One of the most pressing concerns for startups is how to get a new product in front of the right customers without having a marketing budget blowout.
You’ll need to give some serious thought about whether to adopt a channel sales strategy or stick to a direct sales strategy. Which one is right for your startup? Do you have to choose between them, or can you find a balance of both strategies to cover all your bases?
In this post, we’ll take a closer look at direct and channel sales and how to use them effectively to grow your business.
What is direct sales strategy
Direct sales is the traditional method of sales – direct to consumers from your business. For the direct sales strategy to work, you need to hire a sales team that’s good at their job (selling!).
Your team needs to know your product down to the tiniest detail and be excited about selling it for you. It’s your sales team that will be directly responsible for the growth of your business.
Your main means of sales within the direct sales strategy are:
Unlike the channel sales strategy (more on this below), with direct sales you and your team are in control of the entire sales process from start to finish. As you have direct contact with your customers, you can refine these processes (and your core product) to make your sales cycle and acquisitions as efficient as possible.
Building and managing a sales team is expensive, and can quickly tie up your cash flow. If you’re looking to scale with this model, it means putting more money and effort into hiring and training extra in-house sales reps to do the work.
The biggest upsides are that you don’t have any external sales partners to manage, and can keep 100% of sales profits inside your business.
What is channel sales strategy
Channel sales strategy refers to the process of building partnerships with third parties in order to get a wider reach for your product.
Many startups and successful companies opt for this strategy to get their products into the hands of more end users. You might have come across the partnership programs offered by Hubspot, Slack, and Salesforce as examples.
Each of these partnership programs are great examples of channel sales opportunities for app developers and SaaS startups. For example, Salesforce has their AppExchange program, an online marketplace for apps and consulting services. Partners can tap into the Lighter Capital AppExchange Fund to get to the next level, but as a channel strategy they can add their products to the marketplace and take advantage of Salesforce’s customer base to increase exposure and sales of their product. For instance, the SurveyMonkey app integrates survey data into the Salesforce CRM. By partnering with Salesforce, the AppExchange marketplace is now a new “sales channel” for SurveyMonkey.
Companies like AppSumo are also becoming increasingly popular with many early-stage SaaS startups. AppSumo customers get lifetime subscriptions and heavily discounted products, and in return the startups can reach more prospects through AppSumo’s customer base and email marketing campaigns. The drawback to this channel strategy is that these startups must offer their product to AppSumo customers at discounted rates, lowering profit margins. The hope is that the increased sales volume is enough to make the effort worthwhile in the long run.
Partnering allows you to leverage the existing customer base of an established brand, so you can expand your own customer base. This lets you take your products to a wider market and increase your cash flow at low cost, without needing to scale your sales team.
There are a variety of different ways you can implement partnerships for your channel sales, including:
Managed service providers
Depending on the nature of your product, you may be able to include several of these partnership models in your sales tactics to increase your reach and revenue.
Benefits of channel sales for your company
The main reasons that channel sales are popular with SaaS companies are:
Instant credibility by being associated with a well-known partner brand
It’s a model that’s easily scaled. You can increase your revenue and reach by bringing more partners on board.
Reduced sales and marketing costs. Your partners will be doing a lot of this heavy lifting for you.
There’s no need for expansion of your existing team, as a single channel manager can handle numerous partnership deals.
The downsides of channel sales
Bringing third parties on board to help you grow your business makes sense in many ways, but it’s also wise to study the downsides before going all-in on channel sales.
The biggest sticking point will be the cut that your partners take from each deal. Negotiating a fair price will be up to you, but you can expect to lose as much as 50% from each sale that your partners close for you. When you’re weighing up this loss, it’s important to take into account the reduction of your customer acquisition costs, and (hopefully) the increase of your overall sales volume once your partners are on board.
If your startup relies on monthly recurring revenue (MRR), the metrics and calculations around this are impossible to predict when third parties are involved. You may have zero control over their sales process and you’ll be at the mercy of their sales team when it comes to opportunities to close deals on your behalf.
Choosing your sales partners carefully is critical to your (and their) success in this type of relationship. Partnerships can quickly turn sour if communications and support break down, or if there are conflicts between your partners and your direct sales team.
Is direct sales or channel sales best for your startup?
Most startups begin with hiring a sales rep (or two) and taking the direct sales route, adding channel sales further down the track.
Although some companies find huge success using channel sales strategies, it’s not the best decision for everyone.
If your product is new to market and you’re still developing, testing, and finding your product-market fit – your partners will find it frustrating trying to keep up with the changes. In turn, this makes it difficult for them to market your product successfully to their own customer base.
Your target market is also important to take into account with channel sales. When you’re selling to enterprise customers, the market might be too slow and small for this model to work well for you. Individuals and small to medium businesses make the most sense as a customer base when you’re looking at channel partnerships.
Even though setting up channel sales can be more cost effective than hiring a sales team, you still need to invest time in identifying and building relationships with the right partners for your product. If you’re relying on predictable recurring revenue for your business, it’s best to wait until you have more readily available cash flow before you start investigating the channel sales path.
Time and experimentation are the best ways to strike a balance between the two sales strategies and see which ones are most effective for growing your business.
Channel sales vs. direct sales: final thoughts
In summary, choosing between a channel sales strategy and direct sales strategy largely depends on the type of product you’re offering, how developed it is, how much predictable revenue you need, and who your ideal customers are.
You also need to think in terms of profitability and whether you can afford to lose percentages of sales to third-party partners, or whether you want to keep all your profits to yourself.
Finding a good balance of these two strategies will help you take your offerings to a wider market while still retaining control over your sales process and maintaining enough predictable monthly revenue.
Build and grow your Salesforce solution faster with Lighter Capital
At Lighter Capital, we’re betting big on Salesforce AppExchange partners, which is why we’ve set aside a $25M fund specifically to support and grow this amazing ecosystem. Salesforce partners that receive Lighter funding have been able to grow monthly revenue 45% within four months and grow total revenue 100% over 24 months.
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