You built the product. You hired the sales team. You made the marketing investment. And you even sold your product to dozens of enterprise customers. Your customer base is strong, but you need to jump to the next level to continue the ever elusive hockey-stick growth.
Most startups reach a point at which scale becomes a crucial part of their growth strategy — they need to reach thousands of new customers in much less time than it took them to reach their first hundred. This is when a channel strategy can be most helpful.
Which channel strategy makes sense for you?
In the simplest terms, a channel strategy is a way to leverage partners to quickly get your product in the hands of thousands of customers, without having to rely solely on your internal salespeople.
What’s in it for them?
When evaluating channel partners, it is important to understand how different partners monetize. When you know what’s in it for them, you can focus your attention on the partners who are likely to invest equally in your partnership.
Channel partners make money in a few different ways:
- Transaction fees — charging X% on each sale, usually ranging from a few percentage to double-digit percentage points.
- Back-end rebates — These are kick-backs to the channel partners based on volume, technology, behaviors from the partner, etc. These can range anywhere from 1–5% of revenues.
- Market development funds — Think of these as marketing costs to sell your product (i.e., if the channel partner does X for the startup, you’ll pay them Y). These percentages are usually negotiated on a contract-to-contract basis. When starting out with a new partner, making the right investments in advance may be required to capture a go-to-market focus with the partner.
When should you invest in a channel strategy?
While most startups engage with channel partners much later than they should, the best time to invest in a channel strategy is after you have successfully sold your product to at least dozens of customers. That typically means you’ve been selling for at least six quarters before you engage any channel partner. Why wait this long to scale? Think of it like the game of telephone: if your message (or your product) is inconsistent as it moves through channel partners, you lose control of what the customers end up getting. Plus, you may exhaust internal resources if you’re not ready to handle scale.
If you’ve been successfully selling for over a year, you need to decide how many customers you want to reach and how quickly. Can you get there on your own? If not, how many channel partners do you need to get there? Do you have the resources to enable that many channel partners? At this stage you may want to bring on a VP of Channels to spearhead this effort; there are also companies like Vation Ventures who can help you navigate the channel partner ecosystem and develop programs, processes, and tools you need in place to have an early successful channel program.
Once you’ve worked out the answers to these questions, you can start exploring which channel partners are right for you. A smart way to accelerate channel adoption is to offer a higher margin initially (i.e., 30%+). This will entice the channel partner to focus on selling your “riskier” product instead of a “safer”, more traditional technology which may be offering 15–20% margins. Once your brand takes off and the product is differentiated enough, then the pendulum swings back in your favor and you can reduce the margins to a more competitive rate.
In conclusion, while the channel partner ecosystem is rapidly evolving, startups need to start thinking about formulating their channel strategies early. This way, you’ll have a set path to engage with channel partners after six quarters of selling directly. This will also help you move fluidly to a channel model from direct selling and scale faster.