November 28, 2005
Atttenuate Goliath’s “Channels of Distribution” Strength
This post is part of the overall posting “How Can David Beat Goliath?- Strategy #7: Attenuate Goliath’s Strength“:
As a large company, Goliath has a well-developed set of channels of distribution, both direct and indirect in many cases. Channels of distribution come in several flavors, including:
Direct distribution approaches
- Field sales into large enterprise
- Telesales into small and midsized businesses, departments of large enterprises, and municipalities
- E-commerce sales to consumers and individuals at businesses (of all sizes)
Indirect distribution approaches
- Through systems integrators to large enterprise and large government
- Through VARS/Resellers with or without distributors
- Through big box retailers to SOHO and consumers
- Through e-commerce affiliates
- Through OEM approaches to all customer categories
The large company has spent years perfecting its channels of distribution and generally has well thought out approaches that function very well.
Attenuating the large company channel of distribution strength…
While the large company starts with a significant advantage, there are a several approaches that the emerging growth company can use to help minimize the large company strength and, perhaps, gain an edge:
- Align yourself with the large company channels of distribution if you have complimentary products to the large company. This is a straightforward approach that works if you are truly complimentary. (It works best if the large company agrees that you are complimentary and agrees to help!) This could result in you getting introductions to prospects as well as gaining valuable indirect channel partners.
- Align yourself with your large competitor’s large competitor. Two companies competing with the same large company might be natural allies.
- Focus on the Channels of distribution where the large company isn’t involved or where the large company has some issues. This would generally be indirect channel partners who have great relationships with your target customers that for one reason or another are not working with the large company (for example, different geographies, bad relationship, channel conflict with the large company’s direct sales force).
- Develop your channels of distribution that have more efficiency than the large company’s channels (note, this really needs to be part of an overall strategy that includes simpler and more targeted product, lower price, more efficient customer service, which I describe in “Aiming Toward the Economic Singularity“). The basic concept can be a significant advantage over the large company, as they will have difficulty building their more efficient channels (even more difficulty than you will, as they already have a distribution approach in place that will have conflicts, both internal and external). For example, use telesales into departments of large enterprise (and the SMB market) if they have field sales into large enterprise, use the indirect channel if they have only direct telesales, use e-commerce approaches, etc.
No matter what distribution approach you choose (excluding the OEM approaches, which are highly varied), the following approach seems to be the best practice:
- Start with direct distribution. You need to have direct access and relationship with the end users so that you can perfect your product, services, and marketing messages. You also need some reference customers!
- Once you have perfected your value proposition to your customers directly, you can work on expanding your reach through building up your indirect channel. Some thoughts:
- You should do your homework and truly understand the segment of channel partners that are best for you. This is the exact same process as choosing the right customer segment and will take real work. Just so I am clear, it may turn out that there are not appropriate indirect channel opportunities for your product. If there aren’t, don’t push it, as it won’t work!
- You need to perfect the value proposition for the end customer before you approach the channel. While there are some exceptions, this rule is important, as there is no reason a channel partner should work with you if you do not have a solid “package” to offer their customers.
- The best indirect channel relationships seem to start with the emerging growth company offering value to the channel partner rather than the reverse. You need to develop your value proposition to your channel targets (this is very similar in concept to the approach to developing your value proposition to your target customers)! Note that this will take some effort and resource to do right! The key question that you need to ask is “what is in it for them?” (Btw, the best way to find out is to ask them who they currently do business with and why, what there ideal scenario is, and how can you craft a package that will add the most value for them).
- Put in place a training program and website specifically to address the channel partner’s needs. You need to treat them like your most valuable customers, as they truly are customers!
- Once you have your value-proposition right for the channel partners, you need to “prime the pump.” If you have ever siphoned gas from a gas tank, you know that just putting the hose into the tank and into the bucket doesn’t do anything (which is the same thing that will happen when you sign up most channel partners if you don’t “prime the pump”). Just like you need to suck on the hose to get the gas flowing into the bucket, you will need to offer up leads and help close some deals with each salesperson/group at your channel partner so that they can learn how it is done and also see how easy it is to make money relative to selling other products and services that are in their catalog.
- Start with a very small number of target partners. Remember my magnifying glass analogy? If not, take a look.
- Indirect channels take a very long time relative to direct channels to build. They also require you giving up some of the economics, which is hard for many companies to swallow (especially if they have a direct sales culture). My view is that if you are building a large company OR if you have a product or service that is naturally an indirect channel sale, then you will want to pursue this strategy. If you need or want short-term results, however, then you will need to pursue a direct strategy.
- As with every other specialty in your business, there are a lot of complexities with respect to the indirect channel. I highly recommend that you hire an advisor or full time person that has this type of expertise to help you both build your channel strategy and execute it.
Large companies do have the advantage that they have great channels of distribution. However, developing a targeted approach to building your own channels can help attenuated the large company advantage. If you adopt the strategy of going after a different channel, particularly if it is part of a strategy of “aiming toward the economic singularity” or a strategy of focusing and delivering superior value to your niche then you can gain an edge, possibly a large edge in the longer term!