Direct Sales vs. Indirect Sales

Few things are as important as nailing down your sales strategy during a go-to-market (GTM) planning exercise. And, yet, most companies get it wrong.

Earlier this week, I was consulting a founder/CEO who wanted my perspective on a variety of business challenges. During one exchange, the CEO said, “John, you just summarized in 5 minutes what literally took us over two years to figure out.” What prompted him to say such a thing? I told him to forget about selling through channel partners - for now. In the beginning, the worst thing you can do as a startup CEO is to sell through the channel. Let me explain why.

(Note: This post is specific to VARs (value add resellers) and vendors that sell B2B technologies that have high average deal sizes. It does not address distributor arrangements.)

Many startups think that selling through an indirect channel is the right approach to early revenue generation. The two most frequently cited reasons for this view are: (a) channel partners will provide the necessary coverage, and (b) they will deliver quality sales opportunities. On both counts, this is generally not true.

Coverage and motivation are two completely different things. If you are able to find a channel partner that is highly motivated to sell your products, it could make sense to add them to your GTM strategy. However, you will rarely be able to find them.

Why is that? Simple. The single motivations for a channel partner is profit. That’s it. Channel partners need to move product at volume. It is worth reminding yourself that you are hoping for channel partners to sell your products precisely because you are nowhere near generating volume sales. Think of the situation from the channel partner’s perspective.

Channel partners do not have the incredibly large margins that a product vendor enjoys. Some channel partners get additional “value add” revenues from services that piggyback on vendor product sales. But, without volume product sales, there is not a pull through of these other revenue streams. So, a channel partner could be jeopardizing its entire business by dedicating too much effort on your product. They are not motivated to blow up their business for you.

Now, onto the question of whether or not channel partner will deliver high quality sales opportunities? First, let us assume that you are only considering partnering with a partner that is doing a significant amount of business. If a channel partner is not driving a lot of business, it then follows that they would not be much of a lead generation vehicle for you since they do not have enough customers to introduce your products to.

Meanwhile, a channel partner that has a lot of customers will only bring you high quality sales opportunities if your product is not disruptive to their existing sales motion. If introducing your product can delay a purchase, it is not a good thing for the channel rep. And, almost always, your new (unknown) product will introduce risk. This is the least understood part of early stage startup GTM and what the  CEO I mentioned above was referring to when he stated that I summarized in five minutes what it had taken his company two years to learn.

The most common way that a channel partner will bring YOU a golden sales opportunity is when its own customer(s) inquire about your product. Thus, the vendor still needs to sell and market its own product to the end customer. The channel partner in this case is actually not bringing you a sales opportunity but rather serving as a fulfillment channel. And, you are giving away a big portion of your profits to what is essentially a fulfillment intermediary.

To get a clearer sense of your initial GTM, it is useful to think through others’ incentives - not your own. Then, combine that analysis with that of your own required tasks for building either a direct or indirect sales strategy.

In order to find the right channel partners, a vendor must work backwards from the target customers. Do those customers primarily purchase through a channel? What channel type? Do these channels carry competitive products? Do they carry a portfolio of complementary products (e.g., selling 10 of your product will naturally lead to selling 100 more of another product)? How extensive is their technical pre-sales capabilities? How much of their income is generated from post-sales services? Are they mostly transactional or solutions-oriented?

Based upon an extensive analysis, you will get a firmer understanding of the specific tasks required to be performed over a certain period of time. These are things like partner sales training, technical training/certification, establishing processes (PRM, or partner relations management), deal registration, incentives, partner portal, contracts, and numerous other less familiar but critical things such as dynamic business planning/tracking, co-branded collateral, lead gen routing, and the list goes on.

I am sure you can see where I am going with this. Here is what this looks like from a partner’s perspective:

Low Motivation + High Risk + High Cost = Heartburn

Lack of Motivation: Partners would rather sell what is easier to sell. And, the familiar is always easier to sell. People always choose easy money over more difficult (but potentially more lucrative) money.

Introducing Risk Into Existing Deals: Channel sales typically have shorter sales cycles and this is by design, as they make a lot of their money from post-sales engagements. Consequently, the channel tend to favor established vendors selling known products into known situations.

Sales Training Cost: Every month, week, day, hour and minute they spend learning how to sell your product is opportunity cost for them.

Is Direct Sales The Only Way? In the beginning, direct sales is probably your best option to generate revenue. Once you build up some critical mass, you can turn on the channel spigot. For me, the key question is not to decide between Direct vs. Indirect Sales. The real question is, “How can we model our Direct Sales motion and overall GTM so that we can gain early success that can be replicated and scaled?”

Everyone knows how expensive building out a direct sales team can be. I would argue that implementing a high performing channel partner strategy is more expensive and riskier by many orders of magnitude. Remember that just as there is a thing called sales enablement, there is this little thing called partner enablement. The upside to hiring your own direct sales rep is that they are motivated, lower risk, and lower relative cost.

The reality is that there will be a relatively small number of sales opportunities in your first revenue year. Startups should use this period wisely by focusing intensely on just two things: (1) prosecute those deals and close them, and (2) build up the opportunity pipeline. To do so, you do not need an army of sales and marketing people.

Instead, what you need is razor sharp focus and discipline. And, at all cost, avoid the flawed  logic that plagues so many startups.

If someone tells you that hiring five sales reps can yield $8M-10M in revenue, you should really ask some very pointed questions and test the assumptions This is the prevailing (but broken) approach of many startup CEOs, VCs, and Sales VPs because that is that way they have always done it. Heavily venture-backed Silicon Valley startups can get away with (and spend their way out of) this strategy but the vast majority of startups will not be able to survive this type of illogical GTM planning.

Why is it illogical?

The assumption that a single sales rep can retire a $2M quota leads me to believe that there are some dramatic (and likely incorrect) assumptions being made. Let us dig into a hypothetical case.

Let’s say you are selling infrastructure software that has an average deal size of $100k. For each sales rep, that represents 20 deals necessary to achieve their quota. In a best case scenario, that means each rep will need a pipeline of at least 3x-5x, which translates to 80 quality sales opportunities. To provide some context, even a marketshare and mindshare leader in its field such as F5 Networks needed almost 3x pipeline coverage to meet its sales goals.

To get 80 strong opportunities, a rep will need to tackle roughly 160-320 qualified opportunities over the course of a year. For five reps, this translates to 800-1,600 qualified and accepted sales leads. Where do those qualified opportunities come from? Ask a competent marketing head who understands real-life conversion rates for high touch B2B products and ask her to apply the math to see what the numbers north of that 800-1,600 qualified opportunities must to look like in the marketing funnel in order for this nightmare of a model to actually be valid. It’s HUGE.

My advice is to Invest in acquiring the sales opportunities. You will need just two sales reps to close those deals. I recommend having two sales reps because that will help you judge who can close and who cannot. Another path forward could be to hire a more senior outside sales rep along with a pre-sales engineer (SE) who can wear both hats. Using either approach, you will avoid a high cash burn rate while actually being able to improve and refine your GTM based on results you can measure and analyze. Based on this initial  analysis, you will now have actual metrics you can use as a basis to build out and scale your field organization.