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Channel 1.0: how middlemen added value

6 min read By 10/11/2020 No Comments

image: Kelvin Case

In a series of blogs Hennie Jansen, partner and CCO at Channext takes you along his personal journey in channel. From a reseller’s and a vendor’s perspective to owning a marketing agency for 15 years in which he worked a lot with distributors and resellers. Jansen witnessed a revolution of how the companies run channel marketing and sales, resulting in the emergence of a new phase: Channel 4.0. 

But before we go deeper into the revolution, it’s necessary to understand where current processes and flows are coming from.

The first successful channel

The first form of channel sales and marketing has been around as long as humanity. Take for example China’s Silk Road, which was a network of trade routes which connected the East and West. It played a key role when it came to economic, cultural, political, and religious interactions between the regions along the route. As you can imagine, it derives its name from the lucrative trade in silk carried out along its length, beginning during the Han dynasty in China.

Middlemen, people who brought the silk, paper and gunpowder during their travels around the world showed it to locals and explained to them why this was a high-quality Chinese product.

So, what’s changed?

The interesting part is that, in maybe even hundreds of years, not much has changed with regards to reselling. Obviously, the way the products have been marketed changed big time, leading to some very creative campaigns. But what we’re aiming at here are the politics and processes behind selling. In many industries, it’s still a matter of just channelling products. Shipping goods from point A, to B, to C. Without actually adding a whole lot of value per step. But the world has changed because of the internet, which has made the market way more transparent. This results in the price being the only differentiator, while resellers are earning less and less since margins are no longer sufficient.

Delivering a complete solution

When I started my career in the graphic industry, we purchased products as a reseller and sold it to end-users. One of the main brands we had in our portfolio was Digital Equipment Corporation. We sold PDP-11 minicomputers, as they were called, which were used for industrial control, controlling experiments, running businesses, word processing, and many other uses. Of course, nowadays you wouldn’t consider these to be small, but at the time these were the industry standard. We delivered a significant volume to companies in the newspaper and publishing business.

These end-users were happy because we delivered a complete solution to them. And with a complete solution I mean not only dropping off the computers but also pre-configuring them, installing them at the site and training end-users.

We, as resellers, were satisfied because we were fairly compensated. The margins we got (roughly 40%) were sufficient enough to spend on the needed sales and support resources. The money was spent on setting up a team of account managers and account specialists. Because we were selling complex products, we really had to dive into the books to be able to configure the products and deliver a tailor-made product. You can imagine training our staff and supporting the customers was time and money consuming.

Here’s a division of Channel 1.0 into three pillars to give you a more methodological overview of how it was (and in some cases still is) organized:

Location

It was geographically determined who was responsible for selling a product in a certain region. For example, my company had made exclusivity deals with both hardware and software vendors for the Benelux. Our customers knew exactly where to go in case of need for new products or support of a specific brand, without us pro-actively promoting our company. This way, we could fully focus on end-users in this area and we didn’t have to stunt with prices.

Compensation 

Margin agreements were made with regards to reselling products. As mentioned we made annual agreements with hardware and software vendors, with fixed margins. This gave us space to deliver not only the physical products but to actually add value to our service. Nowadays, margins are so thin, resellers have to distribute products at such a big scale in order to be profitable. And instead of the reseller, the internet offers knowledge and support.

Information 

This is the channel structures’ common thread: the need a vendor has to explain to the end-user why the product is the best solution for their problem. End-users literally came to our offices to get a better understanding of the products they were buying or to get help. And since we were the exclusive reseller of these products, there was no competition on that level either. Separate contracts were closed with end-users to guarantee reliable handling and technical support.

Through these three pillars, Channel 1.0 has been thriving for a very long time. As the IT market emerged I noticed that it became more complex to make decent arrangements. The Channel started to move towards a 2.0 phase, which I’ll discuss in my next blog.

In the meantime, you can watch our vlogs too!

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