- October 19, 2021
- Posted by: lmaziejka
- Category: Strategy
Vendors need to rethink their value propositions if they believe their products are only a tiny part of a partner’s sales package.
By Larry Walsh
Anyone who lived through the Great Recession of 2008-09 remembers “too big to fail,” a phrase used to describe how some banks were so large that their collapse would scuttle the economy. Well, in the channel, we have the opposite, “we’re just a small part of the deal,” a phrase that reflects the capitulation of value and potential.
Channel leaders are getting comfortable uttering that phrase as a means of explaining why partners are less engaged with their products and services. If you’re only 10% of a total sales opportunity, it’s easy for a partner to overlook your contribution. If you’re just a fraction of a fraction of the total sales value, it’s hard to rationalize how including your product or service will bolster the total sale value or profit margin.
It’s a convenient excuse.
Partners and salespeople frequently push the “too small” narrative because it suits their interests when negotiating with a supplier. While a vendor may be a big player in its respective place, those in the field will counter that the overall size of a company or its market share doesn’t make sales easier when its product is just a component of a much larger system.
Accepting this argument is capitulating to a low-post position in value and contribution. It overlooks how even complex systems are dependent upon smaller components and materials for proper operations and outcomes.
By definition, complex systems are more than the sum of their parts. The individual components may have some endemic value, and can even function independently, but components’ actual value is extended and enhanced when combined with other modules and systems. Together, they have greater functionality, output, and value.
Examples of “greater than sum” exist all around us. A glass panel in a plane’s windshield is peanuts in cost but will ground flights if it’s missing or broken. Steel rivets cost pennies, but bridges would collapse without them. Spark plugs cost a fraction of the total cost of a car, but the engine won’t run without them. And no one would use an elevator if it didn’t have emergency brakes.
Some technology vendors know their relative position in the value chain, particularly in software and cloud segments. SAP, for instance, commissioned a study that found that a partner earns $7 for every $1 spent on its products. In the past, VMware would tout ratios of $19 to $1. These are gross revenue figures, meaning that they don’t represent a net profit to the partner. They show how even a product representing a fraction of a large sale has a drag effect in bringing more goods and services into the deal, increasing the total contract value.
Savvy partners know how to leverage small components to amplify their blended margins. If they’re refreshing a data center or a company network, the big-ticket items are all visible – servers, storage arrays, and routers. All of the price negotiation and margin compression are happening around these products. They make up margin by slipping in smaller components with high margins; these profitable products often go unnoticed by the buyer.
Even if a vendor’s product is a sliver of a deal and has a low-profit contribution, there are always service opportunities. The average partner makes two to three times more profit on professional services than it does on product sales. As has always been the case in the channel, the partner makes more money on the things it does for the customer than on the products it sells for the vendor.
Vendors may say that their small position in a deal makes it hard to compete for partner attention; therefore, they must pay more in compensation. Rather than thinking money first, vendors should work on being frictionless. Partners tend to gravitate to vendors that are easier to do business with, have higher brand recognition and purchasing consideration, and offer expeditious support. If a vendor makes the go-to-market process seamless and efficient, partners will keep coming back.
The creation of go-to-market strategies includes crafting value propositions that reflect the total potential of a vendor relationship, product, and service. Vendors shouldn’t rush to do compensation tricks just because they’re a minor slice of a system or deal. Instead, they should accentuate the enhancing aspects of their brand and products to the partner and customer. Value is in the outcome, not in the part.
Larry Walsh is the CEO, chief analyst, and founder of Channelnomics. He’s an expert in the development and execution of channel programs, disruptive sales models, and growth strategies for companies worldwide. Follow him on Twitter at @lmwalsh_CN.