SMBs Promise Powerful New Revenue Streams: If Large Vendors Know How to Tap Them
People have often asked me about the graphic below, which I created about two years ago. At that time, I was interested in finding out what some of the largest tech companies were thinking about in terms of their channel programs. As part of my research, I interviewed channel stakeholders at IBM, Oracle, Cisco, Symantec, and Microsoft and asked them about the types of programs they have and how their channel sales have evolved.
One thing was clear: at all five companies there had been an evolution from direct sales, to sales through a small number of large partners, to additional sales through a large number of smaller partners. The evolution in these vendors’ approach to channel sales mirrors the growth of small-to-medium-sized businesses (SMBs).
There's been an evolution from sales thru a few large partners to sales thru a lot of SMBs. Click To Tweet
The Rise of the SMBs
Increasingly, other large vendors interested in capturing SMB business are beginning to make this same transition to the indirect channel. The graphic was my attempt to construct a model of the key elements of the indirect channel sales motion, and to show where incentives can be implemented to help small partners capture more SMB sales.
In general, channel sales have allowed these vendors to focus on their core business—developing new products and selling them in quantity. While working with a few large distributors and partner organizations was sufficient in the past for the vendors to capture most of the enterprise market, things have changed. According to IDC, 54% of the addressable market for technology vendors are SMBs. Vendors have watched the SMB market grow, and they want a piece of it.
Channel Sales of Yore
If you think back to, say, the 1960s, companies like IBM relied on a direct sales force to generate sales. They had a small number of salesmen (and they almost always were men) who could make a few phone calls, book a couple of appointments, and sell large volumes of IBM computers.
But then as competition increased, sales became smaller. It became too costly for companies like IBM to justify the amount of resources that went into closing these smaller sales.
So they brought together a group of “Tier 1” partners. Vendors were able to work closely with this small group to turn them into trusted advisers. The vendors took the time to make sure these large partner organizations were very knowledgeable about products, and that the partners registered their deals, bought directly from the distributors, and handled returns and other product issues. The vendors sacrificed a few points to, in effect, multiply their enterprise sales force.
SMBs Pose a Challenge
It wasn’t long before vendors began to realize that there were a lot of smaller companies that could use their products too, if only the vendors had the bandwidth and the capacity to sell to them. For the vendors, it was all about trying to capitalize on their products and solutions in order to maximize their profits in this new market.
The SMBs were far too small for the vendors to sell to directly—too small for even their Tier 1 partners to sell to. It just wasn’t worth the time it took for them to go through the entire sales motion to close a $300 deal. It was worth it if the deal was going to be, say, $15,000. Otherwise, they would just let the opportunity pass.
Given that many SMB customers are used to purchasing from companies that they know and trust and that are of like size, this attitude makes sense. Small customers want to work with small resellers that know what solution service or a product fit their needs. Ideally, they want to work with resellers they’ve done business with before—who know from experience about the customer’s buying habits and as well as the customer’s user base.
The Ship of Industry Changes Course
Many large vendors understand these SMB preferences and are dedicated to bring on resellers that are appropriate to the market. The companies I mentioned are investing approximately 6-10% of their annual revenue into indirect channel programs. They’re making the investments because they see the benefits.
To get these same benefits as the larger vendors, second and third tier tech companies must follow suit. Like the larger competitors, they need to trust that these much smaller partners can fully represent them to customers. But that trust can be hard to come by since vendors don’t often have the kind of frequent contact with smaller resellers that they do with their larger partners. What the vendors need is infrastructure with clear terms and conditions, and established processes and policies in place, to guide these smaller deals.
The image above is a model for the kind of infrastructure that the second and third tier vendors need to put in place to build that trust. And the incentives (in red) are the sort of engine that helps them build it.
In the “old days,” companies usually paid one type of incentive—a pay-for-performance model that rewarded partners only for what they sold. Since then, many new kinds of incentives have emerged that reward partners not just for selling, but for changing their behavior and following practices that the vendor has established—all to prove that they can be trusted.
In my next post, I’ll talk about the specific programs that vendors are using to enable and reward partners that are driving the right kind of business in the right way.
ABOUT THE AUTHOR
John Walker, Business Development, EMEA General Manager at CCI
With 15 years experience in channel program development and support, John Walker manages CCI’s EMEA office and heads up our channel research team. He is regularly engaged to support strategy development and execution for some of CCI’s most high profile clients – EMC, Google, Plantronics, and Hitachi. John also supports CCI’s multi-channel and sales strategies and detailed implementation tactics.