Given the every-increading need for start-ups to break-even sooner than planed, I thought I’d pass on some words of wisdom about selling and having the right sales strategy. A good friend of mine (and former software sales exec and VC), Miles Mahoney, recently posted an article on the VC Journal online and has given me permission to republish it here for my readers. Hope you enjoy.
Miles Mahoney of Indirect Sales Strategies says a company can expand its market share, maximize revenue per head and decrease its cost of sales by using the right blend of direct and indirect sales strategies
With the economy in recession and liquidity events few and far between, there is no better time for venture capitalists to consider the benefits of indirect sales strategies for their portfolio companies.
By using the right blend of direct and indirect sales strategies—as opposed to an all direct sales model—a company can expand its market share, maximize revenue per head, decrease its cost of sales, and increase its sales productivity. Indirect sales strategies are all about creating the greatest amount of sales and revenue leverage in the shortest amount of time and at the most reasonable cost.
I know this from more than 15 years of leading indirect sales efforts at some of the world’s largest independent software vendors, including SAS Institute.
But don’t take my word for it. Industry analysts like IDC and Gartner have research teams dedicated to working with their clients on channel strategies. Their reviews of software companies for end customers are very critical of those who do not have a “complete” sales strategy that includes both direct and indirect sales channels. Why? Because they do not want their clients buying software from a vendor that could go out of business because of its inability to grow its customer base and control expenses.
My experience has been that many VCs invest in software companies without a clear understanding of one of the most critical elements for those companies’ success or failure: their sales strategy. This is the strategy that will dictate how the portfolio company plans to increase revenue through indirect sales channels vs. direct sales channels; how it will drive market adoption, increase attachment rate of sales and services partners; and whether its product is “channel ready” and has a high probability to be OEMed, resold or distributed.
“Having the right sales strategy is important, but also leveraging the right tools can exponentially add value and real revenue to your strategy,” says David Folk, managing general partner of Jefferson Partners, which has been a client of my company, Indirect Sales Strategies. “In our investments in small and mid-sized companies, we have learned the importance of leveraging indirect sales strategies and how critical they can be for creating real growth for a company and its shareholders.”
Keys for Channel Success
The indirect channels approach has been used by the most successful software vendors to catapult them from an early stage companies to a market leaders. Some of the steps along the way to produce success include:
• Determining markets where indirect sales channels can propel an ISV into existing or new markets.
• Finding several key partners that will work with an ISV on the product requirements of the channel as well as those of end customers.
“By using the right blend of direct and indirect sales strategies–as opposed to an all-direct sales model–a company can expand its market share, maximize revenue per head, decrease its cost of sales, and increase its sales
productivity.” |
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• Building those requirements into an ISV’s production plans.
• And working with channel partners and several end customers to test the product as delivered by the channel.
The way we like to start in assisting a company in building their strategy is by putting together a solid “segmentation plan.” This takes an ISV’s existing and potential markets and determines the best sales channel to reach them. We may also segment by product as well.
Next, a company needs to determine the top partners in its particular market and product segments. This can be done in several ways, including looking at its competitors’ partners and also at companies with similar channel needs in complimentary or non-competitive markets.
Once a company has lined up qualified partners, it needs to get their input on their product needs, including functionality, installation, training, implementation and support.
Then it’s time to test the “channel-ready” product with a few customers prior to approving the product for general distribution.
The whole process—from ensuring that a product is ready for the channel to product launch can be measured in months if a company has a product that is a good channel fit and was really a finished product from the start. If a company’s time line looks much longer, that may indicate that its product doesn’t have the right “fit” for a particular market or channel. A long time line may also be an indicator that a company’s product isn’t truly complete and that the company needs to invest in finishing it, regardless of the sales channel.
Problems with Direct Sales
Early stage and smaller ISVs are constantly trying to address revenue growth, but they tend to go about it in the wrong way, costing their venture backers money and lowering overall VC returns.
A common mistake in direct sales is to rush to put more “feet on the street.” While additional direct sales resources can have a positive impact on revenue, the cost effectiveness of direct resources can be disproportionate to the actual results. This can negatively impact the balance sheet and diminish market valuation for acquisition.
| “While additional direct sales resources can have a positive impact on revenue, the cost effectiveness of direct resources can be disproportionate to the actual results. This can negatively impact the balance sheet and diminish market valuation for acquisition.” |
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In many instances, small ISVs rely heavily on direct sales as a way to mask fundamental product inadequacies or a lack of product readiness that is required to generate the volume of sales necessary to grow. Investors would be well advised to ask the fundamental question: “Why are all of your sales coming exclusively through your direct sales organization?”
Is there something about the product or the market that dictates that only a direct sales team can succeed with the solution? I have worked in and with a number of companies where dependence on direct sales insured delivery of products that were continuously customized and therefore never became “market ready.”
While a company must have a market-ready product, as that company matures it may want to extend its product line to develop a larger partner ecosystem that broadens its market coverage and increases revenue. At one business intelligence software vendor, our channel strategy led us to produce both a packaged product that could be used off-the-shelf and sold through distribution and a higher-end product that could be customized by our consultants or consulting partners.
Common Mistakes
Sometimes the need for an indirect sales strategy is recognized by an early stage ISV, but the company doesn’t understand exactly what is required for success. Critical issues such as product stability, training, installation and usage documentation are typically glossed over.
One company I worked with had a high-end product used by major corporations that it also wanted to sell to small and medium businesses. Its strategy was to sell the same product to smaller customers by reducing the price and selling through resellers. While there was some immediate success, the program could not scale because it didn’t address a critical need of small and medium businesses: a product that is easy to install and maintain. This important feedback led to the development of a simpler installation method for smaller customers.
Another common mistake among ISVs using a direct sales approach is to wait too long before product launch to address pricing, promotions and awareness. Often times, initiating those actions within weeks of launch results in delays, missed sales opportunities and last-minute interventions. A better approach is to establish a channel-based work stream that runs parallel to a phased product rollout. It helps to drive key decisions around sources of growth, product position and market timing implications—all key factors to channel success.
Leveraging the indirect sales channel doesn’t just reduce costs for an ISV. It also helps the company get to market with the product that best suits customers’ needs. Top-performing ISVs will ping their top-tier partners during concept phase to answer questions such as, “Can you integrate it with other products?” and “Can you make money selling it?”
By allowing some channel partners to have access to a product prior to channel launch, an ISV can garner important feedback. Also, it allows key channel partners to become “skilled up” on a product before launch and hit the ground running once the product formally hits the market. When channel partners are embraced and made part of the process, they have a vested interest to perform well.
Having a well-formed indirect sales strategy provides a proven way to generate additional revenue and increase your market share, while at the same time keeping an eye on spending and total head count for a better valuation. It is imperative for investors to insure their portfolio companies have the right sales channel strategy in place before capital is spent.
Miles Mahoney is the founder of Indirect Sales Strategies, which is based in Eagle, Idaho. Prior to Indirect Sales Strategies, Mahoney served as VP and GM of Global Alliances and Channels for SAS Institute Inc., the world’s largest privately held software company. Mahoney may be reached at (208) 631-3649 or at mahoneymiles@gmail.com.
By Miles Mahoney, Indirect Sales Strategies
