As the former owner of an MSP software disty who has spent the last 4 years delivering growth in Vendor Land, I feel it's my duty to lift the lid on what really makes distributors tick.
What's the perfect solution for getting software products into the global MSP market quickly and efficiently?
When starting out, the answer seems straight forward enough. You would set up a direct sales and marketing function. If you are fortunate enough to be based in North America, you have access to a huge and mature MSP market, a limited number of time zones to work with, a buying culture that you deeply understand, a market that speaks English as it's first language and transacts in a single currency.
Naturally, the time comes to look at scalability and at this point it makes sense to look at other geographical regions. However, when you look at other markets things suddenly become a lot more complex.
Take Europe, Middle East and Africa (EMEA) for example. Start with the fact that hundreds of MSP vendors want a piece of the pie in a sector with only around 40 true product categories. This is a region with 116 countries, 2500 native languages and 25 mainstream currencies. However, the real challenge is the fact that all this diversity means that each country has its own very distinct buying culture and processes. This is before you even think about Latin America or Asia Pacific.
Suddenly, global expansion can become a more complex and expensive endeavour than anticipated.
At this point, vendors tend to come to a fork in the road:
Option 1 - Open a direct sales office and put feet on the ground.
Option 2 - Set up relationships with regional distributors and hire a small, remote channel management team.
Option 3 - A hybrid of the two, going direct in some countries, and via distribution in others.
From a financial perspective, Option 2 - selling via distribution - can feel like a solid choice. It gives you an opportunity to test certain markets whilst building brand presence and building initial revenue.
But, how do you actually engage a distributor with the assurance that they will truly be active in selling your product? Whilst there are many vendors enjoying huge success in going to market via distribution, I also commonly speak with leaders at vendors who feel disillusioned or upset that their distributors are not performing as they had expected.
The truth is that there are a huge number of factors - many of them variable - that play into making a distribution relationship work. Sometimes, these factors are nothing to do with the vendor and the distributor might genuinely be having some challenges. However, in many cases the vendor needs to look earnestly at how they have set up the relationship commercially, the type of distributor they have partnered with and dynamics in the wider market.
A Rapidly Changing Distribution Landscape
Right now, fundamental shifts in the distribution landscape are taking place. What worked for vendors 2 years ago might look completely different today. The assumption that "distribution is distribution" could not be further from the truth, especially when it comes to MSP and cloud products.
There are typically 3 types of distributor in the market:-
Broadliners
Value Added Distributors
Marketplaces
Right now, we see many of the Broadliners - who have their heritage in shifting tin - trying to move away from largely being focussed on a traditional sales motion (annual, perpetual sales via resellers), into a marketplace dynamic where partners can procure cloud products on a consumption basis. These Broadliners offer access to vast partner networks, sometimes thousands of partners per country, but onboarding is slow and cumbersome with legal processes and API developments sometimes taking years, and sometimes lacking focussed execution after launch.
We then have born in the cloud marketplaces who have moved faster and seen explosive growth, especially in the Microsoft space. However, they also experience their own growing pains with globalisation and the challenges of delivering distribution the old fashioned way while they wait for their marketplace platform technology and geographical positioning to properly mature.
Finally, independent Value Added Distributors, typically specific to one country or region can provide hyper focussed support and big impact. However, they tend to have extensive vendor waiting lists and are able to be selective about who they work with.
Key players in the market are also on the acquisition trail. Bringing together a group of distributors in different countries, all with their own product portfolios is a major challenge. Suddenly, a distributor goes from being an independent Value Added Distributor (VAD), and becomes a regional satellite office as part of a group with its eyes on a longer term roll up strategy and multiple products in each category.
For vendors, this changes the dynamic massively. Overnight, they have potentially lost the special relationship they worked for years to nurture and are now in a "pay-to-play" environment where they have to compete for access into the partner base, and have their training and engagement time with sales staff limited.
Platform Vendors Going All In Impacts Distribution
ConnectWise, Kaseya and N-Able continue to acquire products or develop their own at a truly staggering pace and are moving closer the the "one-stop-shop" concept. Each of these vendors now boast a substantially differentiated offering compared to the legacy days of PSA and RMM. In addition, NinjaOne, Atera, Halo PSA and Acronis are the new kids on the block with truly impressive offerings in the multi-product platform mix. The average MSP needs products in 35-50 categories, so the ability to streamline and consolidate under one trusted brand makes sense.
In addition, as we move further into the realm of "as a service", these platform vendors are best placed to support MSPs in co-working relationships. For example, N-Able's new MDR service allows MSPs to whitelabel the service and work hand in hand with the vendor to deliver a high calibre security offering.
This all in approach from the flagstone MSP platform vendors, all of whom have a substantial MSP community following and engagement resources, means that the job gets harder for MSP focussed distributors vying for the attention of MSPs, and also vendors who want to penetrate the market but are not in the platform fold.
The Distribution Enigma
Distribution can easily feel like a complex strategy to undertake. I tend to compare it to being like a box of mixed up cables that needs to be untangled, but you just stick it in the corner while you decorate the rest of the room.
The truth is, it doesn't need to be such a challenge. Finding the right distributor can be absolutely pivotal for your business. There are just two key things to understand:-
The Concept of Distributor Risk
The 9 Foundations of Distribution
Distributor Risk
I like to talk about Distributor Risk with vendors because I feel like there is very little chance that vendors fully appreciate what it takes to be a distributor, and the risks involved. Discussing this can provide clarity on distributor intention and agenda, therefore aiding the relationship.
Imagine someone coming to you and offering you a fantastic new opportunity to join a progressive software vendor. You might be excited at the prospect of a juicy salary and share options. When you sign up, you know that the business already has resources. If you are in sales, you know there is access to an abundance of leads, sales engineers, marketing teams and operational people to handle billing and revenue collection.
But hold on, if the CEO came back to you and said actually this job is commission only - no base salary, you get to keep 15% of the revenue, what would you think?
At this point, you might be getting ready to wave a red flag - but there's more.
You need to collect and hold the money yourself and accept the credit risk if customers don't pay.
If you are selling in Europe, but the vendor is American, you need to be ready to take the hit on currency fluctuations.
You also need to find your own leads, and probably sell in competition with the company, which has employed sales people in the same region to give customers "other options", but they possibly won't tell you that until you actually see it happening because they didn't think that it mattered, and they will probably be selling at a lower price.
In addition, you need to employ your own sales engineers and get them certified on the product. For the 15% revenue you get, the business will provide some initial training but after a month you are on your own.
When it comes to marketing, you will need to cover the cost of that yourself for at least a year, to see how you get on - then if you are lucky the company might co-fund 50% of your marketing initiatives to help sell the product.
You have to grow above expectations, make a big impact - maybe the vendor wants 100 new MSPs in year 1 (which probably means you need to work through about 800 sales qualified leads). All of this with no ownership of the brand, no control of messaging, and no involvement in deciding the long term strategy of the business.
At the end of all this, if you don't quite meet expectations (or even if you do), or if there is a change in CRO the vendor will possibly "quiet quit" on you and find somebody else to try, leaving you unaware of your new competition until you trip over a low key press release.
Do you take the risk? Probably not.
Distributors do all of this by choice. The more successful a distributor becomes with a vendor, the higher the risk - because a single change in go-to-market strategy, or even a bad Channel Manager can have a fundamental impact on the business.
When vendors can go into discussions with distributors with all of this in mind, they can start to get a true understand about how a distributor will act as the relationship progresses.
The 9 Foundations of Distribution
The 9 Foundations are a ranking system that we created at my old distribution business - Zedsphere - to help us understand how best to place our focus. It served us well, and allowed us to identify the vendors that we could be most successful with.
Using The 9 Foundations prevented us from doing a little for each vendor, and helped us do a lot for one or two very strategic partners. This is really how our special talent became getting vendors their first 250-500 MSPs in the EMEA market.
For every box a vendor can tick against one of The 9 Foundations, the higher they rank. A 9 out of 9 is gets massive focus, a 1-2 out of 9 would attract a more passive/reactive approach.
1.Margin Availability
Distributors need to cover the cost of marketing, sales people, sale engineers, events, operations and finance and keeping the lights on at the office. In addition there's business tax and currency fluctuation to consider. In the MSP space, a distributor should be looking to make a minimum of 25% gross margin. This means that as a vendor, you should be prepared to give a 50% distributor discount, because MSPs need a partner discount as well. If the product is not sold on to the end user, this can of course be reduced - but it still needs to be meaningful.
This means that even with a 25% margin distributors don't start to make money on a vendor product until they are generating at least $1-2m dollars a year in revenue. Up until that point, most of the cash is absorbed by running costs. This is particularly important point to understand for vendors who are new into the market.
2. Run Rate
A great way to help distributors get past that essential $1-2m point is to provide them with some run rate business. This means switching partners across from a former distributor that has been terminated, or switching your direct business across to the channel.
Many vendors baulk at this concept because it means disrupting the channel, it creates a lot of work and they possibly lose a significant chunk of revenue to the distributor. It's fundamentally a very brave move for a revenue leader at the vendor to make, and requires ultimate trust in the distribution relationship. It is also the fastest route to success with a distributor because you become important to them overnight and it's a surefire way to "switch on" a distributor.
3. Marketing Funds
Vendors should provide an MDF programme that is transparent and fair. Commonly, vendors feel that "fair" means that the distributor makes the marketing investments initially to prove their capability, and the vendor will put skin in the game when they feel satisfied that the money will be well spent.
The fact is that with multiple vendors on the disty roster willing to splash some cash, vendors who don't or can't make an MDF contribution will be left out of events, lose mind share and lose momentum before they are of the gate.
4. Inbound Leads
This is a complex process operationally, but if you get it right - it can be the secret sauce to success. At Zedsphere, we had an internal SLA that we would always strive to have a higher conversion rate from lead to close than the vendor. I always figured that if the vendor saw that we were the absolute experts on taking a lead and closing a deal, they would always trust us with leads moving forward, send us more and tell their friends.
We achieved this success by ensuring that inbound leads received by the vendor were routed directly to us, on the agreement that we would pick up the phone and call that prospect within 2 minutes. When a lead landed, everyone on the team would be notified and we would all shout 'LEAD IN", then, the first person available would pick up the phone, and usually the prospect (to their amazement) was still on the product website when we called.
Getting good leads to a distributor is the beating heart of the relationship, it keeps them thinking about your product and actively selling it - and it gives you a reason to continually train and engage them.
However, there is a BIG caveat here. You need to be certain that the distributor is treating your leads with respect. After 4 years working vendor side, I have to admit I've been dismayed at the poor way in which some distributors treat these golden nuggets. Unfortunately, many vendors have a bad experience with one or two distributors and they never trust a disty with leads again, and that is a great shame for everyone involved.
5. Vendor Rep Relationship
This one is pretty simple. If your Channel Manager is not a nice person, the sales people at the distributor are less likely sell your product and it can ruin the relationship. It doesn't matter if the CEO at the disty thinks they are great, it's the sales reps and SEs on the frontline, and if they get treated poorly, they have plenty of other products to push.
In my time, I've seen vendor reps:-
Threaten my staff for not making sales
Make inappropriate sexual advances on my female team members
Take my staff out and offer them Cocaine
Boast about how much money they make
Offer my team members personal bribes to introduce them to partners
Express shocking and extreme racist views in a group setting
The list goes on. Regardless of personal tastes, there should be an expected level of decorum that exists when representing a business. If a partner lets you know about a problem with the person representing your business, you need to respond appropriately and do something about it, that person is doing severe damage to your business and your brand.
6. Product Buoyancy
The level of demand (or potential demand) for your product will have a huge impact on how positive a distributor feels about working with you. A distributor might love a product so much they they are willing to go all in with minimal support from the vendor. However if you are a middle of the road product in a saturated category you shouldn't be expecting a distributor to set the world on fire without ticking at least 5 or 6 of the boxes in the 9 Foundations.
Also remember that the product is only one part of the process. Even if your technology is world leading, you need to make sure you get the word out about how it will benefit MSPs. You can't adopt an "if we built it they will come" mentality, especially when working with distribution.
7. Executive Buy In
It needs to be clear to the distributor that there is support for a distribution strategy at C-Level and above, and for the long term. If there is a hint that you will let the distributor win you your first 300 MSPs and then you will open a direct sales office in the region, then they will be reluctant to fully invest. Many distributors have been in this position, me included - it has a massive impact on the business and can ruin years of work.
8. Exclusivity
Give your distributor the chance to own the region. Many vendors think it makes sense to sign as many distributors as possible and let them compete. In some cases this may work for products with huge run rate and super high demand. However, you can easily become over-distributed, making it difficult to focus and you end up in a situation where distributors spend more time trying to poach business from each other, than winning you net new accounts.
It also breeds some contempt when a distributor finds out that you have partnered with their competitor, and they can tend to switch off as a result.
9. Attentiveness and Support
A good way to think about a distributor - and their team - is as though they are team members that you have actually employed. In effect, you are in a situation where you have an extended group of people selling your product. If you had employed them, you would want to ensure that they had appropriate training and support, but importantly access to your leaders and an understanding of the company strategy.
This is challenging to achieve, because of course every vendor wants facetime with distributor staff and it's impossible to provide that for every vendor. Channel Managers who want regular "cadence calls" without a truly beneficial agenda other than to tick their activity box, might find that they are kept at arms length.
The real way to get access is to tick as many of the 9 boxes as possible, and be creative and inclusive with your distributor strategy.
Distribution is a go big or go home option for vendors
All of this considered, it's clear that working successfully with distribution is not as simple as just signing an agreement and pressing go.
Every distributor is different. Each has their own super power, and it is up to the vendor to understand what benefit each distributor brings and what their capabilities are.
Distributors are so varied in size and shape that you may think a lot of this stuff does not apply. Would a huge broadliner think about The 9 Foundations in the same way as a small regional independent Value Added Distributor?
Fundamentally, yes.
At the end of the day, there is a leader at the distributor making an assessment of the relationship based upon its commercial virtues. Whether that's a Vendor Analyst at a Broadliner, or an Owner at a VAD - it needs to work for them, and if it doesn't there are hundreds of other vendors in the space who might just tick a few more boxes.