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the matrix: think distribution
Internet is not a market; the Internet is a channel. Every organization,
regardless of what they sell, should have multiple paths and means of
distribution. It should be a matrix. It does not necessarily have to be put
together all at once, but, if you have only one means of sales, you have much
too high a risk quotient to be able to sustain success and have the economic
return that you really need.
does that mean? There are multiple ways of defining distribution and multiple
distribution methods depending on a lot of factors that we have already talked
about a little bit.
you have a direct channel for example, meaning that you have salespeople
calling directly on end clients such as the Fortune 500 or Global 5000, then
you have feet on the street. It is the highest cost mechanism you could
possibly have, and it typically is used when you're selling solution products,
complex products, complex concepts and strategic concepts. It has the longest
sale cycle. We saw sales cycles for complex software products that were
typically a year or more. To put salespeople on the street with the technical
support they needed, it would cost typically $250K, $300K, $400K per year. And
you know what? The average turnover rate is about 40%, both voluntary and
involuntary, plus the average time to productivity is six to nine months, so
it's very expensive. On the other hand, if a direct salesperson is successful
and they establish customer relationships, they can generate, $1 million, $2
million, $3 million per year in sales. After you cover that $300,000, it pretty
much drops to the bottom line, but it's high risk with high up-front costs.
you go through resellers and integrators, it’s high volumes and lack of control
over what they do. You have to train them, you have to incentivize them, and
you compete for their attention because there are other things that they
resell. In essence, you're selling for them, they just happen to be an
is a great thing to couple along with direct sales, meaning you can fertilize
the marketplace by having people on the phone who can be very, very productive
at reasonable cost if they are professionals. Hire very experienced
professionals in that role, train them well and they will fertilize. If it's a
very high transaction potential, you may then have a direct sales person or a
reseller go along and capture that business. Locally, OTG Software has a great model for this.
They basically have telesales, they have resellers and, when they get to a
certain level, a direct salesperson takes over the account working with the
reseller and the partner. They share the commission, so they get rewarded. It's
part of that matrix.
on to distributors, you may have components, you may have little things that
get bundled into other products. You have a typical software module that gets
bundled into a larger software module, which becomes a solution. You're selling
into someone who OEMs and, in turn, creates something for the end user.
to Web-based channels, if you think that selling over the Internet is a recent
phenomenon, it isn't. It's been around for a very, very long time, since at
least 15 years ago. There is a company called McAfee
that we all know, now part of Network
Associates. McAfee had anti-virus software that was downloadable from the
Web, or, rather, from the Internet, because the Web really hadn't been
developed at the time. It became an extraordinarily successful, Web-based
company. This is also a channel by which you can do customer support and
marketing, but it is not, in and of itself, a sustainable distribution
you take all the things we just talked about and ask, “How do I plot this on
the curve? How do I figure it out?” Well, take a look at this, which is
The variable cost is on the Y-axis; the
distribution mechanism and method are on the X-axis. It basically says,
starting at the left where you have a distributor, moving to resellers and all
the way up through the direct model, that your variable costs to go through
each channel will rise as a function of how close you get to the customer. At
the same time, the transaction price should rise as it goes from the left to
your graphs are backwards, you're never going to make money. If you have a
high-tech sales method with a low transaction price, it's the kiss of death.
You can make this as sophisticated as you'd like. You can start to plot your
average transaction today and tomorrow, and you can begin to figure out whether
or not you've got the economics of distribution to work properly.
is another method of distribution as well, which is through partnerships. We've
all seen partnerships. It goes back to the concept of fertilizing or, if you
will, softening the battlefield for the infantry.
more than ever, it is very, very difficult for a lone organization to be
successful in the distribution or sales method without working with the other
providers of technology or services to that end consumer. An operating system
won't work without a chip; an application software package won't work without a
database; a database won't work without an operating system. You don't
typically have an application from Siebel without
having an application from Oracle. You
don't typically have a systems integrator doing work for you without having
another subcontractor to that systems integrator. Depending on whom you're
speaking with--a consumer trying to figure out what to put on their desktop all
the way through an IT director or CIO at a Fortune 10 company--the person has
to deal with a huge number of companies vying for their time and budget. The
best thing that you can do to help your sales and distribution is to make it easy
for the purchaser by explaining to them that you've done integration work with
your technology, product or service that makes it easy to work with something
they already have. You can be someone selling system management products for
performance over the Web and you focus on companies that have Oracle databases.
By that last definition, you have made it easy for the buyer to understand how
to conceptualize what you do for them, and you've made it easier for the
salesperson to identify the target to whom they sell. You may have cut about
40% of your marketing budget by being able to do that.
you look at this index [below], it basically means that there are a lot of ways
to go out and fertilize, or soften that battlefield, by having relationships
with other firms who do the same thing.
way to conceptualize this is that, at the far left, you could have something
like a joint press release with a company. It may not do a lot of for you, but
it at least gets your name out as a promotional thing. There’s not a lot of
value to it over the long run, but maybe you do one of those a month.
may have a marketing relationship or a co-op arrangement with another firm
where you share leads and cut each other in for 10%, making joint sales calls,
perhaps. That may be helpful.
you have a market relationship where you're in a sub-market. We talked about
Oracle a minute ago. You may sell only to Oracle users, or you may sell only to
companies that run Linux. That's a market that gets defined. Who is the leader
in that market? You need to have a relationship with Red Hat or some other organization, because
you're a sub-market within a market.
may have a technological relationship where you embed some technology from
someone else into the product that you own. That relationship becomes much more
dependent because your product won't work without that other one; and vice
versa, someone else may put your product within theirs, and that becomes a
you have a financial relationship which essentially means that maybe a
strategic partner has invested in you, so, you, in turn, are dependent upon
them for some type of sales and distribution relationship.
bottom line to all of this is that there is a lot to think about and a lot of
what I said is really qualitative as opposed to quantitative. On the other
hand, what you really need to look for are definition, analysis, quantification
of your market, thorough understanding of the alternatives and a matrix of
distribution mechanisms where there are corresponding margins in economics.
you very much.
the audience: q & a
I’m Alex Norco of Okron Data. Could you
give a typical example of an IT services buyer? How do they buy and how do they
Burton: Sure. The first
things an IT buyer would normally think of are: What is the task at hand that I
need to accomplish, and what has my manager told me that I need to do in order
to get it accomplished? That means things like: Do I have to have high quality?
Do I have to have low budget? Is it a strategic item? Is it a tactical item? Do
I have to work that new service provider in with a matrix of others?
can be sure that the IT services buyer has 10 sales call a day from various
firms wanting to sell them services, so I think it's very important to
understand what he or she wants and then try to conceptualize your product. The
first thing that the best salespeople do is listen. They have four or five
questions that they ask to try to understand what it is, then they turn the
services that they sell into something that meets those criteria--if, in fact,
most important is that all of those folks are working under an increasingly
compressed budget with an increasingly compressed timeframe and they've got far
too many vendors that they have to deal with. They're looking for something
that differentiates and makes it easier to deal with a particular vendor.
I'm Marc Hausman with Strategic
Communications Group. John, one of the things you mentioned was that you
can't do sales and distribution without marketing. Could you comment on the
role that advertising and public relations play and what types of advice you
provide to your portfolio companies?
Burton: Advertising and
public relations are obviously very important in the sales and distribution
matrix. I think it's a question of what role you expect them to play by
defining to whom you sell. If you identify that you're selling to the IT
organization in the Fortune 500, you can then help to define a public relations
program and an advertising program. You may define that you can't afford an
effective advertising program, but you ought to start with public relations.
should choose your public relations and advertising firm as a function of how
they understand the objectives you've defined in the way we've talked about,
and whether or not they have done anything to focus on the constituency to whom
you're selling. You'll find your salespeople always say, “I don't have enough
leads. We're not in the press enough. Nobody knows who we are.” PR and
advertising help those things, but they’re not a sole solution.
Hi, John, I’m Howard Friedman with e-cerv. What
are your thoughts on the balance in your distribution mix, particularly early
in your company life cycle when you're actively looking for distributors and
partners? As a percentage, perhaps, what do you think is an acceptable mix?
Burton: I've seen
companies that have completely indirect sales models that rely completely on
partners to sell for them. To get back to an example I mentioned before, OTG
Software had a 100% reseller market until about 9-12 months ago when they
started a direct channel. The more indirect sales you have, the more you have
to hedge your bets. I'd say lower price, more indirect, the more you have;
higher price, more strategic, the fewer you have because they are more
expensive to maintain. It depends almost entirely upon whom you're selling to,
their budget and the transaction size of the service or product. I don't think
there is any magical answer, although I'd say that a healthy mix is what you
In partnerships, do you, in effect, become a distribution channel for any other
Burton: Maybe. It's
important to understand what your partner is trying to accomplish as opposed to
what you want to accomplish. In many cases partners are not looking for
anything other than differentiation from someone else that they deal with. In
some cases they are looking for you to help them sell their products or sell
them completely. The biggest mistake that I see is trying to get partners
without understanding their objectives and economics. It can be any one of
those things, and that's what you need to examine--whether you need help
selling, they need help selling or whether you both are stronger selling
together, which, in many cases, is what drives mergers and strategic
relationships of real detail.
Good morning. I’m Brad Barker with Hope & Care International. Earlier in
your presentation you alluded to what seems to be the cry of the entrepreneur,
“nobody understands me” or “nobody understands my technology” or “it's very
difficult to explain.” Can you give some advice, from a sales perspective and
an investor's perspective, on how to drill down and get to that core component
so that it's easy to understand, whether it’s an elevator pitch or otherwise?
Burton: That’s also a
very difficult thing to answer. The best way to do it isn't by relying on an
explanation of the technology, it isn't through seeing a demo and it isn't in
hearing just what one customer says. It's all of those together because
different venture capitalists will approach problems in different ways. Some
are going to approach it from a technical standpoint, because they feel very
comfortable on the technology side; others are going to feel comfortable from
the market side and may or may not have experience with it; and others will
look at it and say, “Well, I know that market space, so how good is the
management team and how much experience do they have?”
elevator pitch is terrific, but the presentation of why your company or product
or service is different should have a very, very pithy statement about what the
sales channel is and why it's different, what the technology is and why it's
different, who the clients are and why they like it, the problem it solves and
why and, most importantly, why they can't live without it. Often I hear why the
entrepreneur thinks it's important
and why he or she thinks the customer
can't live without it, but the customer could care less. What you tell a
potential client about your product is the same thing you tell the venture
Hi, my name is Kimberly Sclarsky with 2s2i.
I'm interested in knowing how you create a sense of urgency within your target
audience, say Fortune 1000 companies. Do you think it's a function more of the
selling process or the marketing/PR end?
Burton: If I could
answer that precisely I would have made the largest breakthrough in the world,
made my job as a CEO a lot easier and been able to avoid the phenomenon in
which 80% of your sales occur in the last two days of the quarter. What I can
tell you is that it's always easier to create urgency on the part of the client
when you understand his or her objectives and time lines, explain your
objectives and time lines and then try to qualify whether or not your
objectives can really be met. Often what happens is that a salesperson is
really trying to push something uphill that isn't ready. The way you create the
urgency, I think, is by understanding what the solution is going to be and why
there is value.
quick anecdote. Often when I did territory reviews I'd ask salespeople, “When
are they going to buy?” They'd say, “Well, I've talked to them. They all agreed
and consented. It's in their budget; I've checked that. They are going to buy
at the end of October.”
now October 15, so I'd say, “That's great. Have you sent them a contract?”
no, but they said they are going to buy.”
say, “How do you know they are going to buy unless you send them a contract? If
they don't want to look at it, they're not going to buy. If they don't like
what the contract says, they are going to buy and they're negotiating it.” It's
a multiple means of creating that level of urgency by a standard sales process
definition and execution. At the end of the day, the easier you make it for the
client to decide, the more work you do for them and the more easily it's going
to close in the timeframe you want.
I’m Arnold Pachtman, CFO For Hire. A lot of the things you mentioned that
entrepreneurs should say are all marketing things, yet a startup company will
defer bringing on a marketing specialist until the first round of venture
capital. Maybe the CEO and the CTO will do the marketing in the first year.
What do you think about that?
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