Giving Customers Choice in Buying

Vendors can sell direct to customers, but they need to make the rules of engagement clear to partners.

By Larry Walsh

In conversations about channel conflict and account ownership, someone invariably says – to much agreement from everyone else– that the customer owns the customer.

In other words, the customer has the final say in who they buy from and whether they’ll continue sourcing from the same vendors and partners.

If we hold that the customer is the final arbiter of any sales relationship, it stands to reason that the customer also should have a choice with whom they buy, even if it means cutting channel partners out of a deal.

The question comes up frequently whether vendors can or should allow customers to bypass the channel and source directly from the vendor. Should customers have the right to choose where and how they buy products and services?

The simple answer: Yes, but under certain conditions.

Defining Channels

Before getting into the entire customer choice issue, let’s review what a channel is and why businesses have them.

A channel is simply a route to market. Channels can be direct or indirect; they can be high-touch, automated, or self-service. Some channels require intermediaries (partners) to reach the target market. Some products require partners to facilitate sales and product acquisitions. And some products naturally flow directly from the vendor to the customer (with some help from logistics providers).

The entire point of a channel is to deliver a point-of-sale wherever customers are.

The 2112 Group devised six questions for determining whether to work with partners to reach customers.

  1. What can partners do that you can’t?
  2. Where can partners go or operate where you can’t?
  3. What can partners do that you don’t want to do?
  4. How can partners increase the value of your products and services?
  5. What relationships do partners have that you don’t or can’t develop?
  6. Do the economics (costs) favor partnership models?

The answers to these questions reveal whether partner channels are necessary and feasible. If the answers are “no” to all, chances are a vendor can go to market and support customers without working through indirect channels.

2112 also developed its “Channel Goldilocks Zone” model (below) for describing the evolution of product development and maturation, and explaining how this process creates a finite window in which products and services are optimally suited for sales through different channels and partner types.

 

Under the 2112 Channel Goldilocks Zone model, commoditized products become less valuable to channel partners because they have little value (margin) and ability to accrete value (value-add services and solutions). Consequently, vendors have less reason and incentive to sell commoditized products through indirect channels once they fall out of the Goldilocks Zone, as it costs too much to service and support indirect partners in those sales.

The 2112 Channel Goldilocks Zone model isn’t perfect and doesn’t reflect every product or sales condition, but it does provide a means for testing some products for the appropriateness of selling through indirect channels.

The point is that not every product or service needs to go through channel partners.

Going Direct Is Getting Easier

Since Amazon burst onto the scene 25 years ago, pundits predicted that the Internet would disrupt and disintermediate the channel. If people and businesses can buy from anywhere at any time through online marketplaces, why would they want or need to buy through channel partners?

It didn’t quite work out that way, and the indirect channel thrived over the past two-and-a-half decades despite the threat. Even the advent of cloud computing didn’t disrupt the channel, as vendors discovered they need partners to find and convert customers to cloud services.

Let’s face it though: Going direct is getting easier.

Amazon is disrupting the retail segment through its online marketplace, but it’s not the only game. Nearly every major hardware and software vendor has an online marketplace for selling goods and services. Amazon Business sells everything from paper towels to servers. Security vendor Palo Alto Networks shifted its channel policy to push more sales through its marketplace. And cloud vendors including Salesforce.com, Amazon Web Services, and Microsoft have online marketplaces for selling cloud services, equipment, and applications. These same vendors are selling the products of other vendors. In January, Microsoft announced that it’s now generating more than $9 billion through its co-selling program, in which it sells the products of its independent software vendor (ISV) partners.

Vendor-operated marketplaces are the very thing at the root of channel partners’ dread. If executed properly, they’re a more effective and economically efficient route to market for vendors.

Going Direct Isn’t a Sin

Dell got a lot of grief over the years for its policy of allowing “customer choice.” Dell’s policy in the early years of its channel expansion was that customers could choose to buy through partners or direct from the vendor itself. It’s not that it was a bad policy; there just wasn’t enough clarification around the rules of engagement.

Partners will often criticize vendors that sell direct as being unfriendly or hostile toward “The channel.” In reality, even the most ardent channel-centric vendors sell direct or around partners. Some vendors achieve their high percentage of channel business not through resales but through alliances and OEM relationships. Even vendors that “sell with” partners are driving revenue through direct sales that are fulfilled through channel partners.

Giving customers choice in how they source products and services requires clear rules of engagement. Vendors should consider doing the following:

  • Make choice clear: Communication is paramount. Vendors should make it abundantly clear that the customer is the party that ultimately decides from whom they will buy products and services.
  • Offer deal-registration guarantees: Vendors should honor partners’ deal registrations and not allow sales to flip to direct. If the customer does flip direct of its own accord, the vendor should have some mechanism for crediting the partner for originating the opportunity.
  • Promote partners to customers: Even when selling direct, vendors should offer their partners the opportunity to deliver complementary and value-add services to help enhance customers’ experience and return on investment.
  • Implement pricing neutrality: If a customer approaches a vendor about a direct deal after a partner already provided a quote, the vendor should not undercut the partner. Having pricing neutrality will help mitigate the tendency of customers to believe they’ll get a better price by going direct.
  • Demonstrate commitment: Vendors have a habit of establishing rules of engagement and then finding ways to go around the rules. Vendors need to demonstrate commitment to their rules of engagement through transparency to and communications with partners.

Vendors shouldn’t apologize to partners for direct sales or for sales through marketplaces. Having direct sales or automated direct-sales mechanisms like marketplaces isn’t a sin or a crime against channel partners. Vendors aren’t in the business of ensuring the viability and productivity of channel partners. They’re in the business of doing what’s best for their own businesses. Sometimes that means promoting and working with channel partners; sometimes it doesn’t.

Making it a policy that customers have the right to buy from whom they want – even direct from the vendor – isn’t a bad thing. Vendors just need to make sure that the rules of engagement are clearly stated and understood by their channel partners.


Larry Walsh, The 2112 GroupLarry Walsh is the CEO of The 2112 Group, a business strategy and research firm servicing the IT channel community. He’s also the publisher of Channelnomics, the leading source of channel news and trend analysis. Follow Larry on Twitter at @lmwalsh2112 and subscribe to his podcast, Pod2112, on iTunes, Google Play, and other leading podcast sources. You can always e-mail Larry directly at lmwalsh@the2112group.com.