Larry Walsh is the leading go-to-market advisor to technology executives, channel leaders, and solution providers around the world. Widely known for his ability to cut through problems and challenges facing vendors, distributors, and solution providers, Walsh is sought for his advice, counsel, insights, and consultation on channel strategies and technology market trends.
In this episode, Larry shares how to determine channel profitability and the economic equation that goes with it. He talks about how brand presence is one of the determining factors to persuade channels to take the risk of selling your product. He also differentiates how you can make money or compensate channel partners for selling a product directly versus selling a subscription for a product. He also shares what his company, Channelnomics, does.
Podcast: Play in new window | Download
Why you have to check out today’s podcast:
- Learn how to structure your process in terms of relationships you want to create with your channel partners in order to meet the types of need you have
- Understand the pricing strategy that goes with having channel partners, so you get them to convince to sell your product instead of the competitors’
- Find out the sales motion [sales model] you want to operate on so you determine how to set the compensation and who sets the price
“Once you fall out of that zone where there’s none of the endemic margin in your pricing to support yourself plus your partners, then stop selling to your partners.”
– Larry Walsh
Topics Covered:
01:38 – How he transitioned from being the newspaper editor to a channel guy
05:17 – A channel being a sales motion
06:08 – Talking about parallel channels and channel strategy
07:20 – Pricing strategy for channel partners
11:15 – What he thinks as a mistake when dealing with channel partners
11:57 – Determining channel profitability and the economic equation associated with it
14:57 – How brand presence affects channel partners’ decision to sell a product
15:57 – When can you go shallower on the margin
17:30 – Selling a SaaS through a channel versus selling a physical product through a channel
21:53 – How to compensate a channel partner for a subscription type of sales
22:56 – How do you make money on a sell-through-sell on a more consumption-based model
24:19 – Differentiating the subscription and consumption-based models
25:03 – Talking about lock-in terms and renewal rates
25:44 – Larry’s pricing advice that has a great impact on your business
26:57 – What is Channelnomics and what does it do
Key Takeaways:
“What we look at when somebody comes to us looking for a channel strategy, the first thing we want to know is, who’s the customer? What does the customer need from you, or what does the customer need to be successful with your product? And that will then define the chain or the channel that it goes through.” – Larry Walsh
“To me, a channel is a sales motion. And that can include direct relationships; it can include automated relationships. So, it’s not the ‘what’ that’s doing it, it’s the ‘how’ it’s being done.” – Larry Walsh
“Often, a mistake that’s made when dealing with channel strategies is thinking about this as what do I have to pay versus what do I have to do to enable? Or what do I have to do to engage with a partner to be a good go-to-market, have a good go-to-market relationship?” – Larry Walsh
“When I think about channels, what I’m thinking about is selling relationships.” – Larry Walsh
People/Resources Mentioned:
- HP: https://www8.hp.com
- Cisco: https://www.cisco.com
- Microsoft: https://en.wikipedia.org/wiki/Microsoft
- IBM: https://www.ibm.com
Connect with Larry Walsh:
- LinkedIn: https://www.linkedin.com/in/lmwalsh2112/
- Email: [email protected]
Connect with Mark Stiving:
- LinkedIn: https://www.linkedin.com/in/stiving/
- Email: [email protected]
Full Interview Transcript
(Note: This transcript was created with an AI transcription service. Please forgive any transcription or grammatical errors. We probably sounded better in real life.)
Larry Walsh
Once you fall out of that zone where there’s none of the endemic margin in your pricing to support yourself plus your partners, then stop selling to your partners.
[Intro]
Mark Stiving
Welcome to Impact Pricing, the podcast where we discuss pricing, value, and the indirect relationship between them. I’m Mark Stiving. Today, our guest is Larry Walsh. And here are three things you want to know about Larry before we start. He is the CEO and Chief Analyst at Channelnomics. We’re going to learn a little bit more about that in a minute. He and I were on a joint webinar with model and, and I was blown away by his intelligence and how it applies to channels. So, this is just going to be a fascinating conversation. And he started his career as a writer slash editor. And somehow, he became this brilliant channel guy. Welcome, Larry.
Larry Walsh
Thank you. You know, I like the way you position that, somehow, I became this brilliant channel guy, it’s necessity, you know that most writers and editors don’t make any money.
Mark Stiving
Absolutely, that’s why you went into it in the first place, because you wanted to be poor.
Larry Walsh
We used to say in my newspaper days, the competition was so high, because the stakes were so low.
Mark Stiving
Yeah. Nice. So, how did you make the transition? Normally, I ask how you got into pricing. But since you’re not a pricing guy, per se, how did you get into channels? What happened?
Larry Walsh
Storytelling, it’s selling, and that’s why I have to say, about when people ask me about what I do. Nobody understands it, because nobody really understands what a channel is as like, well here in COVID times, it’s very easy. Do you buy toilet paper from Georgia Pacific? No, you buy it from a supermarket or some other retail store that gets it from a distributor that gets it from some logistics company; they get it from the manufacturer that then sources some raw material to make it. So, there’s an entire chain, of which materials flow before they get to you. And that is a channel. And I got into this; it was really a different route. For me, I was still an editor; I was the editor of a magazine called Bar Business, which specialized in technology channels. And I was a security guy before that. I was a guy who wasn’t doing internet and information security. And I found this channel thing. And I was like going; I had no idea what it was. And it’s absolutely fascinating and completely underappreciated.
Mark Stiving
So, it’s kind of interesting because when you said the word channel and described it, it’s not the way I think of a channel. So, let’s talk about this just for a second. I think what you described was more of a supply chain. Right? If so, if I want to build a computer, I’ve got to buy a bunch of parts. And those parts come from sand somewhere that was dug up off a beach someplace, and right and so there’s this whole supply chain to get sand into my computer. And yet, when I think of a channel, I think of it as, there was a semiconductor manufacturer, they built a part, they sold it through a distributor, who had a salesperson who called on a customer, Intel, who bought the product. So, where’s my disconnect?
Larry Walsh
Well, look, I think when I think about channels, I’m thinking about selling relationships. How do we get the product into the hands of whoever the consumer happens to be? Now to secure an example, does, you know, silicon, get to, how can sand become silicon that becomes a chip that gets into a computer that gets to where we are today, recording a podcast? Well, there’s some guy who’s mining sand to turn into silicon; they have a sales process, they sell to a fabrication company, that fabrication company then uses that raw material to create a product. That product then gets sold to a manufacturer or a PC manufacturer, that PC Mac or the chip manufacturer or wherever we are in the stuff gets the chip manufacturer, the chip manufacturer or the PC manufacturer sells it to a distributor and sells into a reseller sells it to us. At each point in that chain there was a sale. Now what you consider to be a supply chain from a manufacturing perspective, you’re absolutely right is that you can actually define that as a supply chain. But for me, as I’m looking at sales strategies, I’m looking at how we get the product to market at each stage and dollar past hands. So, therefore it was flowing through a channel and can trace every product back to its natural material.
Mark Stiving
Okay, so I’m going to define channel as one of those pieces. And so, if you think about the supply chain going from sand to computer, there was a channel to get sand to actually to the silicon manufacturer. Then there’s a channel to get the silicon to the semiconductor manufacturer, and then there’s a channel to get the semiconductor to the computer manufacturer. Right? And so that helps me think about it, because now I only have to worry about the profitability of one company at a time, right, the customer I’m dealing with.
Larry Walsh
Right. And so, whenever you’re talking about, and keep in mind, a lot of, at least in my orbit, a lot of people wanting to find a channel is having a one-tier, two-tier relationship. Either you’re going through a reseller, or you’re going through some level of distribution to reseller to customer, to me, a channel is a sales motion. And that can include direct relationships; it can include automated relationships. So, it’s not the what that’s doing; it’s how it’s being done. It’s very simple for me because when I look at the relationships within channels, the question I’m asking is, what’s the relationship? Is it sell-to, sell-through, sell-with? Are you referring? Are you automating? I don’t care what you call yourself. I just want to know how you’re structuring the process.
Mark Stiving
Yes. And in today’s world, we’re probably doing multiple of those at once.
Larry Walsh
Probably, yeah, we are ultimately. And that to me, is that we’re toying with some new ideas around this. Yes, and nobody would actually call it this. But there are such things as parallel channels. So, if you take companies that we support, you know, we work with companies like HP, Cisco, Microsoft, and so forth. They have different types of channels to meet different types of needs. What we look at when somebody comes to us looking for a channel strategy, the first thing we want to know is, who’s the customer? What does the customer need from you, or what does the customer need to be successful with your product? And that will then define the chain or the channel that it goes through?
Mark Stiving
Okay, this is starting to make a lot of sense to me. So, let’s pretend for a second that we’re going to sell through a secondary channel, whether it’s a distributor or a rep firm; I don’t really care, right? Now, we’re going to sell through a channel. And we need to get the product to an end buyer. When you think about pricing, which I do all the time, do you have a method to teach people how to price? Or would you just like to judge my method and what I teach people how to price through that?
Larry Walsh
You know this is a reason why I’ve been looking forward to this conversation because it is a huge debate in channel circles or actually around channel circles. What I mean by around is that channel people are overlooked and underappreciated because sales organizations say they need their channel partners, but then they want to take credit for it all. And nobody wants to pay the overhead of supporting a channel, even though channel sales have proven time and again to be less expensive and more profitable to support than a direct sale. However, when we start talking about pricing strategies, the technology market where we are primarily specialized in is going through… I have to say that I think that at some point over the next decade, the rest of the market will fall in this direction, is going to services. So, it’s not that you’re differentiating between what is a product and what is the service. It’s that we’re selling products as a service, then some people listening in may have heard this term everything as a service. So that’s the sell everything on subscriptions. Well, it’s an interesting case because the channel typically operates not on pricing versus so much as discounting or margin. So, what they’ll say is that we will discount, we will give you the partner, a margin, a share of the margin, so call it 10%. And then they’ll go through their discounting process. So, we go from straight to, you know, the difference between street form price and strike price. So, it doesn’t matter because the partner who is going to receive that 10% no matter where they end up in the discounting. The problem with services is particularly in, when I said I worry about what the sales motion is a difference in when you deal with the channel. The channel pricing is independent of yours. So, you can say that you’re setting the price; the street price is $100. And you’re going to give the partner 10, 20% of that. But the partner can’t live on 10 or 20%; they have to come in and add something to that. So, they’re going to do their own markup on top of it. And so, the challenge that a lot of companies do going into services now is understanding what is the appropriate markup or what is an acceptable markup on top of the services or whatever they’re enabling the service to be sold as.
Mark Stiving
Let’s just say let’s not bring in services yet because I want to get to the pricing mechanism. And then we’re going to confuse the heck out of it when we bring in everything as a service because that to me is much more challenging to think through how do I sell on a channel if I’m going to sell a part. I don’t care what is it, to sell a tractor through a dealer, right? I’ve got a thing that I’m trying to sell here. The way I think about pricing this if someone were to ask me, how do I price this through the channel? I would always say, well, what’s the end customer willing to pay for the product? So, let’s go out to the farmer who’s thinking about buying a tractor? How much do I think it’s worth to him if I’m selling John Deer, what’s the Kubota price? And are we better? And how much better? And so, I’m looking at that end-user price? And then I’m stepping back and saying, okay, how much do I have to pay my channel, my distributor, my dealer to motivate him to sell my product. And I think of that just like a price, right? I’m paying him to do something for me. And that payment could be a 10% margin or 20% margin, whatever it is. And we often think of that as a margin number as a percentage, not as a dollar value. But it’s really just okay, just like I want to sell to an end customer, I have to know this dealer could be selling my tractor could be selling somebody else’s tractor. How much do I have to pay him to motivate him to do a good job selling my products?
Larry Walsh
That’s a very monolithic way of looking at it. And that’s often a mistake that’s made when dealing with channel strategies, thinking about this as what do I have to pay versus what do I have to do to enable? Or what do I have to do to engage with a partner to be a good go-to-market, have a good go-to-market relationship?
Mark Stiving
Okay, so I got to sit back because there’s nothing different between what I said, and let’s pretend I’m going to just price a product out in the marketplace. And you can say, well, the price is just kind of monolithic, that’s just the number where you really want to be asking is, how can I add more value to my customers? Are they willing to pay me more money? And absolutely, that‘s an absolutely true statement. And I think our channel partners do the same thing?
Larry Walsh
No, no, no, no, no, no, no, no, no. And we may be talking past each other. But a lot of the equation has to go into whether you may be surrendering 20 points to a partner. But how much more can the partner add on independent of you because of that sale? What is the economic opportunity that is being created as a result of that product going in? They may not make a lot of money, if they’re making $20 on $100. sale, they have to do five times the sales as you to make the same money. So, the real equation in this is, how do you at least this is the way we look at it is, how do we define the total economic opportunity associated with that one sale? So, if a customer spends $1 with you on this product, you know, the pricing impact, I’m going to resell you and the customer is going to spend $1? How many more dollars will they spend with the partner as a result of that sale? That’s the calculus that we go through to determine channel profitability and the economic equation so many times, and it can be as you know, we’ve seen numbers ranging from seven to one to 19 to one.
Advertisement
Pricing decisions feel risky. How nervous are you knowing you need to raise prices? When, where, and how much should you raise prices, so you don’t lose customers or lower your rate of new customer acquisition? It’s risky enough to make you want to put it off till next year, along with any growth. But pricing doesn’t have to be such a mystery. When I work with clients as their go-to-resource for pricing advice, I help them better understand the value of their products and how their buyers use price to make purchase decisions. We jointly create strategies they’re confident implementing. I can do the same for you. Together, you and I apply pricing frameworks to your price increase initiatives, or your new product launches, or even moving to new pricing models like subscriptions. The best pricing decision you can make right now is to gain access to proven pricing advice. Take some risk out of your pricing. Learn more at impactpricing.com/advisor. I look forward to working with you.
Mark Stiving
So, I actually love this conversation. Thank you, Larry. So, the way I think about it in the way I tried to describe what you just said to me is, let’s say that I have a product that you’re going to sell a ton of accessories around my product. You would likely be willing to sell my product at a much tinier margin than some competitor who doesn’t have as many options. He doesn’t have as many upsells; you’re not going to sell more things. And so, to me, it’s all about what does it take for that channel partner to make more money, convince them that selling my product is a better decision than selling my competitors’ products?
Larry Walsh
So, the caveat on that is that do you have the brand presence to have that kind of leverage? So better known brands, market leaders can afford to have skinnier margins going to their partners because they have higher consideration and purchasing rates amongst their customers. Now, if you look at it from a startup perspective, that’s trying to build market share or build presence, maybe they are going to spend more on the margin so that they can, you know, to cajole partners into selling the more or taking a risk by selling them. So, it is very contextual in the way that you set these levels. I agree, 100%,
Mark Stiving
I agree, 100%, right. It’s just like, if I had a good brand, I could charge a higher price to an end customer. If I have a good brand, I can probably get away with that. We could call it charging a higher price to my dealer. But we could also call it just to squeeze the margin because of the brand image I have.
Larry Walsh
I mean, I wouldn’t call it squeeze in the margin; I think it’s a matter of equity. And again, if you can say, you know, if you have a market leading brands with market-leading products that are in high demand, maybe you can go shallower on the margin, but it’s mostly because you can then also justify that by saying how much more they’re going to be able to do and attach sales. That’s the logic behind it.
Mark Stiving
Yes, Sir. And it may not even be attached sales; it may just be, look, people are going to call you and ask to buy my product where you have to go physically sell somebody else’s product.
Larry Walsh
Yeah, I mean, hey, look, nobody ever knows, it’s the old saying nobody ever got fired for buying IBM. Yeah, that’s because it was a safe purchase. And as a result of that, the IBM partners, I mean, it’s not so much like this today, and there’s a lot more competition. But back in the day, IBM partners were very comfortable because they knew they had a first-mover advantage in terms of consideration.
Mark Stiving
Okay, awesome. This has been fabulous so far. Now, when we were at the Model Land meeting, I asked you a question at the end, and you didn’t answer it. So, let’s work our way towards getting to that question. Okay, let’s talk about selling services through a channel. So, by services, we’re going to talk about SaaS or XaaS or whatever it is, but let‘s think of it as a subscription-type product, where you’re going to have a monthly or annual payment for a product. Okay, first off, you have any general comments about what does that look like? How is it different than selling a tractor through a channel?
Larry Walsh
Well, it’s vastly different and exactly the same. So, a lot of the same considerations that go into it are still the same, you still have to provide knowledge exchange and skills enablement. You still have to provide marketing support, marketing materials, and then you can start talking about, you know, how do you prime the engine with incentives, either front or back incentives? Right? The difference is beyond that. This is where those cloud vendors or those services companies have to make choices around what they want to do with a partner, or what’s the partners’ expectation. So again, come back to what’s the sales motion, is it sell to or sell with, or sell through, because if it’s sell to, then the reseller or the partner in which we call them service providers, they are the ones who are actually branding and delivering the service. So, they are the end-customer to the cloud company. And then they are going to create a service independently, and then sell that down to their customer, if it‘s sell with and there is some level of collaboration between the two companies. And if it’s a sell- through, it’s a reseller motion where they’re just passing paper. So, the partner in this instance, we’ll just create the contract, and they may have some lingering service or administrative role that goes on to support the customer. It’s the choice though, and this is what I mean by choice has been made. Is that do you want to cut the partner into recurring revenue? Or do you want to pay the partner for the total contracts are some percentage of the total contract value? And then let them move on to the next customer? And that is a bit of tension that’s going on, at least in the services world is which one should it be? Because if you have them on the share of the recurring revenue, well, there’s mind you, let’s set aside the entire you know, acclimating to that model and building that recurring revenue stream. But now you’re paying the partner in perpetuity for something that happened once or at least perceivably happened once. But if you do a transactional model, where you pay them on the TCV, and they get paid once, and they’re largely disengaged, then do you run the chance of losing the partner or the customer? So that’s where we, that’s why I say we have to make choices in terms of which model we choose and how do we set compensation and then on top of all that, is that there are differences between this, how they get price, so in the sell to model, the partner sets the price, in the sell through sell with model, the partner and the supplier or the cloud company will mutually set a price. And what we see happening is that starting to sense this earlier, and I sell two bottles, I may sell it to you for I may say the list or the street price is $100. I may sell it to you for 80. And then I see you go out and charge 200 $250 for it. And I look at and go, oh my god, I left money on the table. No, you didn’t leave money on the table, is that the partner is the one who’s out there, you know, they had to mark up the price because they’re the ones carrying the heavier load. But yeah, we had this conversation often.
Mark Stiving
And without a doubt, the partner in the sell-to model you just described, without a doubt, that partner is adding value somehow. And that’s how they’re able to get away with that $250 price point, or whatever it happens to be. So, I’m not so worried about the sell-to people, because I think that is a VAR, right? So, I’ve got a value added reseller, I’m going to sell them something, they’re going to put value on top of that and resell it at some other point. And that just seems normal to me as in normal business. But the sell-through or so with model, I think that’s where it gets really, really hard. Because as you said, I used to get, you know, when I sold a tractor, hope you don’t mind I keep bringing up tractors, right?
Larry Walsh
I’m beginning to get an impression.
Mark Stiving
When I sold a tractor before, I may have sold it for, let’s say, $50,000. And my dealer was getting 10,000 off of that. And that’s a big chunk of change. But what if I’m able to, instead of selling a tractor, sell a subscription to a tractor, right, sell the ability that you can use it, but you don’t really own it. And you know, as long as you’re using it, we’re going to charge you based on how much of your fields you plow or how many minutes it’s running, or whatever it happens to be. So, now, how do I compensate my channel with that?
Larry Walsh
Well, look, I think you have it backward, in the sell to model it’s not a VAR model because the partner in that scenario is the end customer. And in order for you as the manufacturer or the supplier of that service, or whatever is enabling that service, in order for you to grow, you are dependent on that partner growing their business. So, they have to continually consume that product in order for you to make more money, as opposed to what you’re describing and sell through or sell with is that there may be a partner involved in that resale of a product or service. But you’re the one who has more control over the pricing and the terms. And how do you make money on this in terms of, you know, how do you compensate the partner? How do you make money on a sell-through-sell-with on what you’re describing as more consumption base? That’s a really good question. If you figure it out, let me know.
Mark Stiving
Wait, that’s the whole reason I invited you on the podcast, Larry, come on.
Larry Walsh
There’s like, the truth is that it’s relatively simple, is that, then you’re looking at the TCV. So, the total contract value should be able to inform the compensation. That’s what I’m saying is that in those models, we tend to recommend more transactional or more one-time compensation for the partner involved to say, okay, it’s like, if you sign a 12-month contract, it’s $1,000, we’re going to give you 10% of it, here’s $100 now, or 20%, or two months, or whatever it is, and give it to you and off you go. The problem you’re describing though, is, going forward, is today we are on subscription, subscription and consumption are two different models. So, a subscription, I’m paying a recurring fee for ala carte. I get his meal, the buffet, the buffet meal out there in Reno is that I can eat as much as I want or as little as I want. It’s entirely up to me, but the price remains the same. On consumption, I don’t know what the total contract value is, until the contract is over.
Mark Stiving
Yeah, and believe it or not, that’s actually true with subscriptions, as well. Because even if you paid me the exact same amount, month after month after month, I know what you signed up for in terms of the contract, but you’re going to stay with me for the next 20 years. And so, the actual lifetime value of that customer is much, much bigger than the one-year contract that they signed in the beginning.
Larry Walsh
Oh, without a doubt, I’m not going to diminish the total lifetime value of a relationship. What I mean by it is, though, is that in the subscription model, you know, what you’re going to get? There is a high degree of certainty of the amount of money you’re going to get from month to month, or year to year. And consumption-based, you know, it’s like electricity. My electric bill is never the same twice. But my internet service is exactly the same. So that’s what I mean in terms of the variableness and the unpredictability between those two models.
Mark Stiving
Yeah, absolutely. And I could see how that confuses the channel a little bit if we’re going to sell them based on a contract. Did you sign the two-year contract? Yes, we’ll get we’ll give you this much.
Larry Walsh
When we first started selling services, it truly was month to month; sign up, we’ll charge you month to month. And for the customer that was decreased risk, you know, if I don’t like this, I can back out of it. Well, what do we have now? If you can still go on to any SaaS provider, by month to month, but if you sign up for the year, they’re going to give you 20 points. Why? Because they know they want to lock you in for the year, they want that level of certainty. And you’re right, the renewal rates, well, renewal rates are an interesting conversation onto themselves. We say, you know, if you’re not renewing it, 90%, then you got problems.
Mark Stiving
I think that’s pretty reasonable for a lot of businesses that makes a ton of sense. So, okay, Larry, this has just been fabulous. I’ve loved this conversation. But we’re going to have to wrap this up. And now I’m going to ask you a real pricing question. What’s pricing advice you’d give our listeners that you think could have a big impact on their business?
Larry Walsh
Pricing advice for your listeners, you know, again, I’m a channel guy. So, take this for, because I deal with how pricing affects the value chain in the market. And to me is that this is about setting a price that matches what the market is willing to pay and a place where you can afford to work with intermediaries. And we’ve actually created a, I wouldn’t go as far as calling a model, but more of a primmer explanation on this is that once you fall out of that zone, where there’s not enough endemic margin in your pricing to support yourself plus your partners, then stop selling to your partners.
Mark Stiving
Makes a lot of sense. All right, Larry, you know what, I didn’t ask you to, and could you give me 30 seconds? What does Channelnomics do?
Larry Walsh
We do a lot. Simply put, we’re a research and strategy firm, we help technology and manufacturing companies around the world identify, plan, strategize, and understand indirect routes to market. So, we work in every region 100; I think we’ve touched 103 countries. And our entire days in and out are just really playing better routes to market for our partners.
Mark Stiving
And I got to tell you channels really are confusing. I mean, there’s so much going on in channels. So yeah, nice. Hey, thank you so much for your time today. If anybody wants to contact you, how can they do that?
Larry Walsh
Look, reach out to me directly. I’m really easy to get to [email protected] or just hit our website channelnomics.com, and we’ll get you the right person to talk to you.
Mark Stiving
All right. Thank you. Episode 124 is all done. Thank you for listening. If you enjoyed this, would you please leave us a rating and a review? Apple podcasts would be phenomenal. And finally, if you have any questions or comments about the podcast or pricing in general, feel free to email me at [email protected]. Now, go make an impact!
Podcast: Play in new window | Download
Tags: Accelerate Your Subscription Business, ask a pricing expert, pricing metrics, pricing strategy
