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when the top line meets the bottom line
in the black

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the matrix: think distribution

          The 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.

          What 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.

 The Matrix

          If 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.

          If 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 intermediary.

          Telesales 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.

          Moving 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.

          As 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 mechanism.

          If 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 oversimplified.

 Distribution Economics Made Simple


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 the right.

          If 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.

on partnerships

          There 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.

          Today, 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.

          If 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.

 The Strategic Partnership Index


          The 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.

          You 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.

          Or 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.

          You 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 dependent relationship.

          Then 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.

          The 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.

          Thank you very much.


the audience: q & a

Mr. Norco: 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 think?

Mr. 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?

          You 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, it does.

          Probably 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.

Mr. Hausman: 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?

Mr. 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.

          You 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.


Mr. Friedman: 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?

Mr. 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 need.

Ms. MacPherson: In partnerships, do you, in effect, become a distribution channel for any other partners?

Mr. 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.

Mr. Barker: 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?


Mr. 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?”

          An 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 capitalist.

Ms. Sclarsky: 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?

Mr. 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.

          One 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.”

          It's now October 15, so I'd say, “That's great. Have you sent them a contract?”

          “Well, no, but they said they are going to buy.”

          I’d 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.

Mr. Pachtman: 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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