Most technology vendors who sell through and with channel partners face an age-old challenge: how to deal with channel sales concentration. All channel managers are familiar with the 80/20 rule: 80% of channel sales are typically generated by the top 20% of channel partners. As I recently told Channelnomics, for some vendors, sales concentration actually exceeds this conventional benchmark, and the issue is becoming more critical.
To adapt to shifting technology consumption preferences, traditional IT channel partners are scrambling to transform their business models. Partners are merging with or acquiring competitors in an attempt to gain the scale necessary to invest in new capabilities. An unprecedented influx of capital from private equity firms seeking to roll up smaller partners who have established customer relationships is adding fuel to the fire, resulting in fewer bigger partners with more channel power.
For years, vendors have been perpetuating the channel sales concentration challenge by helping the “rich get richer.” Vendors allocate the lion’s share of their channel investments (incentives, market development funds/co-op funds, sales and technical support) to the larger partners. Smaller partners tend to get ignored and are starved of resources that would help them compete with the 800-pound gorillas. Smaller partners, frustrated by the inequitable treatment, often lose interest in promoting vendors’ products and services, creating a dynamic that leads to further channel sales concentration.
So how should you manage the “long tail” of smaller partners who collectively drive an increasingly smaller portion of your revenue? As the Channelnomics article notes, some vendors are taking a “meat cleaver” approach to the problem, effectively chopping off the long tail by eliminating all investment in smaller partners or even kicking them out of their partner programs. While this approach may appeal to some, the consequence is that vendors may lose partners who provide important coverage of niche market segments. Vendors also risk losing partners who could emerge from the current turmoil in the channel to be superior competitors in the future. As I suggested in the article, a better approach is to comb through the smaller partner base to find the “diamonds in the rough” with the greatest growth potential and reallocate investments accordingly.
Finding the diamond-in-the-rough partners has traditionally been easier said than done. Many vendors have limited information regarding their smaller partners’ capabilities and growth strategies. Smaller partners are underrepresented in the information sources that vendors have traditionally used to profile and segment their partner base: partner-provided profile information, channel sales team input and data collected at point of sale. Vendors just don’t know enough about smaller partners to accurately separate the wheat from the chaff.
The secret to finding diamond-in-the-rough partners is to mine new sources of information that are not dependent on an established, collaborative relationship with the partner. Third-party data providers supply valuable information on partners’ IT infrastructure. Analysis of smaller partners’ digital marketing assets and use of social media can provide a treasure trove of insights about their strategic focus, expertise, brand affinity and influence over target buyers. More sophisticated vendors are gathering and analyzing these new types of channel data to segment partners based on a projection of where they will be in the future versus how they have performed in the past. As a result, they are able to pinpoint high potential partners in the long tail of the channel and provide resources that will enable accelerated growth.
Tapping new data sources and applying advanced analytics is the key to grappling with the channel sales concentration issue. While this challenge will undoubtedly not go away—the IT industry has been wrestling with the issue for decades—vendors who choose a more sophisticated strategy will capitalize on emerging opportunities as the competitive landscape in the channel continues to evolve.
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