To Be Able To Generate Revenue

Published Date: 02 Nov 2017

ABSTRACT

To be able to generate revenue and profit companies have to have an access to markets. Most of the companies want to focus on their core competence and therefore market access is handled by intermediaries. This allows companies to grow their revenue and profit without significant increases in fixed costs. Choosing intermediaries is a critical task and must be done accurately because wrong intermediary choices can have significant effects to reputation end economic figures. Choosing intermediaries gets even more difficult when moving to software industry, where intermediaries are usually value added resellers and responsible of complementing supplier’s product.

The goal of this paper is to define criteria to evaluate software resellers. The paper discusses criteria used to evaluate resellers and unique features of software resellers. These theories are combined to define criteria to evaluate software resellers. This new knowledge is then empirically studied with a semi structured interview and the results and the findings are merged to the framework.

The literature review highlights the following criteria: number of sales, number of new customers, growth, ability to reach sales goals, experience, background of the management team and existing products. The interview showed that M-Files considers number of sales, number of new customers, ability to reach sales goals and experience important. From these criteria number of sales and experience were very important. Some criteria were seen interesting and will probably be used in the future. These criteria were profit, debt, reputation and existing products. Some criteria important to M-Files were not mentioned in the literature research. These criteria were size of the company, size of the sales team, engagement of the management team (very important) and experience of the delivery team.

PREFACE

This paper is a report for Tampere University of Technology’s course Academic Writing and Research Methodologies II. The research process has given me an introduction to the fascinating world of channel management. That will help me a lot when I start to do my master thesis from the same topic but in broader viewpoint.

I want to thank Dr. Jouni Lyly-Yrjänäinen for his help and inspirational ideas throughout the process. I also want to thank Dr. Miika Mäkitalo, CEO of M-Files, for always answering positively to my frequent question "Do you have a little time?" Miika’s guidance taught me new ways to plan and write and I am deeply thankful for him. I also want to thank Sampo Torikka, channel account manager of M-Files, and Scott Erickson, Vice president of Channel Sales of M-Files.

Arttu Hujanen

Tampere, 14.9.2012

TABLE OF CONTENTS

ABSTRACT _______________________________________________________ii PREFACE _______________________________________________________ iii

INTRODUCTION _____________________________________________ 1

Background __________________________________________________ 1

Objective of the Paper__________________________________________ 2

RESEARCH METHODS AND RESEARCH PROCESS _____________ 3

Research Methods _____________________________________________ 3

Research Process ______________________________________________ 3

THEORETICAL BACKGROUND _______________________________ 5

Creating an international marketing channel ______________________ 5

Software products _____________________________________________ 8

Choosing software resellers ____________________________________ 10

CHOOSING RESELLERS FOR SOFTWARE PRODUCTS_________ 12

M-Files _____________________________________________________ 12

Empirical study ______________________________________________ 12

Choosing resellers for software products _________________________ 14

CONCLUSIONS _____________________________________________ 16 REFERENCES ___________________________________________________ 17 APPENDIX 1: QUESTIONS OF SEMI STRUCTURED INTERVIEW ____ 18

1

1 INTRODUCTION

1.1 BACKGROUND

According to Dent (2011) routes to market restrict access and without right routes to market a company cannot reach the target market. But companies cannot be presence in all their target markets without major resource investments. For most companies having a sales office in every target market is not profitable or strategically wise due to high fixed costs and fixed capital. Therefore most of the companies want to focus on their core competence and use distributions channels to generate revenue without high fixed costs (Figure 1). Distribution channel can be used to create demand for products and services and also to fulfill demand (Dent, 2011).

Figure 1. The relationship between fixed costs and revenue.

Figure 2 describes the different distribution structures. Many software companies, like M-Files, use one-tier distribution where intermediaries provide special services to complete the customer offer (Dent, 2011). These services can be e.g. installation, configuration, customization or training.

Figure 2. Typical distribution structures (Dent, 2011).

Hujanen, A.

2

According to Kotler (2000) and Fein & Anderson (1997) companies have to decide the number of intermediaries at each channel level. Mallen (1996) states that there are three approaches: Intensive, selective and exclusive distribution. Intensive distribution aims to have as many distributors as possible. In exclusive distribution the policy is to have only one distributor in a given geographical area. Selective distribution is something between these two extremes. But the amount of distributors affects also to the quality of the distributors. It is important that the distributors suit for the company’s strategy and the brand. According to Dent (2011) routes to market control the brand, so the attributes important for brand (e.g. quality) have to be presence also in the distribution channel. Therefore choosing the right resellers is a vital task for every company using distributors. To choose the right resellers a decision maker has to have a way to evaluate the potential resellers. Therefore he or she has to have evaluation criteria.

1.2 OBJECTIVE OF THE PAPER

M-Files is a fast growing company and therefore it needs a lot of resellers from all geographical markets. Because the product is complemented by services, the resellers have to be able to offer those services. The resellers usually represent M-Files in their markets, so M-Files brand will be strongly based on the actions of resellers. That is why it is crucial to find competent resellers who are also able to generate profit. Therefore the objective of this paper is …

…to discover criteria to choose successful resellers for software products.

The second chapter describes research methodologies and research process of the paper. The third chapter is a literature review which creates a framework to evaluate potential software resellers. The fourth chapter introduces M-Files and contains the interview and also the comparison between literature criteria and M-Files’ existing criteria. The fifth chapter is conclusions.

Hujanen, A.

3

2 RESEARCH METHODS AND RESEARCH PROCESS

2.1 RESEARCH METHODS

According to Gummesson (1993) the general reason to do a case study research is to better understand complex phenomena. Research methods can be qualitative or quantitative and direct or indirect. Gummesson (1993) states that qualitative methods aim at improved understanding so this report uses qualitative methods to better understand the evaluation process of resellers. According to Gummesson (1993) there are five qualitative research methods: Existing material, questionnaire survey, qualitative interviews, observation and action science. This paper will focus on interviews.

There are two different types of interviews: Formal and informal. According to Gummesson (1993) informal interviews have open ended questions that are not put in any pre-established order. Therefore qualitative interviews often aim to go beyond obvious facts.

According to Weiss (1995) it is important to know what kind of information the study needs and to be able to help the respondent to provide it. Therefore the following matters should be clarified before the interview:

What is it wanted to obtain in the interview?

Tense and specificity in the interview

Questions to ask

Interview conducted in this paper aims to determine the criteria to choose the resellers for software products. The tense will be generalized present to refer to the current situation and currently used criteria. The interview is referring to M-Files instead of the individual respondent to figure out the criteria used by the whole company. This interview uses only open questions that are formed the way the respondent can easily answer. The questions are based on the framework created in the chapter 3.3 to compare the theory to practice.

2.2 RESEARCH PROCESS

The research process (Figure 3) started with a kick-off meeting with M-Files CEO. During that meeting a few different topics were chosen for further discussion and after evaluating topics the current one was chosen. After that the researcher started to design the structure of the study. After a few iteration rounds with M-Files CEO the structure of the study was ready and creating the theory part begun. The theory part is a literature review focusing on reseller selection criteria. The structure of the study was re-designed during the literature review to better fit for the forming framework. When the theory part and the framework were finished, question

Hujanen, A.

4

pattern for interview was formed on the basis of the framework. Before the interview was conducted, the question pattern was checked with M-Files CEO.

Figure 3. The research process

The interview was held on 11.9.2012 in Tampere. The interviewee was a channel account manager of M-Files. The interview was a semi structured interview, questions can be found from appendix 1. The framework was also used to figure out if the literature and M-Files practices meet. The interview will serve as a way to review the created framework and the questions based on that. The reviewed and corrected question pattern will be used in the researcher’s master’s thesis.

Hujanen, A.

5

3 THEORETICAL BACKGROUND

3.1 CREATING AN INTERNATIONAL MARKETING CHANNEL

According to Rangan (2006) channel strategy is consisted from two elements; Channel design and channel management (Figure 4). Designing channel requires answering certain questions like which channel options to choose, how many partners to include at each level, how they should be governed etc. So channel design is concentrated into structural aspects whereas channel management involves the formal or informal rules that govern the day-to-day behavior of the channel members. These two elements should go hand in hand. One cannot govern the channel and set sales targets without understanding the channel costs and margins and other operating features. On the other hand design issues cannot be solved without understanding distribution policies and practices.

Figure 4. The key dimensions of channel design and management (Rangan, 2006)

According to Rangan (2006) channel management efforts can be useless if the structure is not suitable. The environment changes can make the channel structure ineffective or even obsolete if the channel design is not adapted to fit the new situation. One example of channel design failures was IBM’s and Compaq’s attempt to create same kind of built-to-order channel for PC sales like Dell had. The error was that they tried to use their existing distributor networks. Dell used centralized factory while IBM and Compaq used decentralized. Centralized factory provided Dell significant supply chain cost advantages and allowed it to generate profit in built-to-order business while IBM and Compaq made losses, because their production lines were too small to smooth out uneven order flows. IBM and Compaq tried to solve the problem with special pricing and margin arrangements but because there was a flaw in the channel structure channel management actions were not enough and the companies withdrew from built-to-order business. So

Hujanen, A.

6

when a company starts to build marketing channel, the main focus should be on structure.

When the structure is suitable and serves the characteristics of the company, the main concern is selecting the right partners. According to Stern (1999) the choice and the performance of the selected partners are the main determinants to the success and failure of a marketing channel. According to Kiatwisanchai (2007) there are several reasons why partner selection is important to the channel development:

Good channel partners indicate the establishing of channel commitment: Good channel partners will invest to the channel to achieve the mutual goals and objectives and to establish the long term commitment (Coughlan et al, 2006)

Good channel partners will recommend the supplier’s products to the customers: According to Johnson (1994) and Keough (2005) channel partners affect strongly to the customer’s choice – more than 80% of industrial customers in US select the products according to the recommendations of the distributor. According to Kiatwisanchai (2007) the good channel partners will try to support and promote supplier’s products.

Business transactions are smooth with good channel partners: Good channel partners can be relied on payments and deliveries.

Good channel partners have a wide distribution network: According to Kotler (2000) good channel partners usually belong to wide distribution network, because they are experienced, skillful and able to use their existing network to distribute the supplier’s product widely.

According to Moore (1974), Stern (1992) and Blythe & Zimmerman (2005) there are four main factors that have to be evaluated when selecting channel partners:

Sales performance

Financial performance

Management performance

Compatible of product carried

Sales performance can be evaluated with many factors, for instance number of sales, sales stability, sales on specific product line, number of new customers, growth and the ability to reach sales goals. Sales performance of channel partner’s is especially important for companies which mainly rely on middlemen because the channel partners are the key generators for revenue and profit. Financial performance can be evaluated with financial key figures like profits, debt, ROI etc. Economically healthy partners are more reliable and have better ability to pay their bills. Management performance can be evaluated from company’s reputation, experience and background of management team, credit handling, pricing policies, operating procedures, operating facilities, complaint handling etc. The channel

Hujanen, A.

7

partner’s management team has to fit to the characteristics of the supplier, especially when there are cultural differences between the firms. These factors have a great effect to the establishment of good and working relationships among the channel. Compatible product carried refers to the products channel partner is already selling. Selling these products has generated knowledge about industry and the products and therefore training capable reseller requires fewer resources from the supplier compared to the ones who are new in specific industry.

According to Czinkota & Ronkainen (2004) criteria should correspond closely to the supplier’s own determinants of success. Czinkota & Ronkainen list some criteria and the ones similar to Moore’s, Stern’s, Blythe’s and Zimmerman’s are financial strength/credit rating, reputation, compatibility, experience in products/with competitors, physical facilities, record of sales performance, communications, overall experience, cost of operations, knowledge of business methods in the exporting company’s country and/or willingness to cooperate with the exporting company.

According to Dent (2011) B2B intermediaries usually add services to the products using special skill sets which have been recruited, developed and retained. Therefore they can have relatively high fixed costs and project-based revenues which lead to volatile profitably and awkward cash flow. For being able to survive they need to be well focused on their offer to one or more customer segments. This is quite close to the reality of the software business. VARs usually sell and deliver software projects to their customers and therefore require skilled employees to implement, train and support the customers. So it can be expected that focusing on certain segments would allow VARs to use their assets more efficiently and therefore perform better economically. According to Dent (2011) resellers need to invest additional resources ahead of the sales curve to grow. So suppliers should seek for VARs specializing on specific products - those that supplier is offering – to increase the probability of having economically healthy VAR with possibilities to grow.

To summarize, the main elements when choosing a channel partner are:

Number of sales (Moore, 1974; Stern, 1992; Blythe & Zimmerman, 2005; Czinkota & Ronkainen, 2004)

Number of new customers (Moore, 1974; Stern, 1992; Blythe & Zimmerman, 2005)

Growth (Moore, 1974; Stern, 1992; Blythe & Zimmerman, 2005)

Ability to reach sales goals (Moore, 1974; Stern, 1992; Blythe & Zimmerman, 2005; Czinkota & Ronkainen, 2004)

Generated profit (Moore, 1974; Stern, 1992; Blythe & Zimmerman, 2005)

Debt (Moore, 1974; Stern, 1992; Blythe & Zimmerman, 2005; Czinkota & Ronkainen, 2004)

Hujanen, A.

8

ï‚• Reputation (Moore, 1974; Stern, 1992; Blythe & Zimmerman, 2005; Czinkota & Ronkainen, 2004)

ï‚• Experience (Moore, 1974; Stern, 1992; Blythe & Zimmerman, 2005; Czinkota & Ronkainen, 2004)

Background of the management team (Moore, 1974; Stern, 1992; Blythe & Zimmerman, 2005)

Existing products (Moore, 1974; Stern, 1992; Blythe & Zimmerman, 2005; Czinkota & Ronkainen, 2004)

These criteria are general and therefore probably not the best ones for software industry. Some criteria, like debt, refer to resellers’ ability to pay back bought products and therefore are not relevant for intangible product like software. The next section will discuss about the unique features of software products in order to get better understanding of software industry.

3.2 SOFTWARE PRODUCTS

Software products have unique features compared to other goods. According to Mäkelä & Mutanen (2005) software products are not exactly similar to material or information goods but they have characteristics of both goods. They also state that the different nature of software brings distinct features to software business.

Production of the first copy of software can be very resource-intensive but replication has close-to-zero costs. Software business is a high-risk business because significant research and development investment is spent before any copies of software are sold. (Mäkelä & Mutanen, 2005; Messerschmitt & Szyperski, 2003; Kittlaus & Clough, 2009) Because software is usually tightly integrated to other information systems and hardware, extensive planning of interoperability with requirement analysis and specification process is essential. (Mäkelä & Mutanen, 2005.)

Because software products are immaterial they do not require either human or mechanical actor to convey their content. That enables cost-effective and swift distribution opportunities. Software still requires a provider. (Mäkelä & Mutanen, 2005; Kittlaus & Clough, 2009; Kittlaus & Clough, 2009) This creates possibilities for resellers and distributors to operate without significant side costs like logistics or warehousing.

From R&D’s point of view one of the most significant features of software is the possibility to produce and deploy reusable modules which form a distinct entity (Mäkelä & Mutanen, 2005; Messerschmitt & Szyperski, 2003). These modules are like building blocks and they have many important features: they can be shared by multiple projects; they are encapsulated having a well-defined interface to the outside world; and they can be deployed, installed and upgraded as independent

Hujanen, A.

9

units (Messerschmitt & Szyperski, 2003). This creates possibilities to develop vertical products on the basis of the main technology what is exactly how M-Files product family was developed. According to Mäkelä & Mutanen (2005) an increasingly important part of the software business is focused to serve the needs of a particular business function. These markets are called vertical markets and they demand specialized software, which are usually part of products families (Kittlaus & Clough, 2009; Mäkelä & Mutanen, 2005). So the ability to specialize the software to meet the requirements of vertical markets can create significant business opportunities.

Very seldom all the needs of the customer are fulfilled by software alone. Software based solutions can be supported and complemented by a variety of services, e.g. customization. The decision to focus on product-based or service-based business is a key strategic decision. Providing services to complement products can for instance provide constant cash flow which helps a company to survive over bad periods of business. (Mäkelä & Mutanen, 2005.) Tailoring and customization of software can also generate significant revenue. If the software is agile and easy to customize, tailoring with low costs can be a significant competitive advantage compared to rigid systems.

Software products have unique features like low distribution costs, easy replication and fast technology development cycles. Therefore software markets expand often quickly forming very competitive business environments. These environments are also very turbulent and uncertain and therefore extremely risky and hard to navigate. The risk is increased by large sunk costs. This kind of business environment requires special strategies which take into account factors like customer lock-in, entry barriers and first-mover-advantage. As a fast growing, dynamic and rival-intense environment, software business demands speed, integration, innovation and constant change. (Mäkelä & Mutanen, 2005. See also Messerschmitt & Szyperski, 2003)

To sum up, the main unique features of software products are:

High R&D-costs (Mäkelä & Mutanen, 2005)

Easy replication (Mäkelä & Mutanen, 2005; Kittlaus & Clough, 2009)

Low distribution costs (Mäkelä & Mutanen, 2005; Kittlaus & Clough, 2009)

Modules and vertical products (Mäkelä & Mutanen, 2005; Messerschmitt & Szyperski, 2003; Kittlaus & Clough, 2009)

Supported and complemented by services (Mäkelä & Mutanen, 2005)

Fast technology development cycles (Mäkelä & Mutanen, 2005; Messerschmitt & Szyperski, 2003)

As mentioned in the last chapter before the summary, the unique features of software products form a unique and turbulent industry with high uncertainty.

Hujanen, A.

10

Therefore these features have to be taken into account when choosing resellers for software products. The next section will combine the criteria for choosing resellers and unique features of software products to form criteria for choosing resellers for software products.

3.3 CHOOSING SOFTWARE RESELLERS

According to literature there are numerous ways how to evaluate potential resellers. Software products have unique features which require adapted managerial actions to compete effectively in turbulent industry. When ways to evaluate potential resellers and unique features of software products are combined it is possible to analyze potential software resellers with table 1.

Table 1. Evaluation criteria for software resellers.

High

Easy

Low

Modules

Supported and

Fast

R&D

replication

distribution

and

complemented

technology

costs

costs

vertical

by services

development

products

cycles

Number of

X

X

X

X

sales

Number of

new

X

X

X

customers

Growth

X

X

X

Ability to

reach sales

X

X

X

goals

Profit

X

X

Debt

X

Reputation

X

X

Experience

X

X

X

Background

of the

X

X

X

management

team

Existing

X

X

X

products

The X in the table represents that the feature of software products highlights the importance of that evaluation criteria. High R&D costs require a lot of income to cover them, so criteria evaluating reseller’s opportunity to generate revenue is highlighted. Easy replication decreases single product’s costs by every sold software; therefore the ability to sell the software is stressed. Low distribution costs are closely related to easy replication and allow reseller and supplier to deliver the

Hujanen, A.

11

software to customer nearly without costs, therefore variable costs are close to zero. Modules and vertical products require experience of industry and understanding needs of customers and therefore skills and reputation are highlighted. Also growth is required to allow the reseller to offer supplier’s growing range of products to customers. The fact that many software products are supported and complemented by services highlights reseller’s ability to deliver those services and therefore their expertise. Fast technology development cycles require good sales skills and expertise to survive in the dynamic environment while growth and reputation are not so necessary.

Based on the literature on evaluation of resellers and characteristics of software products, the most important criteria for evaluating software resellers, as argued above, are:

Number of sales

Number of new customers

Growth

Ability to reach sales goals

Experience

Background of the management team

Existing products

These criteria strongly highlight two dimensions: sales and experience. Highlighting sales is common for all resellers but highlighting experience is probably a result of software products’ unique features. The completion of solution makes experience of the reseller very important criteria because if the service, e.g. installation, is done poorly, the whole solution can be worthless for the customer. This can have severe effects to the supplier’s brand. This is not as big problem in the other industries, e.g. if a spare part distributor delivers orders late every time, it is easy to change the distributor but still order the spare parts from the same supplier. In contrast, improperly installed software aims the accusations to the software, not to the installing party.

Hujanen, A.

PDF to Word