Direct vs. Indirect: 4 Factors for Determining the Right Revenue Ratio

direct vs indirect channel sales

With all the news and data proliferating online about just how much channel partners can help a business grow and thrive in the subscription economy, it’s only natural to start wondering just how big of a role the partners should play in your business, no matter what you’re selling. Should it make up 10 percent of your recurring revenue? Half? More? Is it worth having the overhead of an in-house sales staff at all?

An in-depth look at today’s sales and customer success landscape shows us that while there’s no perfect formula, there are some clear tendencies. Some companies, like Cisco, carry out the majority of their business through indirect channels - and they’re quickly transitioning from strictly a pre-sales channel model to one focused heavily on the full customer lifecycle.

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And Cisco’s not alone. A recent Accenture study indicated that 70 percent of all tech revenue was generated through indirect channels, and estimated it would only continue grow as more SaaS and Cloud providers start realizing that their next leg of growth will come from partners. Still, others have more modest channel initiatives that allow them to reap the benefits of having partners to help grow revenue and drive adoption and customer success while playing it close to the vest with a substantial in-house team.

In other words, the answer to an ideal revenue ratio is… it depends. On your stage and circumstances, your needs, your customers’ needs and your customer engagement model, your growth goals, your customer acquisition costs, the total lifetime value of a customer, your product, your onboarding process, your team, your culture, and what you’re aiming to achieve with your partners in the first place. Get the point?

That being said, just looking at the numerous advantages a well-oiled, digitized partner program can offer your business and examining how partners can benefit both your and your customers’ businesses, there are some very clear indicators that can help you figure out how to best balance your investment in direct and indirect sales and customer success to get maximum value from both worlds. Here are four that you can start taking into consideration right now:

1. What Growth Stage are You In?

One of most common questions we get from prospects is in regards to when they should start a partner program. And while I can honestly say that any business of any size can benefit from partners, there are some pretty clear indicators that businesses working to scale past their first $3M-$5M of recurring revenue are typically at the perfect stage to start maximizing the return on investment in partners. This, after all, is when most businesses are starting to first truly scale their internal sales, marketing and customer success organizations and can in parallel ensure that they’re building a partner program isn’t just being “managed,” but rather aligned to the direct side of the business and empowered with the right content, tools and resources to deliver the right value and outcomes to prospects and customers.

2. What KPIs are Most Critical to Your Business?

As more and more companies move to a cloud or subscription model, the metrics and key performance indicators (KPIs) they use to measure their success are changing with them. Cash flow becomes more pertinent, as do metrics tied to monthly or annual recurring revenue, churn, customer acquisition cost (CAC), average revenue per customer, and total lifetime value (TLV) of a customer. While all of these are extremely important, much depends on the stage of your business and the cash or funding you have on hand when determining how fast to scale or rely on channel partners. If customer acquisition costs are too high, for example, investing more in your channel may help lower your spend on acquiring new customers by replacing the overhead of several direct reps with one channel manager. Similarly, if churn, average revenue per customer and TLV aren’t where you want them to be, channel partners who might be a better option for driving product adoption and helping customers achieve more value and better outcomes with your product.

3. What Does Your Customer Engagement Model Look Like?

Perhaps no single factor is more important to your business in today’s age of cloud and SaaSification than your ability to deliver a wildly successful experience for your customers. What that means, plain and simple, is that a sale is never, ever really closed in the subscription economy - even after the contract is signed. What it also means is that the fundamental role of channel partners has changed, as well. Gone are the days of thinking about channel partners only for amplifying your pre-sales and marketing reach, negotiating based on margin and inventory, and rewarding and incentivizing based on new logos and revenue.

Today’s channel partner relationships are just as, and sometimes even fully focused on post-sales customer success - covering the full customer lifecycle. As modern businesses realize that the only way to accelerate recurring revenue (MRR and ARR) sell more AND reduce churn, they’ve also realized that extending the reach of their own customer success efforts with the human touch provided by a well-aligned ecosystem of partners after a deal is closed is perhaps the single most important factor for ensuring the best possible outcomes for their customers.

4. Where Are Your Prospects and Customers?

The fourth and final factor I’ll touch on here is where your prospects and customers reside—both vertically and geographically. And once again, it all has to do with maximizing the outcomes and value you can provide to your customers. Unless you’re selling an extremely lucid utility or application, your prospects and customers expect and deserve the utmost results and expertise from the very first moment they enter your pipeline, all the way through their lifetime as your customer. As your business grows, however, your ability to deliver that experience to more customers in more verticals and more geographies becomes more and more complex—and expensive. You’ll find that building relationships with channel partners who already have the knowledge, relationships and insight to meet those customers’ specific needs is the most efficient and effective way to keep your customers happy and prevent them from leaving.

Growth is a complex and constantly evolving game—especially when your business is focused on growing recurring revenue. Your best bet is not to look for a single rule that defines exactly how you weigh your direct and indirect sales and customer success, but rather always be evaluating your ability to deliver the best possible outcomes for your prospects and customers while maintaining the agility to address shifts in the business landscape and emerging markets. Build your channel thoughtfully—put time into it, run analytics on it to see how it’s performing, and make choices and tweaks based on the successes you’re seeing.

The perfect ratio is the one that works for your business—and in an economy where needs are always changing, that’s not a statistic that stands still. 

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