Scaling the Revenue Engine — Chapter 11: Channel Architecture
Channel is critical: choose carefully.
Channel strategy is a key component of your revenue engine, the final building block in the Mission / Strategy foundation layer.
The full set of building blocks in the Mission / Strategy foundation layer are:
- Mission, vision, and values
- Customer segmentation
- Value proposition
- Competitive positioning
- Brand identity
- Pricing and packaging
- Prospect and customer journey
- Channel architecture
Channels are your pathways to the customer. The channels you choose, and the weightings you give them, will significantly impact the breadth of your reach and the quality of your prospect access.
If done well, channel strategy is a force multiplier that will drive significant revenue acceleration and market share growth.
However, it’s critical to choose your channels carefully and then execute each with high fidelity. While many aspects of revenue engine strategy are like software (easy to iterate and optimize), channel is more like hardware (hard to modify once built).
Given the fact that channels are time-consuming and hard to build and often difficult to unwind, it’s especially important to think through major questions up front:
- Given the size of the potential outcome at scale, projected time to profitability, risk profile, and degree of implementation difficulty, what channels make the most sense to prioritize?
- If your channel choices imply finding partners, who has more leverage — you or your partner?
- What is the best approach to pursue the chosen channels including, where relevant, partner selection and deal negotiations / close?
- What investment weight should you allocate to each channel?
- How will you optimize ongoing channel execution?
- What level of involvement do you want your company to have with the end client during and after the sale of your product?
Channel choices run along a spectrum that includes both external (partner-driven) and internal (directly-controlled) channels. Each requires analysis including a careful risk / reward analysis to prioritize your channel selections.
The maintenance, support, and ongoing optimization of any channel are major commitments of focus, time, and resources.
Excessively limit your channel choices, and you limit your upside. If you open up too many channels without sufficient infrastructure, support, and funding, you may court disaster.
Depending on your business model, you can choose among nine channel alternatives (blue is your channel partner; green is you):
1. Independent software vendor (ISV)
- Examples: often vertical-specific
- Sell / distribute software for specific markets
- ISV may choose your software to distribute
2. Systems integrator
- Examples: large (Accenture) to small mom and pop shops
- Help companies rebuild and optimize workflows
- May choose your software as part of their toolkit and bring it into their customer’s company
- Systems integrator usually remains involved post-sale to launch, stabilize and optimize with your company’s support
3. Embedded OEM
- Examples: IBM; Toyota
- Your product is white labeled and integrated into their products, which is sold by them
- OEM owns direct post-sale support with its customer but may turn to your company for indirect support
- Examples: can run the gamut from a large company with a multi-location sales force to small, even one-person independent contractors
- You are primarily responsible for marketing
- Reseller sells
- Reseller prices your product and pays you a wholesale price
- You usually own post-sale support
5. Online marketplace
- Examples: Salesforce App Exchange, Amazon Business, eBay, iTunes
- Your product features in the marketplace
- Marketplace extracts a “rake” from you for each transaction (2% — 35% of transaction value)
- You own post-sale support
6. Co-marketer / direct sales
- Examples: Microsoft, IBM
- Your product and co- marketer’s product work well together
- You commit to promoting each other’s products and to selling collaboratively
- Each company finalizes the sale of its owned product separately
- You own post-sale support
7. Online fulfillment
- Your website enables the customer to buy online via an automated workflow
- You own post-sale support
8. Cold call direct sales
- No significant marketing effort
- You sell, you support
9. Lead gen / direct sales
- Marketing generates leads and turns them into MQLs
- Sales sells
- You support
Choosing Channel Strategy
So how do you make the decision as to which channels to pursue, in what order, with what level of investment? Here are the consideration factors:
- Company Stage
- Top Priority Segments
- Buyer Journey Attributes
- Product Characteristics
- Traffic Based / Lead Based / Account Based Marketing
- Channel Capacity
- Unit Economics
- Deal Structure
- Ecosystem / Partner Dynamics
- Pricing and Packaging Strategy
Consider a B2B SaaS business. In the beginning, angel funding gives you barely enough fuel to develop your minimum viable product. The CEO and co-founders execute the first few sales. You gain enough traction to raise a seed round and create a small sales team. There’s no marketing budget; it’s all about cold calling. Then, with further traction proof, you raise more funding. You now begin to make investments in marketing — in online demand generation, thought leadership, trade show booths, and so forth.
At every step, you made educated guesses as to your top priority segments, the buyer and user personas tied to each segment, the value proposition, competitive positioning, brand identity, pricing, and packaging. All of these are hypotheses, and they must be fully validated by your team before considering channel partnerships.
After you see a steady pattern of profitable, repeatable sales, retention, and expansion, you can put channel partnerships on the table.
A rational channel staging might look like this:
Top Priority Segments
A channel partnership is potentially a powerful way to enter a new segment or accelerate growth in an existing one. But such partnerships must be executed with care. An ill-considered segment-based channel strategy runs the risk of two types of friction:
- Channel conflict
- Price variation
The first is channel conflict. Channel conflict occurs when two sales teams are chasing the same customer — a typical result when no clear rules exist to define each sales team’s selling domain. How do you create clear rules? They may be geographic, vertical, size-based or any other binary criterion. The rule could even be “jump ball”: the first partner to bring in the deal wins. In healthy segment-based channel partnerships, the rules are crystal clear. Avoid fuzzy rules. They result in channel conflict.
The second friction problem is price variation. Price variation between channels can inflict great harm. If customers get the identical product at a lower price via one channel versus another without sufficient rationale for the difference, then you invite upon yourself strong customer dissatisfaction and brand harm. Assume perfect market knowledge and make sure any channel-based price variation is completely defensible.
Buyer Journey Attributes
At every step of the buyer journey (Top, Mid and Bottom funnel), channel considerations are paramount. At Top of Funnel, for instance, the challenge is to create awareness. One way to achieve this is via your direct channels (cold call, lead generation-to-sales, etc.). But ISVs, systems integrators, resellers, online marketplaces, and co-marketers can increase reach significantly.
On the journey from initial awareness to sale, a partnership with a trusted brand can transfer validation. For instance, when Siebel was an early stage startup, it executed a systems integrator partnership with Andersen Consulting (now Accenture) that put the company on the map and sparked rapid scaling. Later, its co-marketing partnership with IBM further accelerated growth. Ads in the Wall Street Journal promoted “IBM and Siebel,” creating a perception that Siebel was bigger than it was at the time. The rest was history.
Such brand affiliations reassure the buyer and reduce perceived risk. This increased buyer trust yields confidence and conviction. For you, it yields a shorter sales cycle and increased conversion rate.
Can you sell your product completely independently or does it depend on another product? Most software solutions, both B2B and B2C, must interface with the customer’s legacy software environment. Multiple integrations into diverse legacy solutions might need to be mastered by your company. But sometimes one (e.g., Salesforce) or only a couple (e.g., iOS / Android) of products are dependencies. Or, a key integration with a major player might open up a significant new market segment for you. Where any of these scenarios are true, a co-marketing partnership or embedded OEM deal with the company that owns the legacy technology might make sense.
Traffic Based / Lead Based / Account-Based Marketing
If you are a media or a marketplace company, you depend on traffic. In the early 2000’s, CareerBuilder negotiated two separate deals, one with AOL and the other with MSN, to switch both partnerships from Monster to CareerBuilder — and announced the agreements to the press on the very same day. A fire hose of job seeker traffic instantly shifted from Monster to CareerBuilder, quickly propelling CareerBuilder to the top of the job board space.
A wide array of online marketplaces exists for B2B companies. For several tech companies, Amazon and eBay are powerful channels. Many others take advantage of vertical-specific marketplaces such as GetApp. When combined with a company’s direct online demand generation activity, these marketplaces can be potent lead and sales accelerators.
Perhaps you run a B2B company with High or Very High LTV. In this case, you have the capacity to execute an account-based marketing (ABM) approach: you can mobilize a sustained, multi-dimensional engagement strategy for each prospect. A large channel partner such as IBM or Microsoft might give you access to a subset of customers that would otherwise be hard for you to reach. As long as you clarify assignment rules by geography, vertical, use case, size, or “jump ball” to avoid channel conflicts, such partnerships can be powerful. If done right, they allow you to divide and conquer, capturing more ground faster.
Whether you choose a direct- or a partnership-based channel or both, building channels out takes a lot of work. So it’s important to determine the total addressable market by channel. Each has access to some subset of your top priority segments. For each channel, if you assume that every potential buyer buys, what is that maximum sales capacity?
This number is obviously an important factor in your channel decisions. Of course, it’s not the only consideration. You must also factor in the degree of likelihood you can execute a partnership, negotiation time, speed to scale, and unit economics. But it all starts with the simple question: “If we perform very well within this channel, does it amount to much?”
Every channel alternative comes with its unique unit economics. It’s important to confirm that the economics make sense before you invest much time developing a channel.
In calculating unit economics for each channel alternative, it’s not enough to know the revenue split. Unit economics are a function of LTV (driven by the revenue split and the length of the average customer) and CAC (the cost of customer acquisition). So closely consider the cost side. Ask yourself this critical question: “Who is responsible for what?”
- Customer acquisition
- Customer support
- Customer success
- Expansion sales
An understanding of your unit economics by channel will help you clarify which channels are viable. A unit economic analysis is also a significant input as you consider how to weight investments in each of your channels.
In channel partnerships, there are many moving parts. The following deal terms are critical:
- Term, renewal, and termination rules
- Who owns what (especially with regards to data)
- Minimum partner performance rules
- Product SLAs
- Hosting SLAs
- Support SLAs
- Authorized segments definition
- Channel conflict resolution rules
- Selling rules
- Sales training
- Pipeline data visibility rules
- Post-sale customer support / expansion rules
- Pricing/ deal economics
Let’s focus on these three:
- Who owns what
- Minimum partner performance
- Pipeline data visibility rules
First, all things being equal, it’s best for you to retain responsibility for messaging and post-sale customer interactions. Your partner will be a communicator of your brand messaging, but you should retain control over that messaging. Similarly, it’s best if you can retain ownership of customer support and customer success unless you can be confident that your partner will execute these functions at the same level of quality as you. A choice to hand these functions over to a channel partner should not be made lightly.
Second, be sure to establish clear financial performance requirements for your partner. Failure to achieve minimum performance levels after a sufficient cure period should free you to terminate the entire agreement. It makes no sense to have a partnership in place that doesn’t perform to minimum standards.
Third, work hard to negotiate access to your partner’s prospect pipeline data. With access to this data, you will understand the funnel conversion dynamics of all your channels. This information will give you the metrics necessary to coach your partner and will help you further optimize your direct marketing and sales performance. Getting the data flows right is a critical channel partner success factor.
In an embedded OEM deal, you’re making a choice to bury your brand so be sure it’s worth it. Ask yourself these questions: Is the deal so substantial it transforms your company? Does it open the door to other significant deals (e.g., does one sizable auto manufacturer OEM deal give you the inside track to three more)? Can you compartmentalize the deal to one segment, while you pursue a branded strategy with other segments?
In all other types of channel partnerships, your partner has at least some influence on your brand reputation. You must ensure that your brand is represented to prospects and customers properly. Affiliation with your brand may be a driving factor in a partner’s interest in you. Or it may be the other way around. Or both.
Regardless, the marketing, messaging, sales training, and sales performance management actions of your channel partner not only impact the partner’s success but they also directly impact the perception of your brand in the marketplace.
So be sure you have the deal structure in place that ensures you can demand excellence in execution and brand fidelity.
Ecosystem and Partner Dynamics
Since channel partnerships tend to be rigid, long-term deals with onerous termination protocols under a non-performance scenario, it’s important that the motivation to perform is very high on both sides. This motivation is affected by the dynamics in the market.
If new technology is disrupting a dominant legacy company and you are a player in this new technology, there is the potential for a solid partnership. The more mission critical the partnership is to your partner’s success, the more the CEO and top team will be hard at work to drive towards success.
On the other hand, if the relationship is tactical (i.e., one of many sales partnerships) where success or failure is of no significant consequence to the partner, then the likelihood of partnership success is much lower.
Pricing and Packaging Strategy
As previously noted, pricing practices are often a source of channel conflict. It’s never a good thing for one customer to be able to price shop from channel to channel. Take, for instance, systems integrator and reseller partnerships.
It’s critical that you either negotiate price parity with your direct channels or have bright segment boundaries with clear and defensible price variation rationales.
One essential challenge to master is how to manage pricing as your product evolves. As you add product features, you may choose to introduce new packages at new price points. These will require negotiation with your partners. Make sure your partnership deal terms include a transparent mechanism through which to introduce changes in pricing and packaging.
Channel Strategy Execution
Channel Partner Pursuit
After defining the channel partners you seek to work with, the next step is to execute an efficient and effective plan of pursuit, a function of the business development role. For channel partnerships, it can be a long odyssey. It’s not uncommon for major partnerships to be 2–3 years in the making.
How do you track progress? As CEO, you must measure your VP Business Development’s progress by the achievement of milestones along the journey. The sequence of steps looks something like this:
- Choose top priority channels
- Within these channels, define all potential partners
- Rank potential partners based on impact capacity, degree of shared motivation, deal likelihood, projected deal terms, and compatibility
- Map the partner engagement and partnership negotiation process
- Measure progress along each step of the journey
As CEO, you should meet weekly with your head of business development. Expect steady movement from stage to stage towards a deal.
Eventually, you will have a completely implemented channel strategy with productive partnerships in place. Marketplaces will feature your products. But they won’t simply morph into an explosion of leads and sales on their own.
Just like your direct channels, partner relationships require precise management. Implement quotas and track weekly pipelines across all partner channels.
If you have a traffic or leads-based partnership, you’ll conduct ongoing A/B testing to optimize keywords, product descriptions, and pricing. If you sell via an ABM sales approach through a major reseller, you might embed a senior sales executive in the partner’s office. The quarterly planning, monthly review, and weekly accountability disciplines you execute with your channel partners will be instrumental to your success.
In sum, your chosen channels are where the rubber hits the road.