Understanding channel models and structures

With 75% of business being conducted indirectly, it is a good idea to understand the channel structure and how this can fit into your company.

We speak with vendors everyday that are in the process of moving into channel sales and need an explanation of how it all works so we are producing this educational series to make the transition easy.

In this article we are going to cover the different models that can be used in channel sales to increase global reach.

The direct model

When selling direct, the entire relationship is between the vendor and the end user. The initial contact is made by either the end user or by outreach from vendor (whether that is through marketing activities or by cold outreach).

The process goes something like this:

Lead generated – > lead qualified -> passed to sales team to close -> support conducted by the vendor -> Renewal conducted by the vendor.

Each process along this journey is generally conducted by multiple people but it can be done by one person depending on the size of the vendor in question.

Figure 1 – Direct Model

This process is good but what about when we need to scale?

Each salesperson can only handle a certain number of deals at once so the way to scale would be to employ more salespeople, more SDR’s, more renewals agents etc

A new twist on the direct model is the introduction of marketplaces which are aiming to cut out the partnerships and make acquisition of software a direct process on a self service basis. We look at marketplaces in other articles because it is a subject all on its own.

With an indirect model, we are essentially working in partnership with external companies to take over parts of this process with the vendor becoming the support to the partner.

1-tier model

The diagram below is a typical structure for a 1-tier channel.

What does 1-tier mean?

The 1-tier model stipulates that there is one step between the source of the solution and the end user.

In this instance, the reseller purchases from the vendor to sell to the end user.

The benefit of the 1-tier model is that it is more scalable than the direct model.

If we have 25 resellers that are selling the solutions of the vendor, these 25 can be “managed” by one salesperson inside of the vendor.

From these 25 partners, they could have reach into x number of customers.

If these customers were being worked direct, that makes it 25 x the number of deals being worked.

It could become unmanageable at this stage.

Resellers work on a similar model to the vendor when it comes to lead generation, deal management, renewal management, support etc and thus they become another extension of the vendor. It is quite literally mirrored but with the vendor in ultimate control of the processes.

Having resellers increases the lead generation activities on the ground in the country that the reseller is in. They actively push the products that they work with and are more targeted towards the types of customers that they work with.

On top of the brand awareness content put out by the vendor, the resellers supplement this with their activities in their region.

Let us take the regions into account too. They speak the local language; they have their feet on the ground, and they can support their end customers better than a vendor can that does not speak the language of the customer.

Figure 2 – 1-tier model

Introducing the 2-tier model

The difference between the 1-tier and the 2-tier is an extra step in the chain.

We add a distributor into the mix.

What is the role of a distributor?

The distributors’ role is to recruit and support the partners on the ground within a specific territory.

In our previous model we looked at the 1-tier model of the vendor working directly with the resellers on the ground.

This is only scalable to a certain point. Generally, 25 managed partners per individual person within the vendor.

What if we could find a way to have someone manage all those resellers for us and recruit more?

We can…. We can add in a distributor who is a true extension of the vendor within a specific territory.

The distributor will train, enable, and manage the resellers under them in the country that they have been appointed.

Distributors need to be trained to the same level as the vendor as the support passed up the hierarchy. This means that the vendor only needs to support the distributors and the distributors need to support the resellers who then offer first line support to their customers.

The distributor purchases from the vendor, sells to their partner who in turn sells to their end user.

With the theoretical limit on management being 25, the vendor can put 25 distributors in place per internal channel team member who can then manage their selection of resellers who can have many customers.

Ultimate scalability. 

Hybrid Models

Not all channels are built equal! We can have a mixture of models within a single company. It does not need to be fully direct; it doesn’t need to be full 1-tier or full 2-tier.

We can opt for a mixed approach.

Let us say that we are based in the US, we could have a full direct model working over there where we are selling direct to the companies on the ground.

What happens if we want to sell into LATAM or APAC or EMEA?

We could have some 1-tier partners over in the UK…. We speak the same language after all so this could work!

What about the Russian market? The Chinese market? The Japanese market?

We would need someone that speaks the language, understands the culture, and can become a true extension of us. In this instance, we would seek out a distributor.

Referral and Affiliate structures

Referral partners are becoming all the rage these days for SaaS products but are they good enough when support is required in country?

The idea of a referral structure is that the referral partner brings deals to the vendor, the vendor works them direct and then closes them direct whilst paying out the referral partner for the introduction.

Deals have to be tracked against referral partners and payouts need to be conducted towards the referral partners. It becomes a double paperwork exercise based on billing the end user and paying out the partner.

Referral structures work well for low ticket SaaS products but when it’s a product that needs specialist support, the model tends to fall down.

Affiliates work a little different in the sense that they are content marketers who generate business on the back of their own marketing efforts. The customer can typically self serve and buy the product themselves from the vendors website and the purchase is tracked against what brought the customer to the website in the first place. Affiliate links are common place in the world of online marketing and tend to fit into lower ticket, high volume products.

What works best for a vendor always depends on their situation. What types of products do you sell? Do you need the partner to support the products or just sell them? Are you looking to scale into specific territories quickly?

What channel structure would work best for your business?

To find out how Channelyze is the only channel management solution to support all of these models, register for a 30-minute demo for us to show you the full capabilities https://channelyze.io/request-live-demo.html