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Channel Matters Blog > March 2011 > The Channel, the Cloud, and the Chasm

The Channel, the Cloud, and the Chasm

by Chris Marshall
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The advent of the cloud means we still have to cross Geoffrey Moore's chasm. So does that mean that what Geoffrey said about the importance of the channel in helping us do so, still holds or can we disintermediate and go direct?

You will remember what he said (his italics): "The number-one corporate objective, when crossing the chasm, is to secure a channel into the mainstream market with which the pragmatist must be comfortable". That's a pretty resounding vote for the importance of Route to Market considerations. He then knocked down various channel options and plumped for the VAR as the normal best course, even though their services-oriented business model means they aren't scaleable for wider mainstream/late adopter support.

His preferred option was direct sales, as a way of getting fast adoption in the mainstream. But direct sales were considered too expensive outside the sale of high Average Selling Price (ASP) solutions to Enterprise customers. He calculated that, below an ASP of $50k, direct sales were not cost-effective. You therefore need to use an independent channel to amortise the cost of sale across multiple products. He also estimated that retail could not manage products of over £10k ASP, because they were not geared up for the extended sales cycles involved.

However, the call centre and the internet has changed this cost of sale calculation. Dell, for one, proved that you can sell relatively low cost IT products direct over the phone and web very effectively. But even they use the independent channel. And the channel is making up an increasing share of overall IT sales, even as the web cuts the cost of direct sales.

So what gives? The 'whole product', is what.

Especially when solutions are 'out of the box', the now educated buyer is confident to buy 'remotely' with minimal support. But the ubiquity of IT means no solution is an island. The role of the channel is, from the customers point of view, as a 'trusted advisor' or 'single but to kick' as in: "You told me what to buy, you sourced it for me, you put it in, now you can d**n make it work".

Recent research we have done shows a cautious approach to hosted aps among end-users. They are looking for a smooth and variable-speed transition from purchased-and-serviced client-server applications, perhaps through managed services into fully hosted solutions. So the channel is going to have to continue its role as 'the man who makes it all work together' for the foreseeable future.

This trusted advice and integration does not come cheap. Either the customer pays additional fees to the channel or the vendor subsidises them with additional margin to be able to provide it 'free'.

This brings us to the other powerful statement from Geoffrey Moore: "The number one objective of pricing is to motivate the channel".

Now here we have a contradiction. The lower cost of sale is what makes the channel attractive to vendors, but Mr Moore is saying you need to ply them with margin. Isn't that going to make them more expensive? Not if you price right. What he points out is that customers expect the perceived market leader to be 'reassuringly expensive'. About 30% more expensive, by his estimation. If you have to price cheap you are, de facto, not the perceived leader in that market. You need to find a niche where you command more value and can charge more and cross the chasm there.

The final warning is to use that extra 30% to support the channel, not to take it to the bottom line too early. There is a magic period between establishing in the mainstream market and tipping into the price-competitive late adoption area when you can continue to enjoy pricing premium without having to provide the same channel subsidies. That's when you buy your yacht and not before.

The only thing that has changed in the last 20 years about that calculation, is that the yachts have become a bit more expensive. Or you could always get it on a YaaS basis instead.

 

Crossing the Chasm by Geoffrey Moore ISBN 0060517123

 

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