What to Consider when selecting an Indirect Sales Partner

 If you are considering selling your product or service via an indirect channel (when you sell your product or service to an intermediary or middleman, who then sells it to the end user) there are numerous considerations that you must examine. As I have said in other postings make sure you have an overall strategy and ask; will this channel selection support this strategy?    Most people think that companies select indirect channels because they are less expensive to use and support than having your own direct sales force (your product or service is sold by your sales people directly to other enterprises or end users). Again, depending on your strategy, you might use indirect for sales coverage, augmenting your product line, or augmenting a technology you don’t have or to improve your brand awareness. In any case understand the main objectives first.

As for other considerations, be prepared to have thoroughly thought-out the following items (not a complete list but a good start):

  • What are your partner programs (things like engagement rules, incentives, joint marketing, financials, etc)?
  • What are your criterions for selecting partners (territory, skills, products, and name, just to list a few)?
  • What products or services will the partners carry for you; do they already carry your competitor’s products or services?
  • How will the partners and your direct sales force interact (will they compete or augment each other)?
  • Is your product or service too complex for certain types of partners to handle?
  • Financially, will you and your partners make any profit (Do you have sufficient margin built into your product to support this channel)?

Let’s explore the last item (financial considerations) in more detail, because at the end of the day, most companies are in the game to make money and if this can’t happen then the rest is academic (there are cases, particularly in a start-up mode, where getting your name out there is initially more important than making a profit, but let’s look at the other situations).

To go indirect, which can be two or three tier (you and a reseller or you, a distributor and a reseller) each company wants to make a profit.   So a key question for you is, is there enough margin to “share” it with your partners.  Example, let’s say you have a product that cost you $20 to manufacture and the average sell price (ASP) is $50, thus a profit of $30 and 60% margin ( in reality there are other costs ,but for discussion purposes we will keep it simple). In the direct model you will enjoy the $30 and show a profit. 

In the indirect model, each intermediary will want to have some profit also. Depending on the overall situation the intermediaries will ask for a percentage off the ASP so they can sell the product at a profit. The range varies greatly, but it is not uncommon for it to be anywhere from 20% to 60% off of ASP or list.

So with you are two tiered, can you afford to give, let’s say 40% off of the ASP in this example? Is a $10 profit okay for your company?   Now about the three tier situation.

Usually one assumes that the intermediaries have to sell the product for less than the manufacturer (unless they have some unique value propositions).  So given this assumption, let’s see what the margins look like now.              

                                Reseller sells for                               $45.00

                                Reseller buys for                              $40.00                   Reseller Margin                12%

                                Distributor sells for                          $40.00

                                Distributor buys for                         $30.00                   Distributor Margin           25%

                                 Manufacturer sells for                     $30.00

                                 Manufacturer cost                          $20.00                   Manufacturer Margin    34%

 Critical point is does one have enough margins for everyone to go indirect.  As you can see going with the indirect model poses some unique considerations and if they are not explored in detail not only will you lose money, but your creditability and customers.

If you would like more detail on areas of consideration for indirect or any other channels; give me a call (508-838-1073) or visit our Contact US.

RHL 02/08/11

1 comment to What to Consider when selecting an Indirect Sales Partner

  • Sam:
    Thanks for the comments.  Let me add a little more to your comments.
    To your first comment, that customer acquistion cost should be consider,I agree with you. The posting was only suggesting that if one considers going indirect that there are some "gates" to be consder and one of them is will your company AND the patner make a profit. If one can not get pass this gate , then the rest is basically a waste of time.   If one gets by this gate then investments like partner programs, advertising and customer acquistion become the next issues.
    As for you second issue of scalability via indirect, it is usually true but again, it does depend on the type of product or service being offered. A very complex service may not be able to be handled by any partner.  But the main point is too many people see indirect as  scalable and seemingly less costly situation and thus fall into this trap and without doing some homework end up worst off then before.

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