Threats of Reseller-based Sales Channels for Startups

Sales channels for startups can be tricky, especially when dealing with the question of direct or indirect channel strategies. It can be very tempting for founders to want to start with an indirect strategy, since if they get some resellers on board it can instantly lend credibility to their product and brand, increase revenue potential through more customer exposure, and act as a multiplier for further brand expansion.

But in this post I want to highlight a few negative things that often go unseen by founders when considering how they will sell their products.  Both channel strategies are correct, depending on the type of business and age of the company, but below I outline a few things to take a hard look at before engaging in an indirect strategy.

What to keep in mind about a reseller channel strategy:

1. You will largely loose pricing flexibility.

Resellers are entirely dependent on their mark ups for revenue. In order to minimize their risk they will insist that the Channel Agreement have a minimum price.  This basically says that while the start up is still allowed to sell their product themselves, they pledge not to sell below a certain threshold. This prevents the start up from becoming a price competitor with its own resellers.

This restriction can be very harmful for a startup, especially very early (as in, right after launch), since the pricing strategy and price positioning (premium, low cost, etc) may not yet be validated by the market.  If you go for a premium price positioning, but end up having to compete on price in order to get noticed in the market, then you have to retain the flexibility to alter your price.  A restrictive channel agreement can hurt this flexibility.

2. Avoid Exclusivity when possible

Sometimes it makes sense economically to accept a reseller’s insistence on exclusivity.  For example, if you aren’t present in a city and there are legitimate reasons for a geographic limitation (if your business model is based on city by city expansion, for example), then if the price is right (there has to be a premium to justify accepting such a restriction) some type of limited exclusivity is OK.

However, if you just launched you product and a company gets excited about it and wants to be the exclusive reseller, then this is probably a bad deal.  The reseller likely has a lot of information on the sector and experience on what is needed, while the startup is negotiating from a weaker position.  Basically, if a company demands exclusivity in your primary target market, then you don’t really have any markets after you let the reseller take over.  That’s identical to an acquisition, and should be priced accordingly!

Final thoughts on Exclusivity: be sure that it can’t be used as a cheap way to simply eliminate you from the market. Insist that there be minimum purchases of XX € per month or year, or the exclusivity is forfeited.  For example, you must avoid the possibility that a reseller forecast purchases of 100T€ a month, so the founder gets excited and grants exclusivity for that city.  Then the reseller looses all interest and doesn’t sell a dime worth of product, but without the minimums the founder is prohibited from pursuing other resellers or even selling his own product in that city, shrinking the startup’s addressable market.

3. The distance to customers and feedback is increased

This is probably one of the most important on the list but often gets over-looked: if your customer is only dealing with resellers, you aren’t talking to them.  If you aren’t talking to them, you are forfeiting one of the most valuable assets for a just-launched product: the feedback from early adopters.  This feedback SHOULD be having a disproportional impact on the direction future products take. But without it, you are just swinging blindly.  The whole product-market fit aspect of business is essentially defined by these first customers, so you better have a clear channel of communications open with them at all times.  This includes negative as well as positive feedback.  Where do they go if they have technical support issues?  This is especially important for revolutionary products, since they may not understand it 100% from day one and need to be talked thru the usage process.  Absent that, they will simply all return the product en masse to the reseller, who will reward you by cancelling the reseller agreement.

4. Following up with leads becomes trickier

Qualified Leads are gold to a startup that just launched their V1.0 product.  By qualified I mean leads that have a high probability of conversion. Like the guy who randomly calls you after your first press release and says he’s needs your product, and how can he buy it?  Unqualified leads are what I think of as everything else (ie, meeting a guy at CeBit who says the product looks interesting, so you ask him for his card).

The qualified leads are going to be your early adopters. As first customers, they will be more willing to put up with the bugs and give you feedback when you ask for it.

The problem with resellers here is similar to point 3 above.  When you get a qualified lead, the temptation is to forward him to your reseller.  This shows how serious a company you are that you have sales partnerships, right?  And you won’t have to worry about handling the transactions yourself, right? Which is important for when you scale, right? Well… No.  You aren’t scaling yet. You may only have 2 or 3 customers so far, and you are desperate for 100 more before the end of the month in order to meet revenue targets.  So why would you send a customers that says “I want to buy now” to someone else, who may or may not be able to give them attention?  Resellers have lots, and lots, and lots of SKUs.  The odds that they are giving their brand new startup partners’ products attention and priority are minimal.  They are concentrating on their large ticket partners; the ones that help them move thousands of units and product a month.

So there are two ways most founders will send a willing customer to a reseller:

The founder takes his contact info and send it to the reseller. (Who may or may not call him back).

Or he simply tells the customer to go to the reseller (because he doesn’t want to / can’t do the transaction himself), in which case the customer may or may not continue to be interested a few days later when/if he remembers.

Both are bad.  If a customer is willing to open his wallet to give you cash for your product, let him do it right away!  This is doubly important for B2C products which could be arguably “impulse buys” from early adopters.

5. Brand building and market positioning can suffer

Sometimes the business is built for a good reason around a white labeling model. If that’s the case, this point doesn’t apply.  For everyone else, use you own selling platform (even if that is you on the phone taking a credit card number) as a way of building your brand.  Increase the number of people who know what the name of the company behind their cool product is.  Social and viral marketing for B2C is also important and much more complicated if you are only known thru a reseller. Let’s put it this way- which way is easier for you to control your reputation? When you talk to people directly or if they only hear of you from someone else?

6. Terms can be very dangerous for liquidity

This point can probably be made better through negotiations or even factoring, but most resellers will insist on at least 30 days credit terms and probably closer to 90 days net credit terms.   This means that if you only have two months runway left in the bank and sell millions in products through a reseller that has net 90 days terms, you are still insolvent.  As with most other points in this post, this is not so big a deal when a company begins to become a bit more established but can be deadly for a brand new, just-launched startup.

The conclusion is not that a reseller strategy is bad, only that there is a time and place for it, and that time and place is likely not at the beginning.  Resellers can be very useful when scaling.  For a company that is starting to show a bit of traction, and is starting to hit its capacity limits, then resellers can help further push the product while the company starts trying to scale.  But until the startup reaches that point, it’s better to stay as close to the customers as possible.