I was catching up on my blog reading in my old network of bloggers and saw a thread that is closer to what I am working on now. The discussion related to what vendors could expect from channel partners and, like the 6 blind men and the elephant, all the answers differed dramatically - Alan Shimel wants to pay them for being near a deal when it happens and Mike Rothman thinks vendors are nuts if they think VARs will generate demand.

The root cause for this difference lay in the use of the term 'VAR' generically, without a good segmentation methodology. Not all VARs are created equal, so a way of organizing the market according to behavior, seems more appropriate. So, let's talk about the reseller behavior triangle and what it means to vendors.

An effective way to segment resellers is based on how focused they are on three core functions of a resellers - generating demand for products and services, the professional services to install, implement and configure products and the logistics capabilties for fulfilling demand. Generally, partners who are very focused on a given corner of this map enjoy relatively high profits and have very different metrics for measuring their success.

The partner who is focused on Professional Services as a core focus is generally measuring and rewarding based on billing and utilization rate - the effective yield on services cost spent on payroll and fixed costs.

The partner who is focused on demand generation is focused on product margin - a relative state of exclusivity of marketing yields a higher retained margin and less is given away in price competitiveness with other resellers, so these folks are often asking for exclusivity in a territory or focusing on relatively lesser known vendors.

The partner who focused on fulfillment logistics is measuring GMROI, or gross margin return on inventory, as measured by the aggregate margin on a given product line multiplied by the turns they drive. Typically, these are very large, very call-center oriented partners who have a significant web presence.

In the middle of this segmentation chart is a really unprofitable area, the jack of all trades, master of none. There are a lot of partners that exist in this area and typically, they are small, focused on a non-urban area and survive by being a trusted advisor for their local clients and running a 'lifestyle' business. They can do very well with a product when the technology is new and very 'niche' oriented, but quickly fade as the market progresses.

On the zones between the corners are some interesting partner business models, where partners focus on two of the skill areas. An example of this is Choice Solutions, a VAR in Kansas City that is really good at professional services and demand generation for new products. Jim Steinlage, the CEO and Founder, is always on the hunt for new and compelling technologies that he can take back into their existing customers, as long as the products fit their business model. This is a profitable space to be in, but again, as products mature, he has to often abandon them for greener pastures (or did, this has changed dramatically since deal registration has come along to protect demand generators. More on this in a moment.)

An example of a partner who is focused on demand generation and logistics is CDW. While they get derided by VARs for being low price sellers, the reality from the vendor community is that they do a really good job of upselling from a given base product to additional technologies when the vendor focuses on them correctly. Their recent move into the services space should be interesting to see if they can balance all three areas without falling into the unprofitable zone - history is against them on this.

Technology markets, of course, evolve and follow a clockwise rotation in this model - starting with demand generation (vendor initiated first, then channel initiated, to Rothman's point) and then into being a pro-serve market with the focus on services first being configuration (how does this new technology work?) and then into integration (how does this new technology work with others?). Eventually, the knowledge on a given technology becomes pervasive at customers and then migrates into a commodity phase, with some services on lifecycle management, as the primary channel model.

What does this mean for vendors? First, there is no generic reseller model, but a wide array of behaviors that drive how you should be recruiting and managing your partners. Second, there are programmatic tools for each segment of this model to drive and reward the right behaviors, from deal registration to drive demand generators to customer satisfaction incentives for services to specialized programs for commodity products; applying the right programmatic approach to drive the right behavior for the stage of the channel cycle is critical. Lastly, vendors should think hard about when they enter the channel - too early and you will be paying well in advance of the return you will get. As in life, with channels timing is everything.

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