Transform Your Sales Strategy with Channel Economics
/I joined Hewlett Packard in August of 1981, straight out of business school, with a role in finance and facilities. I liked the work and my education and prior experiences prepared me well. Compensation was good but not great, and the path to senior leadership seemed both arduous and opaque. I was looking for something a tad more diverse and exciting.
I was lucky enough to play tennis with one of HP’s mid-level Channel Sales leaders, who suggested I get into channel sales, which was (and continues to be) a critical route-to-market for HP. To be honest, I was quite horrified at the thought, as there was always the buzz that sales was a bit sleazy. But, he convinced me that my business and financial skills could play well, so I made the plunge into Channel Sales.
After going through all the training and trailing, I received my set of accounts (VARs) and was sent out into the streets. At first, I stuck with my HP neophyte training playbook, telling channel partner owners, managers, sales reps, etc. about HP’s fine products, speeds, feeds, warranties, T&C’s, etc.
Laser printers had just hit the market and I aced the training that taught me page per minute, toner consumption, font capabilities, and paper capacity. What I learned quickly after a few dozen speeds and feeds presentations was that in Channel Sales, while product knowledge is important, the channel economics was key to not just meeting my numbers but blowing them clear out of the park.
How and Why Does Knowledge of Channel Economics Drive a Sales Agenda?
My first “major account” was a Washington, DC VAR called Memory Systems, owned and led by an ex-football player named Jim Gorgei. Jim was a fantastic serial entrepreneur who flatout knew how to make money.
On my first few meetings with Jim, he hammered me pretty hard on the slim margins that HP printers earned in the market and hit me up for extra MDF to make it barely profitable for him to sell them. Here again, I stuck by the playbook from HP and stressed quality, technology prowess, loyalty, and of course some sales charm.
Ugh... It wasn’t working.
So what did I do? I changed course.
Coming from a family of small business owners, I knew cash flow was job one, job two, and job three. Friday’s payroll had to be met.
I also knew most entrepreneurs want to sell their business at some point, so valuation was important.
Finally, I knew that many companies on a fast growth trajectory could quite literally grow themselves out of business if working capital requirements were not understood.
While it was true that HP Printers earned only a so-so gross margin, the reality was that they played extremely well to the overall financials of Jim’s company. After studying Jim’s financials submitted to HP as part of his credit application, I was well prepared for my next meeting with Jim.
A Shift in Sales Strategy: Focus on Channel Economics
When the beating began on the tiring margin problem, I responded with, “Jim, I read your financials, and I’ve calculated that you need $1.23 of working capital for each dollar of growth.” It was a simple calculation of payable, receivable, and inventory ratios, but Jim loved it. Now, he was negotiating with a formidable debater instead of product spec guy. Our relationship changed profoundly.
I showed him that HP Printer inventory turns were close 24, meaning his inventory was going out the door every fourteen days generating receivables he was borrowing against. Then, I explained that I was prepared as his rep to get the turns even higher.
Net-net, HP printers generated really positive cash flow, as he was paying HP every forty five to fifty days and he was being paid by his customers much faster. I showed him the “back end” margins he was earning through MDF, how to use MDF to reduce opex costs, recurring revenue through after sales supplies and accessories sales, and more.
I was able to convince him that lower margin, high volume sales could be as attractive as high margin, lower volume sales. Jim continued to challenge me on channel economics, and his new CFO played a regular game of “gotcha” in this area, but I held my own.
But, through profound results, my relationship with Memory Systems’ executive team went from HP sales rep to a true business partner.
Channel Finances: Not Easy for Everyone
Working with Jim was great and he taught me a ton. The lessons learned at my first assignment, while needing more sophistication, played well with large global distributors and mega partners like CDW.
As an individual contributor, I had the code to influence the channel partner and, equally important, to influence our internal team at HP.
Then came a promotion to sales manager, and the playbook became more difficult.
I was honored to lead a solid group of channel sales reps in Philadelphia, PA. They were a great group, and as part of my first hundred-day plan I traveled with each one of them to their respective accounts.
While the sales skill levels varied by both talent and experience, financial acumen was clearly underdeveloped. I thought it would be an easy problem to fix, I could just train them.
Well, what I learned from that naïve idea was that I am not the best teacher in the world, with little patience and, at times, too quick to judge.
“No problem,” I thought, “I’ll hire a professional instructor to teach what I thought was reasonably easy material.”
Outside trainings occurred, private coaching was deployed, and, while the skill level moved up in general, only a percentage of the team really felt comfortable with having a channel economics conversation with a partner or internally.
The ultimate learnings from this time was financial conversations aren’t for everyone.
So what’s the solution, not just in a territorial assignment of local VARs, but also in some meaty assignments of publicly traded Global Distribution and National/Global mega billion dollar partners?
What was clear then and crystal clear to the team here at Gilroy Associates now, is this skill, this discipline, is an imperative if a vendor expects to optimize their performance in the channel.
From balance sheets and income statements to cash flow and key financial leading and lagging indicators, a vendor must have this capability on the team to understand how their companies products and services make an impact.
What’s also clear to us, however, is that not everyone is capable of learning it and leading with it.
So what’s the answer? Unfortunately there is no easy answer, but here are some thoughts:
Do an audit or have an outside firm do an audit of your channel teams and be introspective of your own skills in channel finances. Could your team or you hold your own with a C-level executive at one of your partners?
If your answer to the above is yes, could you do it for a cloud-based product/solution?
Identify or hire members of your team who have the ability and passion to learn and execute in this skill set.
Retain a company that could possibly coach or even Skype into a partner meeting.
The net-net (no pun intended) is if this isn’t a core competency within your channel program, your ability to align, penetrate, and optimize your or your team’s assignments is indisputably at risk.
This article was originally published in July 2018 and has been updated.