reseller Compensation, Factors that make a Partner Channel Successful – For more information, contact Greg

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  • Example coke selling direct
    Products that are identical can achieve an enormous disparity ion their chice of go to market.
  • So you can see that there may be more effective methods than applying just one route to a market. In fact, choosing the wrong route may not work at all, imagine having a direct sales force selling coke directly to the end customer.
    In the software field it is important to look first at the customer and what they want and then work that back to the vendor to determine the right route to amrket.
    For instance, if your product is embedded in another in order to sell it, then you would be dealing with an OEM channel
    If, because of geographical coverage, you do not have a direct presence in a country, you may start off with an agent who provides introductions and first line contact with the customer – an agent channel
    If the customer usually buys your prodcut in conjunction with another (hardware, software or other) you may want to sell your software through that route – reseller or in thencase of added value a VAR
    If the customer is unlikely to purchase additional high value goods but you still want to maintain account management, perhaps the most efficient method would be ‘inside sales’ or telesales
    Some of the other routes that could be considered are; distribution, alliances, system integrators and so on
  • However, with any route to market, it is imperative that you do not lose sight of the two aspects of revenue and operating income – we are continulaly looking for ways to increase both by making the model more efficient.
    So, when we discuss each route as well as satisfying the ciustomer we must bear in mind hte costs, for instance, there is no point in staffing up an indirect route to market, making it less efficient than a direct one, so lets have a look at typical compariive results and costs.
    You can see that looking at a single sale the costs are similar, but the margin through a partner makes this model unattractive, however you can see the building blocks of getting the right channel
    The direct sales force are paid more, the expectation is that their win rate is better, because they are better trained, they may be able to work on larger deals more easily and probably have larger quotas
    The amount of support required by all sales will be similar and the costs of support should be equal as support engineers are paid equivalent salaries whether in the vendor or channel environment. Travel costs again should be the same.
    So the major variables are the costs and efficiencies of each operation (sales/pre sales etc) v’s the expandability of the channel. Very simply the channel model should be able to spread their fixed costs over an expanding number of partners.
  • A direct sales force is not approptiate for every company and certainly isn’t approprite for every stage in a companys lifecycle. A small company may not be able to to afford its own sales force, so it may need to utilise an indirect method until sales and profits are enough to afford the fixed expense of a direct sales force
    In addition it would be less profitable to have the direct salesforce involved with smaller customers or those in outlying geofraphies
    Indirect can afford to engage with these by sdelling other products too and spreading the cost over all these product sales
  • The best way to control

Transcript

  • 1. Sales Guerrillas Increasing Company Value By Sales Channel Choices An introduction to the relative merits of Software distribution by direct or indirect methodologies Produced by Sales Guerrillas 1
  • 2. Contents Which Channel - Introduction Why Use Indirect Channels Company Valuations Revenue, margins, operating income, gross profit Basics of Software ‘go to market’ (GTM) models Financial Comparison of GTM models Qualitative Comparison of GTM Models What do Resellers look for What do Resellers offer Reseller Costs Reseller Compensation Factors that make a Partner Channel Successful Produced by Sales Guerrillas 2
  • 3. Which Channel - Introduction A direct sales force is not appropriate for every company and certainly isn’t appropriate for every stage in a company’s evolution. A small company may not be able to afford it’s own sales force. It may need to utilise an indirect channel until its sales and profits performance improve enough to afford the fixed expense of a direct sales force in the field. In addition it would be unprofitable to have your highly paid and efficient direct sales force spending time on smaller deals, outlying geographies, segments that they may not know, and so on. Indirect channels can afford to engage in these areas by selling many other manufacturers product lines too. By doing so they spread the same cost over several product lines. When a territory is producing several $m of sales it may be time to think about using a direct operation, but this is a P&L exercise in justification. Going from an indirect to direct in a single country may require additional expense of legal, HR, marketing and so on. It is not just a straight swap. Most companies at some time conclude that they must pursue indirect channels to survive and grow Produced by Sales Guerrillas 3
  • 4. Why use Indirect channels The benefit of indirect channels is that it is a cost transfer business. Essentially the cost of doing business in a direct sales model; the sales person, pre sales, pre sales consultancy, training/implementation, cost of support is borne by the indirect channel. This is completely cost ineffective in a small channel, as not only do you have the costs of support, but also the reduced margin because you are giving a percentage to the reseller. But, when it is scaled up, eventually there is a cross over point when those resources are spread across many resellers, and even when offset by the margin given to the channel, result in a higher operating margin than the direct route. In addition, working with; distant geographies, distinct market segments and smaller customers, in each area the channel has the solution required by the customer and this will normally drive vendors to consider channels more seriously. However, just moving accounts to a channel does not produce the same result. If the channel is just a lower cost salesforce, this is something the vendor should not overlook doing directly. When moving accounts in this fashion, margins should be reduced so that operating margins are not negatively affected and the channel should be rewarded on increases in business, not just maintaining the transferred accounts Produced by Sales Guerrillas 4
  • 5. Why use Indirect channels Worst Cases Without the right routes to market, you simply won’t reach your target market. In a competitive environment , you may find that your route to market is your only differentiator Usually your company will have all the figures to model your direct salesforce. In the same way the Key Differentiator of the Successful Indirect Vendor is a laser like intensity on the commercial dynamics of the relationship based on the understanding the key measures that matter for reseller and by good visibility of how these measures are performing on a regular basis Produced by Sales Guerrillas 5
  • 6. Company Valuations Company valuations depend on a host of factors and there are many different methods of calculation. Some of the factors that are taken into account are; turnover, profit, yield, EPS, return on Equity, Operating margin, Interest cover, dividend cover, assets, cash flow, free cash flow, return on capital employed and a hundred other factors and their derivatives. However, there are some fundamental characteristics that drive the valuations of software companies and these are the characteristics that stockpickers look at, to govern their choice of stock. These people are looking for undervalued companies that have the opportunity to increase in value because other investors have not noticed their valuations. Whilst again there are numerous methodologies; takeover targets, merger arbitrage, recovery plays, director share deals, technical analysis, and more, here we will deal with the conventional efforts of the sales operation to add value. Produced by Sales Guerrillas 6
  • 7. Company Valuations • Stockpickers are looking for companies that exhibit the following basics • Increasing revenue qtr by qtr, year on year • Increasing profits year on year • Increasing earnings per share year on year • Growing software companies are unlikely to pay dividends so these are not looked at • Low Enterprise Value / EBITDA – this takes out the problem of debt • High Operating Margins indicating low levels of competition • High levels of recurring revenues from maintenance or SaaS agreements Again, these are simplified measures but you can see the importance of ever increasing revenues and margins, and of course, when these are projected into the future the stock price increases, based on the expected earnings per share increasing into the future. Produced by Sales Guerrillas 7
  • 8. Company Valuations • • Let’s look at a typical example, taking data from Yahoo Finance for a US software company The Operating Income is (49,440) and every resource concerned with taking the product to market comes under either the SG&A row or Cost of Revenue, so, obviously, affects the Operating Income. With Channels, the net revenue is included in the total revenue, (so no costs), apart from those supporting the channel, which again would appear in the SG&A row or Cost of Revenue Produced by Sales Guerrillas 8
  • 9. Company Valuations Definition of 'Operating Income' The amount of profit realized from a business's operations after taking out operating expenses - such as cost of goods sold (COGS) or wages - and depreciation. Operating income takes the gross income (revenue minus COGS) and subtracts other operating expenses and then removes depreciation. These operating expenses are costs which are incurred from operating activities and include things such as office supplies and heat and power. Operating Income is typically a synonym for earnings before interest and taxes (EBIT) and is also commonly referred to as "operating profit" or "recurring profit.“ In order to increase operating income, we need to; increase revenues and decrease the other aspects (costs), one method of doing this is by utilising the optimum route to market. This could be what we know as; direct sales, indirect sales, inside sales, telesales and their combination and derivatives (distribution etc). Produced by Sales Guerrillas 9
  • 10. Basics of GTM Models Produced by Sales Guerrillas 10
  • 11. Basics of GTM Models This interactive spreadsheet can be found at ……………………. Produced by Sales Guerrillas 11
  • 12. Financial Comparison of GTM models This shows the cross over in gross profit between direct, agency and channel sales. The shape and crossover are dependent on the inputs and, more relevant is that either route may find it impossible for a given market, e.g. Enterprise sales for indirect, far flung geographies, activity driven sales and so on. So often, it is not a choice of direct or indirect, simply that only one will be effective, and therefore, the question is how to how to make that route efficient Produced by Sales Guerrillas 12
  • 13. Qualitative Comparison of GTM Models Direct routes Give immediate customer insight and can instantly respond Do not give margin away to a third party Are usually better trained, more knowledgeable about the market, and possibly a higher calibre of sales professional, all due to the investment made by the vendor. These staff are more valuable in high earning accounts – majors, internationals, global, enterprise You have control of the sales force; where to sell, what to sell, how to sell, pricing, termination, activities to support company image You have complete commitment, exclusivity, usually a higher target, usually a better quality sales person, usually a higher paid salesperson, usually a higher close rate, better subject matter expertise, you have contract ownership Indirect routes Increased reach, could provide; special services, position the product in an established channel, have immediate access to a defined segment or geography Require a margin, dilute the sales force, introduce competition, distance the customer May have a reduced cost of sales if correctly run, reduce your revenue, possibly good for smaller customers outlying geographies, lower value products, different market segments Offer; a ‘one stop shop’, credit, tech support, supplier efficiency and cost effectiveness by leveraging their assets and infrastructure, local service and support, local inventory, Ease of Produced by Sales Guerrillas 13 doing business – sales, marketing, billing, consultancy etc., Community presence
  • 14. What do Resellers look for The Reseller wants A competitive product and money. The only relevance of the product to the reseller is convincing them that the end customer demand will be higher for that product than your competitors or hopefully for the other products they sell. Reseller evaluates Customer appeal, margin, cost of sales, cost of support, lifecycle, returns, warranty claims, promotional spend, stocking requirement, add ons, up sell, finance and credit terms The vendor wants Market education, product management, marketing, promotion and sales We are selling the channel value proposition, NOT selling our product, and this is exactly how a second rate product can and does win Successful suppliers understand all this, and all channels respond positively to the supplier that has invested in understanding their model (not the vendors!!!) 14 Produced by Sales Guerrillas
  • 15. What do Resellers Offer Typical Core Offering Demand generation Marcomms, segmentation Telemarketing, telesales mailings Lead generation, exhibitions, seminars Case studies Pricing management MDF and Coop funding deployment Sales Sales staff, promotions Pricing control, phasing and payment Supply Fulfilment Delivery, installation, implementation, training 1st line technical support Market Information Channel, product and customer feedback Services Specialised Offerings Demand generation Value based audits Sales Global account creation Services To vendor and other resellers Produced by Sales Guerrillas 15
  • 16. Reseller Costs On the right is a sample selection of costs that a reseller has to cover Marketing Ensure your value proposition is better than their other vendors to ensure you get ‘mind’ or ‘sales’ share’ In any costing analysis ensure you are covering the resellers overhead costs as well as ensuring they make an operating profit Marcomms, Telemarketing, Inside Sales, Seminars, Roadshows, Exhibitions Sales Sales staff with commissions, pre sales, post sales, implementers, discounts Transactions SOP Logistics Offices, admin staff, cars, telephones, computing, delivery Inventory Stock holdings, returns, non payments Finance Credit, DSO Produced by Sales Guerrillas 16
  • 17. Reseller Compensation Historically set margins we offered or simply a ‘buy’ price but now ‘base’ and variable margins offer a more flexible approach to rewarding good business practice. However, check with ‘legal’ before you adopt for a country to ensure you are not breaking local law. Also, before you implement, ensure that your company processes can quickly calculate and pay the reseller, if not, don’t even attempt them, there is nothing worse than not keeping promises Margin, rebates and back end margin Rewarding exceptional/over target performance Deal registration Performance ranking and tiers Forecasting accuracy Marketing spend and effectivity Pre sales support Post sales, implementation support Reduction in debtor days Certification Training attendance Partner events Free training/consultancy days Coop and mdf Competitive discounts Exchange rate fluctuations Free event attendance Produced by Sales Guerrillas 17
  • 18. Factors that make a Partner Channel Successful Think like a Customer and a Partner - In the same way as ‘thinking like a customer’ makes a direct route successful, think like a partner. What could we do to ‘delight’ the partner? Ensure that campaigns, policies etc. work for; the customer, the partner, the partner salesperson and principal, channel management and the vendor. Work towards a partner community, so that it borrows resource from each other and shares best practice, if not the partners can be a drain on central resources Publish results monthly so partners can compare performance, and reward success publicly (best partner awards) Ensure that joint funding produces measurable results and really treat the partners as extensions of the company – would you charge a salesperson to; attend training, attend kick off etc Build a relationship on trust, beyond the company contracts. There will always be problems as the fundamental objectives of the vendor and partner are different, but you need a person who can do the best they can for the partner community, given the problems that will arise. Produced by Sales Guerrillas 18