Monday, April 18, 2005

Channel Strategy: Understanding the Costs of Channel Development

Launching a new channel is never cheap. Before advising partners to build channels or launching your own channel program, understand the costs of developing and operating that channel

A couple weeks ago, a channel account rep and I were analyzing the financials of his channel partner. The income statement showed a decline in gross margin (not an unusually occurrence among resellers) and operating income. While channels can be a good route to market, they most often do not yield improved gross margins. Increased discounts to create an opportunity for the partner versus the direct sales force reduces margin.

There are multiple opportunities to link the benefits of a channel to a vendor. Properly implemented, a channel can deliver improved operating profits and can create barriers to competitors and new market entrants. However, channels are not typically a magic way to increase gross margin, despite any given vendor's enthusiasm. Sales channels are about increasing coverage and reducing the cost of sales.

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