No easy way to define ‘channel-friendly’

Datto's Rob Rae, whose post on channel-friendly status preceded this article.

Datto’s Rob Rae, whose post on channel-friendly status preceded this article.

Solution providers have heard terms like “channel-friendly” and “channel-centric” to describe a vendor’s relative position to partners. If a vendor is channel-friendly, it’s open to working with partners to reach customers. If a vendor is channel centric, its primary route to market is through partners.

Of course, there’s the antithesis — channel-hostile — in which a vendor is mostly unwilling to work with partners and has a direct-centric go-to-market philosophy.

This week, Rob Rae, vice president of business development at Datto, revived the debate over what it means for a vendor to be “channel-friendly.” He writes:

“A little rant here: How does a vendor call themselves channel-friendly and then post their pricing on their Web site for all to see? The channel should dictate their own margins, at least until you’re a multi-billion dollar company that rhymes with ‘hell’.”

Rae is obviously talking about the pricing and go-to-market practices of Dell Inc., which — despite seven years in the channel — continues to be dogged by its direct-first practices of its past.

Let’s start with a question: Can a vendor be both direct and indirect?  The answer is yes, and we see it all the time. It’s especially true if published prices is the litmus test.

Dell isn’t the only vendor that publishes product prices. Hewlett-Packard Co., Lenovo, Toshiba, Acer Inc., Microsoft Corp., Symantec Corp. and more publish the baseline price of their products on their Web sites. Dell, which is turning over more than 200,000 accounts to partners, is really not any different.

While vendors cannot, by law, dictate street prices charged by partners for their products, they have mechanisms for maintaining price integrity. By publishing prices, vendors protect their own sales, as well as those of partners, from value erosion. The problem is when vendors publish prices that undercut the wholesale price given to partners, creating a clear-cut channel conflict.

Pricing practices aren’t the only test for whether a vendor is channel-friendly. Some solution providers and channel advocates say any amount of direct sales that do or could conflict with partners makes a vendor unfriendly. Perhaps, but consider that many channel-friendly vendors generate more sales and revenue through direct sales than indirect partnerships:

  • IBM generates only 20 percent of its sales through channel partners.
  • Hewlett-Packard earns around 35 percent of its sales through the channel.
  • Microsoft says it’s nearly 100 percent channel, but much its revenue is through the sale of products to vendor partners that incorporate the software for sale to direct and indirect channels.
  • Dell, despite its legacy reputation, generates as much — if not more — indirect revenue as Hewlett-Packard.

“Most vendors that have a hybrid distribution, particularly those with a robust online direct business, post pricing on the Web,” Frank Vitagliano, vice president of channel sales at Dell, tells Channelnomics. ”In our case, we provide a ‘pricing halo’ that ensures some level of margin depending on the product. However, in the vast majority of the cases, transactions that the partner is driving include far more than just a product price, our partners traditionally provide a price that includes services, support, integration, consulting, etc. That is their value add.”Dell’s position, as expressed by Vitagliano, is the norm. Vendors have never guaranteed partners the right to make money off their products, but rather the opportunity to leverage products and technologies to build systems and packages that have a value greater than the sum of their parts. This is the accretive value that comes from layering products, and professional and managed services, much of which a vendor has no control over in execution and pricing.

Now, what if the channel-friendly test is about direct verses indirect sales?

Many managed services companies or companies that support managed services — such as remote monitoring and management (RMM) and professional services automation (PSA) software vendors — are not really indirect companies. They often act like a channel-friendly or channel-centric company, as their growth is predicated on the growth of the MSPs they support. But, in reality, they’re direct companies; the end consumer of their technology is the MSP.

Vendors are only a supplier of raw materials; they’re rarely suppliers of a total solution or system. The job of the channel partner is to aggregate technologies and create packages that satisfy the needs of the end user. Yes, vendors will supply their products to partners at a discount, or as many call “giving the partner margin,” but that shouldn’t — nor was it ever intended to be — the total of what a partner can and should make on a technology sale.

Imagine if vendors offered partners no discounts, incentives or support, but had the quintessential technology needed by customers. What would channel partners do? Every time Channelnomics puts this question to solution providers, they say they’d source the technology at cost and make money on their value-add services. That’s the way the system should work.

The vendors have their own perspective on the value delivered by the channel; they call it “partner loyalty,” but we’ll get to that another time.

The point, for now, is the channel is not easily defined, but the ultimate goal — making money — is a matter of individual initiative. Vendors create the conditions under which partners can leverage technology to make money, but those conditions are not an automatic path to success.

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