Building a Distribution Matrix 02/22/01

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Presentation

Getting To The Bottom Line On Revenue Generation
A Crash Course On Building Your Distribution Matrix

Projecting A Global Future

The days are over when the only distribution channels a company had to be concerned about were those that reached across the United States. This morning’s meeting was opened by Mario Morino, Chairman of the Morino Institute, who provided some highlights and lessons learned from his recent trip to the World Economic Forum in Davos, Switzerland. The upshot? Global business is here, and it means a lot more than having a Web site or translating your software into French and Spanish. Any entrepreneur who hopes, someday, to grow a large, sustainable business will operate in world markets, with a growing list of international competitors and significant cultural challenges. Markets and demographics are shifting dramatically, and the Internet is no longer just a playground for Americans. People and businesses in other countries have their own visions, objectives and demands, and won’t buy cultural blindness or the kind of provincial arrogance many technology entrepreneurs have displayed in recent years. There’s a world of opportunity expanding in which the currently estimated 40% of Internet usage by Americans will shrink, according to some projections, to less than 20% in the next five years. Seizing the growing global opportunity will require entrepreneurs to use the kind of thorough, quantitative analysis of distribution strategy discussed by John Burton, and performed by people who know and understand the wide variety within global markets. As Morino said, “Fundamentals still rule the day. You can talk about intellectual property assets, but they’re not really assets until you find the advantage that translates them into sales and revenue and market share."

(Bethesda, MD -- February 22, 2001) In today’s tech business climate, the companies getting venture funding are the ones that can convincingly demonstrate where the profits are (or will be) coming from. It doesn’t take an MBA to know that before you can show profit, you need revenues, and to get revenues you need distribution channels. At this morning’s Coffee & DoughNets meeting, netpreneurs got a crash course in Sales and Distribution 101 from John Burton, a successful technology entrepreneur, marketing guru and now Managing Director of Updata Capital.

Burton told the crowd that most of his VC colleagues want entrepreneurs to explain their revenue potential, market dynamics, how they will capture customers and the distribution mix they plan to use. It’s all part of a general “back-to-basics” theme that netpreneurs have been hearing about a lot lately. Even if you’re not on the funding hunt, there’s nothing more important to success than planning and executing the right mix of channels. After all, generating revenues is what makes it a business instead of a hobby.

“The companies that have been the most successful,” said Burton, “are not the ones that have made technological breakthroughs, they are the ones that made those breakthroughs coupled with unique marketing and distribution capabilities to promulgate their concepts and ideas.”

Building and executing upon a sound distribution strategy involves many factors, and the first, perhaps the most important, is understanding your market objectives. For companies that make software and other products that means: Who are your clients? What are their budgets? On what platforms will your product operate? Do you have revenue breakdowns by partner, rep and channel? Do you know SG&A as a percentage of revenue? What about market share, contract size, channel turns and sell through? Service companies should be able to describe who their new clients will be; the engagement size, length and control; average billing rates; gross margins; and utilization rate. Only by first having a reasonable picture of these quantitative factors can you start planning a mix of distribution channels to achieve your goals.

And, when it comes to distribution, “mix” is the key word. Burton provided an overview of the value and usefulness of channel alternatives, and stressed the importance of a balanced distribution matrix. He said, “Every organization, regardless of what they sell, should have multiple paths and means over distribution. It doesn’t have to be put together all at once, but, if you have only one means of sales, you have much too high a risk quotient to be able to sustain success and have the economic return that you need.”

The Matrix Of Distribution Channels

Direct Highest cost; High value product; Long sales cycle;
High complexity; Secure customers long term

Resellers & Integrators
High volumes; Training & incentives; Marketing & leads key; Great competition for attention; Channel conflict possible

Telesales Good alternative or parallel to others; Lower cost; High margin; More “contacts”

Distributors Component sales; Little control; Little customer contact

Partners Lead generators; Endorsement; Little control; More marketing than sales

Web-Based Highly effective for cost management; Marketing cost could be high; Strong equalizer and disintermediator; Used in concert with other methods

Burton’s discussion included specific tips and examples on these and other topics, such as analyzing your client capture techniques, pre-selling for customer input, laying a distribution groundwork, the relative use and effectiveness of partnerships and more, all of which can be found in the session transcript.

At the highest level, however, it all comes down to knowing and understanding your market. On one side that means understanding the business costs, economics and return. Are you creating a market or servicing one? Do you have people on your team who understand the specific market and how to best reach it? But, most of all, it means understanding your clients. Why do they need your product? Is there a budget for it? How will you build an ongoing relationship with them? The need to understand your customers and their goals is becoming increasingly important in a world of technological change, diversity and globalization, a theme Burton picked up from Mario Morino’s opening presentation on his recent trip to the World Economic Forum in Davos, Switzerland (see sidebar).

And it is every bit as important to understand the “nots” of distribution strategy. According to Burton, for example, “The Internet is not a market, it’s a channel.” Misunderstanding that may have been one of the causes for some of the more quizzical startups during the dot.com craze. Consider the Internet as one of the factors in your matrix for sales, marketing and customer support, not as an end point. Similarly, said Burton, sales and distribution are not the same as marketing, though he added, “You cannot do sales and distribution without marketing.” Finding the right mix for customer capture and retention at different stages of growth is what it’s all about for your company, and what VCs will expect to hear about more consistently, clearly, and with more realistic numbers.