Lesson #344: The Lucky 7 Steps to Channel Sales Success

More often than not, most growing business typically use sales and marketing efforts to drive their revenues.  Marketing basically uses advertising and other techniques to bring leads into the business.  And, your sales team either closes the leads handed to them by the marketing department (inbound sales), or they actively hunt new end-clients down with prospecting efforts (outbound sales).  But, there is another path that most companies don’t pursue, which could be the most effective for quickly scaling your revenues, and that is channel sales.  This post will help you understand what channel sales is, and how best to set up your channel sales efforts for maximum success.

What is Channel Sales?

Channel sales is identifying third party companies that have large quantities of your target customers to become a reseller of your product or service, typically in exchange for some revenue share.  For example, let’s say you are a software business that helps manage a company’s financials.  Instead of calling into target companies one-at-a-time with your outbound sales team, let’s stay you reach out to a consulting firm that has hundreds of CFO relationships.  You convince them on the value of your software and how it will help their clients’ businesses and drive incremental revenues for the partner, and their sales team takes your software to market for you.  So, think of it is one-to-many selling, as opposed to one-to-one selling, which should result in a much faster go-to-market strategy and scaling revenues more quickly than you typically could on your own.  

Best Products for Channel Sales

Honestly, most any product or service could be set up for channel sales success.  In the B2C world, let’s say you are a consumer product.  Instead of calling into the end retailers directly, build a channel sales effort around selling into key distributors nationwide that already have solid relationships with the end retailers you want to be distributed through.  Or, in the B2B world, you just need to find potential partners that have large target audiences that match your product or service.  That could be selling through trade associations, consulting firms, value added resellers, or whoever else would make sense. 

Are you intrigued at this point?  Good, you should be, as channel sales is like giving your revenue growth a steroid injection.  If you are now interested in learning how best to set up your own channel sales program, follow these lucky 7 steps to success:

1.  Set Desired Partner Criteria

The first thing you need to do is define what a good partner looks like to you, as trust me, not all partners are created equal.  Setting some high level categories of potential partners and a questionnaire of key questions you want them to answer to “qualify” as being a good partner for you.  Maybe they need to be of a certain revenue or customer size?  Or focused on a potential industry?  Or have happy client references?  Or have known demand for your product or service?  Or a desire to create a new revenue stream for themselves using your product or service?  And, are willing to put some sales and marketing muscle behind the launch of the efforts together?  Or, all of the above!  A good channel partner program must be structured in a win-win way, so both sides are invested in its success and are economically incentivized to see it succeed.

As part of this, you will need to figure out how to structure the program in a way that the channel partners are not duplicating efforts, calling into the same companies or regions.  This is often done by giving the channel partner a particular region of focus (e.g., 50 different partners selling into 50 different U.S. states).  But, before giving anyone exclusivity, make them earn it in their first year.  Give them a sales target to shoot for to earn exclusivity in their region, as you won’t know if they are a good channel partner driving new clients for you, until months after the relationship kicks off.  So, don’t get blinded during their sales pitch to you as a good partner, unless you are 100% confident they are a trusted business in their space.

2.  Partner Prospecting List Creation

Now that you have set the criteria, you need to build a target list of companies to reach out to that you feel meet that criteria.  Let’s say you want to reach out to big consulting firms as channel partners, you can find lists of the largest consulting firms online.  That will give you the company name, but you need to find the right person to sell this idea to.  The bigger the idea, the higher up in the company you pitch it.  If your product or service can become a billion-dollar seller for their organization, it might be time to pitch the CEO or CFO on that idea.  Or, if it is more tactical, find an internal champion at that firm to help you sell it into their organization.  Maybe you want their head of a particular industry group that would most understand your solution.  Or, maybe they have a head of business development that you can pitch, and they will tell you the most logical person at their company most likely to be your primary relationship person.  Anyway, this phase is all about buildings lists of companies, individuals and their contact information.

3.  Selling & Acquiring Partners

Just as you would sell an end-customer, you will need to sell the channel partner.  Expect this time, in addition to pitching your product or service, it is more important you pitch the benefits of the channel partnership to the partner.  You will need to emphasize how much money they will make from the relationship (e.g., from a 20% revenue share), and what your plan is to support them and their customers going forward.  So, make sure you have a good pitch deck for this purpose, a good calling and follow up strategy, and a draft of the partner agreement detailing everyone’s roles and responsibilities here.  It is particularly important to detail how they plan to bring sales and marketing support, as your product or service won’t sell itself.

4.  Onboarding Partners

Getting a contract to close is only half the battle; now comes the hard part.  The partner is going to need to be onboarded to help make them successful.  This includes having training materials and setting up a training program on your products and desired process.  The point here, like in anything, you will need to invest in the partner in order to achieve the desired outcome of success.  It’s much more than simply signing the contract.

5.  Partner Marketing & Support

Now comes their hard part, they are going to have to put effort into sales and marketing, making their customers aware of your new product or service.  The promotional plan will have been detailed in the agreement, and now is the time to execute that plan.  But, you will need to assist your channel partners.  They will need example product pitch decks, email/phone scripts, etc.  Anything you would give your inside sales team, you will need to give your outside channel partners, for them to be successful.  And, you will need to provide them a “hot desk” contact number, in case any of their clients or salespeople have any questions best answered by you.  So, support your channel partners, no different than you would support your in-house sales team.

6.  Revenue Sharing & Reporting

Assuming the channel partners are successful in finding you customers, now we need to pay them their agreed upon revenue share.  So, you will need a clear process to attribute sales from a particular partner.  If you are an online business, oftentimes, that can be done with affiliate tracking software; you give each partner a unique URL to promote, and then if anything closes, they get credit for the sale.  If you are an offline business, it is a more manual process.  That could be the partner gets credit for each lead they send you in your CRM.  Or if they are promoting your product to their customers, they give their customer a unique coupon code or reference ID number they give you at the time of the sale.  But, these revenue share calculations should be done monthly, and reported and paid to the partner at such time.  The sooner they see money flowing their way, the more they will want to promote your products or service.  So, make sure there is a clear process for tracking, reporting and paying partner revenues.

7.  Partner Nurturing & Upselling

You can’t think of this process as “one time and done”.  It is perpetual and recurring, quarter after quarter.  You should set up quarterly business reviews with your partners to make sure everyone has clear goals to shoot for and can report progress thereto.  And, your channel sales manager needs to reach out to partners to stay fresh in their minds and keep them abreast of new products or services that you may have added since the partnership started, so the partner can upsell those products to their clients, as well.  Your channel sales manager needs to manage these partner relationships, no different your sales executives manage your direct customer relationships.

Channel Sales Pitfalls

The one downside of channel partners—they will never love your business as well as you love your own business.  You will never be their sole and #1 priority.  They will obviously bias their own sales efforts over selling your products, and you may be one of many products or services that they are reselling.  That is why it is so important you do your homework upfront, to make sure this is going to be a clear win-win for both parties, so that each party are willing to invest in its success.

Closing Thoughts

Hopefully, you now have a new idea on how best to take your product to market, and channel sales may be that winning formula for your business.  Channel sales won’t replace your internal efforts, but a well-designed channel sales program will certainly augment and accelerate your stand-alone efforts.  If you have any questions, don’t hesitate to reach out.  Good luck!

For future posts, please follow me on Twitter at: @georgedeeb.

[VIDEO] What Makes a CEO Fundable to Investors?

 

I was recently interviewed by the Atlanta Small Business Network (ASBN), an online "television network" serving the small business community, about what venture capital investors are looking for in the CEOs of the companies they invest in.  I thought this video turned out great, and I wanted to share it with all of you, to see if it can be helpful to you in sharpening your own skills to impress prospective investors.  I hope you like it!!

The embedded video player didn't give me the option to change the size of this video.  But, if you want to see a bigger version, simply click the expand size button in the player above, or feel free to watch it on the ASBN website.

Thanks again to Jim Fitzpatrick and the ASBN team for having me on the show.  I look forward to our next interview together.

For future posts, please follow me on Twitter at: @georgedeeb.

[VIDEO] How to Start Selling 'Wisdom' Instead of 'Widgets'

I was recently interviewed by the Atlanta Small Business Network (ASBN), an online "television network" serving the small business community, about how to selling intelligence from data collected from your tools (e.g., Wisdom) can lead to higher revenues and long term client loyalty that simply trying to sell them the tool alone (e.g., Widget).  I thought this video turned out great, and I wanted to share it with all of you, to see if it can be helpful to you in your product design and positioning.  I hope you like it!!

The embedded video player didn't give me the option to change the size of this video.  But, if you want to see a bigger version, simply click the expand size button in the player above, or feel free to watch it on the ASBN website.

Thanks again to Jim Fitzpatrick and the ASBN team for having me on the show.  I look forward to our next interview together.

For future posts, please follow me on Twitter at: @georgedeeb.

[VIDEO] How to Grow Using a Roll-up Strategy

 

I was recently interviewed by Chelsea Wood, a Managing Director at Acquisition Lab, an M&A advisory service for early-stage entrepreneurs that prefer to grow through mergers and acquisitions, instead of building a startup from scratch.  This video presents strategies for how to think about planning and executing a roll-up, rolling many businesses up into one company to achieve better economies of scale (which we better detailed back in Lesson #258).  I thought this video turned out great, and Chelsea was kind enough to allow me to share these learnings with all of you. Enjoy!!

Thanks Chelsea for this opportunity.  It was fun collaborating on this project.

For future posts, please follow me on Twitter at: @georgedeeb.

[VIDEO] What's More Important--Product Features or Benefits?

I was recently interviewed by the Atlanta Small Business Network (ASBN), an online "television network" serving the small business community, about how to best to pitch your product to potential buyers, and whether to emphasize the product features or the resulting revenue, cost saving or user experience benefits to your customers.  I thought this video turned out great, and I wanted to share it with all of you, to see if it can be helpful to you in your selling efforts.  I hope you like!!

The embedded video player didn't give me the option to change the size of this video.  But, if you want to see a bigger version, simply click the expand size button in the player above, or feel free to watch it on the ASBN website.

Thanks again to Jim Fitzpatrick and the ASBN team for having me on the show.  I look forward to our next interview together.

For future posts, please follow me on Twitter at: @georgedeeb.

Lesson #343: How to Analyze and Report Your Financial Results

 

You would be surprised how many entrepreneurs don't truly understand the financials of their business.  Yes they are creating them out of Fresh Books or Xero, and they most likely focus on high level numbers like total revenues and total profits.  But, they don't dissect everything in between.  And, more often than not, when it comes to managing the finances of your business, the devil is in the details.  This post will help you learn the basics of formatting, interpreting and reporting your financials, so you will look like a pro with your investors or whoever else may be asking for them.

The Key Financial Statements

There are typically three financials statements that are prepared: (i) the income statement (or often called the P&L statement); (ii) the balance sheet; and (iii) the cash flow statement.  The income statement measures all inbound revenues and outbound expenses of the company, for whatever date range you are interested in studying.  This is the most studied of the financial statements, as all companies are striving to grow their revenues and profits over time.  The balance sheet lists all the assets, liabilities and equity in the company at any single point in time.  As the name suggests, the asset values, must balance with the liability and equity values. The cash flow statement gives you a true sense to how your cash balance on the balance sheet are moving up and down with any operating, financing or investing activities that may not be entirely clear from the profit levels shown on the income statement.  For example, the cash flow statement will adjust for non-cash items like depreciation and show how cash was used other than for paying expenses on the income statement.

Optimizing The Income Statement

To me, these are the key numbers to study on the income statement: (i) revenues; (ii) gross profit margin (revenues less cost of goods sold); (iii) EBITDA (gross profit less all expenses, resulting in earnings before interest taxes depreciation and amortization); (iv) return on ad spend or ROAS (revenues divided by sales and marketing costs); and (v) return on staff spend or ROSS (revenues divided by total payroll investment including salaries, bonuses, commissions and benefits).  There may be others depending on your industry or business model, but these are a few of the bigger ones that apply to most all companies.

Optimizing for revenues is pretty simple to understand--more is better than less!!  The bigger revenues grow, the better.  So, you are always trying to improve your revenues from the preceding period, either the prior week or the same week of the prior year if there is any seasonality in your business.

Optimizing for gross profit means that you want your gross profit margin (gross profit divided by revenues) to be improving, or at least staying flat in every future period.   Said another way, you want your cost of goods sold as a percentage of revenues to be staying flat or improving. Rising costs will obviously hurt your bottom line profits.  And, looking for opportunities to lower your costs, either with new vendors or more efficient processes will help you here.  Gross margins can vary wildly based on your business model, but often end up in the 20%-80% range, with most in the 30-40% range.

EBITDA is obviously benefitted by improvements in revenues and gross profits, but it is also benefitted by keeping all of your other expenses as a percentage of revenues flat or improving over time.  In terms of which expenses you need to focus on optimizing--focus on the big ones.  For most companies that is typically sales and marketing expenses and payroll expenses.  Those should clearly be broken out as separate line items.  The minor expenses can be bundled into "other expenses", but they too should be optimized where they can.  You are doing well if EBITDA is growing in dollars, and the EBITDA margin (EBITDA divided by revenues) is improving over time.  Worth noting, some expenses are fixed one-time expenses (e.g., your CEO's salary), so they will become less as a percentage of growing sales.  And, other expenses are variable recurring expenses that scale as you grow (e.g., shipping costs), that will most likely stay flat as a percentage of sales. So, know the differences here.  EBITDA margins typically end up in the 10-30% range, depending on your business model.

ROAS is probably the most important metric you are managing for.  You can't grow revenues without growing your sales and marketing investment.  And, you want to make sure you are acquiring new customers as cost effectively as possible.  ROAS typically ends up in the 3x to 10x range, and the higher the number, the more effective your advertising investment is.  Worth noting, it is okay if your ROAS slightly declines over time as you scale, as your initial marketing spend is typically more effectively invested than your tactics used at scale.  But, it always has to end up in a profitable return on marketing investment.

ROSS is another important metric to measure.  It helps to measure that your investment in human resources is maintaining or improving its efficiency over time.  ROSS typically ends up in the 5x-10x range depending on your business model.

Optimizing The Balance Sheet

To me, the key numbers to study on the balance sheet are: (i) cash; (ii) debt ratio (total debt divided by total debt plus invested equity); (iii) current ratio (current assets divided by current liabilities); (iv) inventory turnover ratio (cost of goods sold, divided by average inventory); and (v) return on capital or ROC (net profits divided by total invested capital).

Optimizing for cash is pretty straight forward, more cash is better than less!  You always want to have enough cash on hand to ensure you can at least manage your business needs for the coming 12 months or more.  If not, it may be time to consider a financing or lower your expenses and cash burn rate to extend your "life line".

Debt is typically a bad thing for early stage businesses, given all the risks and uncertainties of a startup environment.  And, most debt for small businesses comes with personal guarantees from the owners, which means if the business can't pay its debts, the individual owners are backstopping the liability, and you can personally bankrupt yourself with any business failings.  But, if you are going to take on debt, never let your debt ratio exceed 50% of invested capital.  And, seek-asset based funding sources that can secure your assets or inventories, without requiring any personal guarantees, where possible.

Your current ratio is basically measuring if your current assets exceed your current liabilities or not, and that there isn't any immediate cash squeeze needed to fund working capital needs.  So never let this ratio go below a 1:1 ratio, or there may be some short term capital needed to fund immediate liabilities.

Your inventory turnover ratio is measuring how fast you are moving product in and out of your warehouse.  It is calculuated based on your average inventory levels in the studied period, not necessarily the point in time balance on a specific date.  The faster you are turning inventory the better, to reduce your out-of-pocket cash investment in inventory.  I would say an average business is turning inventory 3-4x per year.  If you are turning less than that, you may need to write off inventory that is not selling or change your product and sourcing decisions to help the business become more efficient.

Your ROC is helping to illustrate that you are getting your investors a good return on their investment.  Depending on how large your business and how fast you are growing, I would say ROC needs to be in the 15% to 35% range, on average, in order to attract and retain your investors. 

Optimizing The Cash Flow Statement

The cash flow statement is simply another way of studying your cash inflows and outflows, where you obviously shouldn't be spending more than you have to spend.  But, this statement is helping your CFO know whether cash was spent or generated from operations (e.g., capital expenditures for replacement equipment); investing (e.g., took an equity stake in a supplier) or financing activities (e.g., closed a new equity investment into the company).

Reporting Timing

To me, every business needs to be studying its business on at least a monthly basis.  Bigger companies tend to study their businesses on up to a weekly, or even a daily basis.  But, no less frequently than monthly.  So, at a minimum, when you get to the 1st day of any month, it is time to study the financial results of the preceding month.

Reporting Analysis

In your financial statements, I would be reporting results for: (i) the current month; and (ii) the year to date period.  And, I would be comparing them to; (i) the original budget; and (ii) the same results for the prior year period (e.g., compared March 2022 to March 2021).  And, the reports need to include: (i) dollar amounts; (ii) percentages of sales; and (iii) percentage growth rates, for every line item.  These reports need to include each of the important datapoints and metrics discussed in this post, so you can track their progress over time, and study if the business is doing better or worse than budget, and better or worse than last year, and to what extent.  

Here are example column headers for your income statement for the month of March: (i) March Dollars; (ii) March % of Sales; (iii) March % Increase; (iv) January to March YTD Dollars: (v) January to March YTD % of Sales; and (vi) January to March % Increase.

Once the reports are created, now you or your CFO need to study the data and metrics, and produce a Management's Discussion and Analysis document, that discusses the key trends and why the numbers are moving in the direction they are, and why they are better or worse than last year or the plan.  That "WHY" is the most important thing here, make sure you have a firm grasp on the reasons behind any movements in your results or metrics, so you can manage them accordingly.  So, build the monthly discipline of actually studying this when allocating your time.

Closing Thoughts

I was a finance major in college, so financial statement analysis is a pretty basic skillset of mine.  But, if you never studied finance, it can be a daunting exercise.  So, hopefully, this post can help point you in the right direction to truly mastering the numbers of your business.

For future posts, please follow me on Twitter at: @georgedeeb.