It might seem ironical that the IT industry, the torchbearer of digital transformation, uses reseller networks in today’s digital world instead of selling to its customers directly.
As we saw in Are Resellers Required In Today’s Digital Age?, the basic tension in the direct-versus-reseller debate can be expressed as follows:
Why can’t customers be allowed to buy the product directly from the principal and avoid the reseller’s gatekeeping? Why is the principal leaving money on the table by using resellers?? Why can’t he sell the gear directly to customers and save the commission paid to resellers???
In this part, we will advance seven reasons to explain why large IT companies still sell via resellers.
- Increase reach
- Get close to the customer
- Variabilize fixed cost
- Enable arm twisting
- Offer BNPL and other attractive terms
- 10X the message
- Create a “too big to fail” effect
Let’s get on with it.
#1. Increase reach
When a vendor starts out, it focuses on a narrow market e.g. West India, East Coast USA. Over time, it expands to other markets. Local companies help the vendor to tap new markets. So it makes sense to appoint them as resellers.
#2. Get close to the customer
Resellers often have prior relationships with local customers and help the vendor get close to customers in new markets.
#3. Variabilize fixed cost
It can be argued that a principal can set up its own office in new markets and hire local staff to achieve #1 and #2.
Sure it can, except that it would need to incur heavy costs. Sales reps need to be paid. While they often receive a part of their comp in incentives, they’re always paid some fixed salary (The industry-standard ratio is 67% fixed and 33% variable although 50:50 and 100:0 are not unheard of). Office space costs money. So does regulatory compliance in different jurisdictions.
The reseller model changes that. The partner bears all the fixed costs of selling the principal’s products and is paid a commission only on the sales it makes. In other words, the compensation model of resellers is 0:100.
Accordingly, reseller networks help vendors convert their fixed costs to variable costs.
On a side note, a lot of vendors find this benefit of reseller model very compelling and try to appoint business partners as early as possible. But the strategy rarely works in the early years of the vendor: No reseller wants to incur fixed costs to sell an unknown product when there’s zero visibility of commissions.
You can make out a merchant's size from their stance on payment processing fees. A small merchant will talk about skin in the game and want variable fees. A big merchant will rant against rent seeking and want fixed fees.
— Ketharaman Swaminathan (@s_ketharaman) April 1, 2023
#4. Enable arm twisting
All the principals named earlier – Dell, HPE, IBM, Cisco, and Microsoft – are multibillion dollar corporations.
Their customers are multimillion dollar companies and above (Since we’re keeping this post focused on B2B, I’m ignoring B2C consumers who are obviously even smaller). As customers, they’d like to have the upper hand in negotiations. But it’s not easy to tower over 800 lb chimpanzees.
Enter dealers. All of them are smaller than the principal. Many of them are smaller than customers. This enables customers to deal with them from a position of strength – aka arm twist!
While there’s nothing new about this raison d’être of the reseller model, I’ve never seen it stated publicly by any vendor – other than SAP, that is:
Some of our customers – particularly small and midsized firms (SMEs) – prefer to work with a company that is smaller than SAP.
#5. Offer BNPL and other attractive terms
Principals are fairly rigid on payment terms and other conditions. Whereas resellers are quite chill about them.
For example, most principals insist on 100% payment for full year in advance for AMC contracts. This goes against the policy of many customers. Resellers provide a via media by agreeing to split the single upfront payment into four quarterly installments and / or give 30 days credit for each installment (à la BNPL, but for B2B).
This advantage can also be expanded to performance guarantees, gift policy, and other sticky terms.
#6. 10X the message
Before I headed the SAP Practice for a midsized IT services company, I was the Marketing Manager for an Indian ERP product company. Our chief competitor was SAP. We did direct selling. SAP had a network of business partners.
Finnegan’s Factor
That number by which you multiply your answer to get the right answer.
For every one time we explained why we were good, prospective customers heard 10 times that SAP was good. Sophisticated prospects knew that resellers of SAP had a vested interest in talking up SAP and applied a Finnegans Factor to discount the 10X message suitably. However, mainstream prospects fell for it hook, line and sinker.
More than anything else, this was our biggest customer acquisition challenge. (It’s another story that I used this consumer behavior trait to my advantage after moving to SAP!)
#7. Create a “too big to fail” effect
There’s a whole cottage industry of resellers around many principals. They make money when the principal makes money. Their health-and-wellbeing is tightly intertwined with that of the principal.
Were something happen to a solo principal, nobody would bother. However, if a principal with a vibrant reseller network faces existential threats, a huge ecosystem surfaces to prop up the principal – because in the principal’s survival lies the survival of hundreds of resellers. This creates a too big to fail effect favoring the principal.
On a side note, the effect is many times more strong in application software where VARs typically make 2-3 dollars in training, consultation, implementation, development, migration and other adjacent services for every dollar in license / subscription billed by the principal for its core product, and thus prop up the principals with that much greater vigor. With due respect to its product etc., this is the one factor that explains SAP’s dominance of the ERP space for over 45 years despite regular reports of one-third of its implementations failing to achieve their goals.
@s_ketharaman: SAP gets $37M in software subscriptions while Deloitte gets $117M for implementation of SaaS HR. For all the talk of SAAS crushing implementation efforts, implementation partner still gets proverbial 3$ in Services for every 1$ of License! #GoFigure.
But the effect is powerful enough even in the case of “pure resellers” that are the subject of this blog post.
Now we know why resellers are still around in today’s digital world. Even Google is increasingly turning to resellers to grow its advertising business of late.
Google learns why Big Tech Companies sell via resellers:
– Position as Tech / SaaS – rather than media services – company
– Duck frequent back-and-forth pings from customers
– Avoid credit / collection hassleshttps://t.co/cFWDQNitNo— Ketharaman Swaminathan (@s_ketharaman) January 23, 2023
Before closing, we should note that, like many business models, direct versus channel is also cyclical.
During the pandemic, factories and warehouses had to shut down or operate with severe restrictions caused by lockdowns and shelter in place government decrees, and companies had to go direct because of supply chain disruptions.
Chanting the Digital Transformation mantra, hardware, networking and software companies digitalized the order-to-shipping process for FMCG, CPG and many other industries to create the so-called D2C channel to supplement their traditional distribution channel comprising distributors, wholesalers and retailers.
However, the IT industry itself largely continued with the reseller model.
(There are a few exceptions e.g. HP gives the option to order ink cartridges directly on its website or buy it through its channel. I’m guessing this is to avoid the classical problem of channel conflict that afflicts many other industries.)
Having said that, the common man is wired to be eternally skeptical about the need for resellers on the Internet. Ergo, any business model that postures to eliminate resellers – and any other form of middleman – will forever enjoy strong Product Zeitgeist Fit. C’est la Vie.
While Product Zeitgeist Fit is basically a Consumer Tech concept because it involves culture etc., it does apply to a few Enterprise Techs also:
* No Code / RAD
* Reusability
* Containerization / SOA
* Write Once Run Anywhere / Cross Platform— Ketharaman Swaminathan (@s_ketharaman) January 2, 2020
