Channel vs Partnership — It’s all about Customer ownership!

Think of any traditional product company. The sales and distribution are always comprised of a few standard channels — Direct (via branch etc., company-owned portals, etc.), Agency (by recruiting agents who work on commissions), Intermediaries (like Banca, Corporate Partners etc.), with pretty much everything else that doesn’t meet a specific form and factor getting categorized as Alternate channels.

An Alternate channel would mean banner led advertising on a few partner portals, could mean attached product sales in specific partner apps, bundled offers as part of a partner product package, etc. Notice how each of these instances involves selling your product in someone else’s ecosystem. However, that’s all they are most of the time. A channel to sell your product to a relevant audience and part away with a cut to the channel partner.

However, we seem to be living in an age of renaissance for these alternate channels. The nature of what is a channel, and who is a partner has taken many shapes, especially in the newly minted startup ecosystem. To understand the remarkable change in the nature of partnerships, it would perhaps help to look at the high-level elements of a typical business — (a) You have a product/service (b) you find a way to reach out to your customer and sell the product, and © you service your customer on an ongoing basis. here’s what’s changed -

There are some companies that have become product experts. These companies are investing in building a robust product, say a unique credit model, a unique insurance product, or a new D2C offering like a gourmet coffee or a luxury watch. These guys are more focused on creating new products and refining them to an extent that the product itself becomes a non-replicable moat.

On the other hand, we have many companies these days that have become distribution experts. Find a unique and repeat use case that brings troves of people, and keeps them coming again and again for various transactions — the classic platform play. Preferably, there’s a unique and sizeable audience that the particular platform caters to. Once you have established this, you build product sales on top of this strong distribution, to either build your business model around it or maximize your bottom-line contribution.

This is unlike most of the so-called partners of the earlier generations. For almost all of them, the entire distribution was laid around a core product/service, both the product and distribution owned by the same entity and every partnership were in effect, just another, often minor, a supplementary distribution channel. Justifiably, most of them have been referred to as channel partners.

In the newer avatars of partnerships, an anchor co mainly owns the distribution and often owns it big (in many cases, being the only distribution channel in its relevant ecosystem). The products that are sold on this platform are well designed, unique propositions that deserve the full attention of a talented team in such product-oriented companies. These partnerships often start off on a parity basis, with each entity needing the other, to bring their product to the end customer and build their business models. And all of this makes complete sense right? A nimble, innovative company building the product, and partnering with distribution focused co. The product company can partner with multiple such distribution cos and vice versa, thus accelerating the pace with which newer innovative products can be brought to the market across all possible distribution channels to reach the end customer.

But every such partnership, at some point, will have to answer one uncomfortable question — who owns the customer? Is it the entity that builds the product which is consumed by the end customer or the entity that brought the product to the customer in the first place? This is an increasingly important question that every partner asks themselves, especially now that we are seeing multilateral partnerships involved in bringing a product to the market (think co-branded cards, neo banks etc.)

Now, what exactly do you mean by owning the customer? surely, the customer can act on his free will and choose to consume the company’s product or stop doing so. A customer has no obligation to any entity whatsoever, beyond the terms of the product/service consumed. So what does this mean?

“Owning the customer basically means having the final say in commercial matters or user experience presented to the end customer”

Think about buying an exclusive insurance offering from say, Phonepe. Who do you think determines the pricing, benefits and claims process for the end customer?
Think about buying a Citi co-branded credit card on Paytm. Who do you think owns decisions for the product benefits, underwriting process and service SLAs?

Both are examples of exclusive products sold in a very big distribution channel. But my subjective guess would be that in one of the situations, the distribution partner has the final say in all things commercial/UW, while in other cases, it would be the other way around. An easy way to determine the customer ownership in most cases is to answer this — “Who does the customer think is the product (hence service) provider?”

My guess is that in the case of Phonepe, the customer will reach out to Phonepe for any concerns with the insurance product bought there, say claims or issues with payments etc. Whereas in the case of Paytm, they’ll probably reach out to Citi cards for any queries concerns they may have on the bills or onboarding problems. In one case it's the distribution partner, in other cases, the product partner. It’s not just a matter of who the customer thinks they should reach out to for servicing, but also the servicing capabilities of that entity as well. In the above example, if Phonepe eventually redirects the customer for all queries to the insurance co., they are eventually handing out more and more customer ownership to their partner (of course there are many elements specific to the nature of an insurance product, for the time being, let’s ignore that). To own the customer, you not only need to acquire the customer's mindshare but also need to invest in servicing capabilities to continue to maintain that mindshare.

The reason it’s very important to define customer ownership is that it may end up impacting the overall sustainability of the partnership for either of the partners or both. To understand why it’s important to own the customer in a partnership, it’s perhaps better to understand the downsides of not being the customer-owner. If you don’t own the customer:

1. You are at your partner’s mercy and can be replaced anytime in favour of a competing product/service provider, sometimes even offering an inferior product or commercials to the end customer
2. Your partner will always command a higher share of the margins made in the end product sale
3. Cross-selling opportunities will almost always be restricted, and if allowed, would heavily favour your partner
4. Especially for product owners, the distribution owner will not share certain crucial details about the customer, inadvertently impacting the experience of the consumer, which impacts your credibility in the long run.

Not a great place to be right? You may claim to co-own the customer or exclusively own the customer, but if you are in the situation above, you are probably living in a false reality. And unfortunately, that tends to be the case with many of the mature partnerships — one entity starts controlling the relationship — many times that being the distribution entity. This leaves lesser resources for the product partner to invest in better capabilities and customer experience, which then justifies the distribution entity to leave less on the table as they see only marginal value addition from their product partner — a self-fulfilling cycle.

Things get even more confusing when there are bilateral and multilateral partnerships, where all the involved entities are aggressively trying to establish their right to customer ownership. As an example: today the customer of a neobank is bombarded with communications from both the neobank, the underlying banking partner and underlying investment partners (things like mutual funds, stocks, etc.) and sometimes other infrastructure partners too (like NSDL, CAMs). It is insanely confusing to the customer when he or she is redirected to various stakeholders, depending on the nature of servicing request (name change, closure, etc.). Hopefully, this is just the temporary state of things, and as the ecosystem matures, the ownership will be more defined — not just in the mind of the partners, but also in the mind of the customer.

So, are all partnerships eventually meant for doom? Definitely not. As a distribution partner, if you are able to bring in and retain more customers, and as a product partner, if you are able to meaningfully scale and add to the customer value on an ongoing basis, chances are that the partnership is going to have a long shelf life. Being very conscious about adding value to your partner and vice versa is a necessary condition for very successful partnerships. This is when both parties generally become accommodating of their partner and do not compete with them. This is when the customer ownership doesn’t matter as much as customer value.

Maybe it sounds a bit too idealistic. But in today’s age, when everyone is trying to scale rapidly at all costs, such deeper partnerships are unavoidable. The ecosystem will have to learn to grow with each other, not at the cost of each other.

Originally published at http://kushalkothari.wordpress.com on October 14, 2021.