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The pros and cons of the 'meat in the sandwich'

The pros and cons of the 'meat in the sandwich'

I was interested to see Dell recently announce the appointment of Simms International as its distributor in New Zealand.

Since day one, Dell has made its direct model a key point of differentiation, so if you’re looking for evidence that the IT industry “ain’t what it used to be” you couldn’t find better than that.

From a vendor’s perspective, a channel-based model is both an asset and a liability. The major pluses are fairly obvious and inherently interlinked: a larger sales force equals increased market awareness and penetration, which leads to increased sales. But there are downsides for the vendor, too. For example, profit margins are lower and reduced control of the sales force can lead to potential customer experience issues.

There are three important “levers” a vendor will take into consideration when evaluating which channel model suits them best: profitability, control of the customer experience and market share. History would indicate that it is difficult (if not impossible) to have all three on a long-term basis.

Apple’s “Apple Store” channel is 100 percent direct and it maximises profitability and control over the customer experience, however it is difficult and very expensive to scale out so it probably wouldn’t drive market share. Up until recently, Dell’s model was fairly similar in that it was direct and maximised profitability and control over the customer experience. However, the company has obviously found that it is not perfect and I suspect their recent moves are intended to drive market share. This contrasts with Microsoft’s channel model, which is successful when it comes to market share and profitability, but which is certainly not problem-free when it comes to customer experience.

While I am on the subject of Microsoft, I am of the opinion its channel is its second biggest asset (after its software IP). I don’t think I would be talking out of school to say that local managing director Kevin Ackhurst and his leadership team are very focused on the health of the local channel and ensuring it remains capable of delivering for Microsoft now and in the future.

Having said that, Microsoft is dealing with a very different environment to that which existed when I first started with the company. Just prior to leaving a reseller to join Microsoft New Zealand in 1997, most of my customers were buying fully packaged product and the margins were spectacular to say the least. $1200 for a copy of Office Professional was about the going rate and, if I recall correctly, the reseller was making around 40 percent margin on each and every copy.

Contrast that with the situation today where the average selling price of a copy of Office is probably closer to $500 and the margin is more like 10 percent and you’re looking at a 90 percent decrease in margin. That is a massive amount of profit to remove from the channel economy and, given that margin pays the mortgage, I suspect it is one of the reasons Microsoft and other vendors aren’t necessarily as “top of mind” with some resellers as they perhaps once were.

In case you haven’t figured it out yet, resellers are very much the meat in the sandwich in the vendor/customer relationship. It is a very safe bet that vendors will be continually changing and fine-tuning their channel models and it is equally safe to say channel economics will be as volatile over the next decade as they were over the last.

There will always be a lot of churn in reseller land - these constant changes almost guarantee it - but the fact that the vast majority of resellers are able to adapt to an environment of near-constant change is a testament to their tenacity and agility.

Brett Roberts is Microsoft NZ’s former CTO and director of innovation, and has spent 25 years in technology, sales and marketing roles. He is also a blogger http://blog.brettroberts.com and a tweeter http://twitter.com/brettroberts


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