Increasing company value by sales channels choices 1.1

Sales Guerrillas

Increasing Company ValueBy

Sales Channel Choices

An introduction to the relative merits of Software distribution by direct or indirect methodologies

1Produced by Sales Guerrillas

Contents

Which Channel - IntroductionWhy Use Indirect ChannelsCompany Valuations

Revenue, margins, operating income, gross profit

Basics of Software ‘go to market’ (GTM) models

Financial Comparison of GTM models

2

Qualitative Comparison of GTM Models

What do Resellers look forWhat do Resellers offerReseller CostsReseller CompensationFactors that make a Partner

Channel Successful

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Which Channel - Introduction

A direct sales force is not appropriate for every company and certainly isn’t appropriate for every stage in a company’s evolution. A small company may not be able to afford it’s

own sales force. It may need to utilise an indirect channel until its sales and profits performance improve enough to afford the fixed expense of a direct sales force in the field. In addition it would be unprofitable to have your highly paid and efficient direct sales force spending time on smaller deals, outlying geographies, segments that they

may not know, and so on. Indirect channels can afford to engage in these areas by selling many other manufacturers product lines too. By doing so they spread the same cost

over several product lines.

When a territory is producing several $m of sales it may be time to think about using a direct operation, but this is a P&L exercise in justification. Going from an indirect to

direct in a single country may require additional expense of legal, HR, marketing and so on. It is not just a straight swap.

Most companies at some time conclude that they must pursue indirect channels to survive and grow


Why use Indirect channels

The benefit of indirect channels is that it is a cost transfer business. Essentially the cost of doing business in a direct sales model; the sales person, pre sales, pre sales consultancy,

training/implementation, cost of support is borne by the indirect channel. This is completely cost ineffective in a small channel, as not only do you have the costs of support, but also the reduced margin because you are giving a percentage to the reseller. But, when it is scaled up, eventually there is a cross over point when those resources are spread across many resellers, and even when offset by the margin given to the channel, result in a higher operating margin

than the direct route.In addition, working with; distant geographies, distinct market segments and smaller customers, in

each area the channel has the solution required by the customer and this will normally drive vendors to consider channels more seriously.

However, just moving accounts to a channel does not produce the same result. If the channel is just a lower cost salesforce, this is something the vendor should not

overlook doing directly. When moving accounts in this fashion, margins should be reduced so that operating margins are not negatively affected and the channel

should be rewarded on increases in business, not just maintaining the transferred accounts


Why use Indirect channels

Worst CasesWithout the right routes to market, you simply won’t reach your target

market. In a competitive environment , you may find that your route to market is your only differentiator

Usually your company will have all the figures to model your direct salesforce. In the same way the

Key Differentiator of the Successful Indirect Vendoris a laser like intensity on the commercial dynamics of the relationship

based on the understanding the key measures that matter for reseller and by good visibility of how these measures are performing on a regular

basis


Company valuations depend on a host of factors and there are many different methods of calculation. Some of the factors that are taken into account are;

turnover, profit, yield, EPS, return on Equity, Operating margin, Interest cover, dividend cover, assets, cash flow, free cash flow, return on capital employed and

a hundred other factors and their derivatives.

However, there are some fundamental characteristics that drive the valuations of software companies and these are the characteristics that stockpickers look at, to govern their choice of stock. These people are looking for undervalued

companies that have the opportunity to increase in value because other investors have not noticed their valuations. Whilst again there are numerous methodologies; takeover targets, merger arbitrage, recovery plays, director

share deals, technical analysis, and more, here we will deal with the conventional efforts of the sales operation to add value.

Company Valuations


• Stockpickers are looking for companies that exhibit the following basics• Increasing revenue qtr by qtr, year on year• Increasing profits year on year• Increasing earnings per share year on year

• Growing software companies are unlikely to pay dividends so these are not looked at

• Low Enterprise Value / EBITDA – this takes out the problem of debt• High Operating Margins indicating low levels of competition• High levels of recurring revenues from maintenance or SaaS agreements

Again, these are simplified measures but you can see the importance of ever increasing revenues and margins, and of course, when these are

projected into the future the stock price increases, based on the expected earnings per share increasing into the future.

Company Valuations


• Let’s look at a typical example, taking data from Yahoo Finance for a US software company

• The Operating Income is (49,440) and every resource concerned with taking the product to market comes under either the SG&A row or Cost of Revenue,

so, obviously, affects the Operating Income. With Channels, the net revenue is included in the total revenue, (so no costs), apart from those supporting the

channel, which again would appear in the SG&A row or Cost of Revenue

Company Valuations


Definition of 'Operating Income'The amount of profit realized from a business's operations after taking out operating expenses - such as cost of goods sold (COGS) or wages - and depreciation. Operating income takes the gross income (revenue minus COGS) and subtracts other operating expenses and then removes depreciation. These operating expenses are costs which are incurred from operating activities and include things such as office supplies and heat and power. Operating Income is typically a synonym for earnings before interest and taxes (EBIT) and is also commonly referred to as "operating profit" or "recurring profit.“

In order to increase operating income, we need to; increase revenues and decrease the other aspects (costs), one method of doing this is by utilising the optimum route to market. This could be what we know as;

direct sales, indirect sales, inside sales, telesales and their combination and derivatives (distribution etc).

Company Valuations


Basics of GTM Models


This interactive spreadsheet can be found at …………………….

Basics of GTM Models


This shows the cross over in gross profit between direct, agency and channel sales.

The shape and crossover are dependent on the inputs and,

more relevant is that either route may find it impossible for a given market, e.g. Enterprise sales for indirect, far flung geographies, activity driven sales and so on. So often, it is not a choice of

direct or indirect, simply that only one will be effective, and

therefore, the question is how to how to make that route efficient

Financial Comparison of GTM models


Direct routesGive immediate customer insight and can instantly respondDo not give margin away to a third partyAre usually better trained, more knowledgeable about the market, and possibly a higher calibre of sales professional, all due to the investment made by the vendor. These staff are more valuable in high earning accounts – majors, internationals, global, enterpriseYou have control of the sales force; where to sell, what to sell, how to sell, pricing, termination, activities to support company imageYou have complete commitment, exclusivity, usually a higher target, usually a better quality sales person, usually a higher paid salesperson, usually a higher close rate, better subject matter expertise, you have contract ownership

Indirect routesIncreased reach, could provide; special services, position the product in an established channel, have immediate access to a defined segment or geographyRequire a margin, dilute the sales force, introduce competition, distance the customerMay have a reduced cost of sales if correctly run, reduce your revenue, possibly good for smaller customers outlying geographies, lower value products, different market segmentsOffer; a ‘one stop shop’, credit, tech support, supplier efficiency and cost effectiveness by leveraging their assets and infrastructure, local service and support, local inventory, Ease of doing business – sales, marketing, billing, consultancy etc., Community presence

Qualitative Comparison of GTM Models


The Reseller wants A competitive product and money. The only relevance of the product to the reseller is convincing them that the end customer demand will be higher for that product than your competitors or hopefully for the other products they sell.

Reseller evaluatesCustomer appeal, margin, cost of sales, cost of support, lifecycle, returns, warranty claims, promotional spend, stocking requirement, add ons, up sell, finance and credit terms

The vendor wantsMarket education, product management, marketing, promotion and sales

We are selling the channel value proposition, NOT selling our product, and this is exactly how a second rate product can and does win

Successful suppliers understand all this, and all channels respond positively to the supplier that has invested in understanding their model

(not the vendors!!!)

What do Resellers look for


What do Resellers Offer


Typical Core OfferingDemand generation

Marcomms, segmentationTelemarketing, telesalesmailingsLead generation,

exhibitions, seminarsCase studiesPricing managementMDF and Coop funding

deploymentSalesSales staff, promotionsPricing control, phasing and paymentSupply FulfilmentDelivery, installation, implementation, training1st line technical supportMarket InformationChannel, product and customer feedbackServices

Specialised Offerings

Demand generationValue based audits

SalesGlobal account creation

ServicesTo vendor and other resellers

On the right is a sample selection of costs that a reseller has to cover

Ensure your value proposition is better than their other vendors to ensure you get ‘mind’ or ‘sales’ share’

In any costing analysis ensure you are covering the resellers overhead costs as well as ensuring they make an operating profit

Reseller Costs

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MarketingMarcomms,

Telemarketing, Inside Sales, Seminars, Roadshows, ExhibitionsSales

Sales staff with commissions, pre sales, post sales, implementers, discountsTransactions

SOPLogistics

Offices, admin staff, cars, telephones, computing, deliveryInventory

Stock holdings, returns, non paymentsFinance

Credit, DSO

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Historically set margins we offered or simply a ‘buy’ price but now ‘base’ and variable margins offer a more flexible approach to rewarding good business practice. However, check with ‘legal’ before you adopt for a

country to ensure you are not breaking local law. Also, before you implement, ensure that your company processes can quickly calculate and pay the reseller, if not, don’t even attempt them, there is nothing

worse than not keeping promises

Reseller Compensation

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Margin, rebates and back end marginRewarding exceptional/over target

performanceDeal registration

Performance ranking and tiersForecasting accuracy

Marketing spend and effectivityPre sales support

Post sales, implementation support

Reduction in debtor daysCertification

Training attendancePartner events

Free training/consultancy daysCoop and mdf

Competitive discountsExchange rate fluctuations

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Think like a Customer and a Partner - In the same way as ‘thinking like a customer’ makes a direct route successful, think like a partner. What could we do to ‘delight’ the partner?

Ensure that campaigns, policies etc. work for; the customer, the partner, the partner salesperson and principal, channel management and the vendor.

Work towards a partner community, so that it borrows resource from each other and shares best practice, if not the partners can be a drain on central resources

Publish results monthly so partners can compare performance, and reward success publicly (best partner awards)

Ensure that joint funding produces measurable results and really treat the partners as extensions of the company – would you charge a salesperson to; attend training, attend kick off etc

Build a relationship on trust, beyond the company contracts. There will always be problems as the fundamental objectives of the vendor and partner are different, but you need a person who can do the best they can for the partner community, given the problems that will arise.

Factors that make a Partner Channel Successful


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