The hidden challenges of channel marketing

Channel marketing is an approach for growing sales by developing relationships with other companies (i.e. channels) that do the hard part of selling for you. One example you’ve probably seen is affliate marketing, where third parties sign up to provide leads in exchange for commissions. There’s many other examples from component manufacturing to distribution companies and retail.

What is seldom discussed in case studies (or sales pitches from affliate companies, for that matter) on the topic, is that while a channel marketing approach can be effective in triggering rapid sales growth, it also has some serious challenges that need to be addressed if you are going to succeed:

a) Pricing power – if somebody is sending you business in volume, chances are they will push very hard to get the best price possible (i.e. your margin will be lower). In addition, raising your prices later on may be challenging, particularly if a given channel represents a large volume of your business (and a useful channel almost always will).

b) Brand – if your “real customers” are actually your customer’s customers, chances are they’ve never heard of you. Unlike Intel, with their successful “Intel Inside” branding exercise, most companies that rely heavily on channels do not have the budget or marketing savvy to create a national television marketing campaign. Nor will their customers permit them to succeed (Intel was lucky that Dell signed on).

c) Inability to choose business – this is a particular issue in the service industry, where success may depend on the ability to turn down business that is not a good fit. It becomes difficult to turn away a project, for instance, when a channel that represents a significant percentage of revenues demands that it be undertaken.

d) Potential conflict of interest – there are several areas where channel marketing can lead to enhanced potential for conflict of interest; the customers of your customers may wish to approach you directly; paying commissions may result in business being directed inappropriately; differential pricing may result in your channels being angered if your direct customers obtain better pricing.

e) Excess growth – a channel approach may result in an inability to control the rate of growth, which has any number of inherent follow-on issues.

The take-away is that channel marketing, while a powerful tool that can be used to fuel growth (and also provide an entrée to otherwise inaccessible markets), does have some inherent risks, and these must be managed with care and foresight if this strategy is to succeed.