Sales and Channel Management

Innovation & New Business Planning - TUHH Institute of Innovation Marketing & Institute of Entrepreneurship, Hamburg · part of my Technology Management MBA · study notes for revision.

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Communication gets a prospect to raise their hand. Pricing decides what you capture when they say yes. Sales is the part in between, and it is the part that most technical founders treat as an afterthought: the concrete route along which a product travels from your workshop into somebody’s hands, and the people who walk it. That route is the sales channel, and choosing it is a strategic decision, not an administrative one, because it fixes your margin, your speed, your reach and how much you ever learn about your own customers.

The session frames the whole topic around two independent choices. The first is direct or indirect: do you sell with your own people and your own shop, or do you sell through distributors, agents, resellers and retailers who sit between you and the buyer? The second is inbound or outbound: do customers find you, or do you go out and find them? These two axes are not the same question, they can be combined in any way, and almost every real company ends up with a mixture of several channels at once, which is where the interesting problem of channel conflict starts.

Underneath both choices there is the same arithmetic. A channel costs money in two shapes, fixed and variable, and produces a contribution per unit sold. Whichever combination gives the better return at the volume you can actually reach is the right one, and that answer changes as you grow. This chapter walks through what makes selling an innovation different, the four functions of sales management, the numbers that tell you whether sales is working, the direct against indirect decision and its criteria, multichannel and conflict, inbound against outbound, how to judge what a customer is worth, and the Formlabs case where all of this comes together on one desk.

Tip

The one idea to carry through. A channel is not a pipe, it is a partner with its own economics. Indirect selling is cheap at low volume because almost all of its cost is variable, and it becomes expensive once volume grows because you pay that margin on every single unit forever. Direct selling is the opposite: heavy fixed cost up front, then a much bigger contribution per unit. So the channel question is never simply which is better, it is at what volume does the crossover happen, and where will I be next year.

1 · Selling an innovation is a different job

The deck starts with why an innovation cannot be sold the way a known product is sold. Customers move through a sequence over time. Early on they say: we have a problem, tell us how to solve it. Later they say: we have a problem and we already know pretty well which type of solution we need. Eventually they say: we know the solutions to most of our problems, so do you have something new and surprising to tell us? By that third stage a salesperson who only answers questions adds nothing.

That is the challenger idea the deck cites: customers need new information that challenges their current beliefs and understanding, and sales has to tell customers what they do not know yet. The salesperson is not a catalogue, they are the person who reframes the customer’s own problem.

The second difference is uncertainty, and it shows up in the shape of the funnel. For an innovative product the customer starts in an enthusiastic phase and then slides into an uncertainty phase, and the crucial point is that they drop out rather late. They drop out after the inquiry, after needs recognition, deep into evaluation, sometimes just before the decision. The consequence for the seller is brutal: the salesforce has to invest a lot of time and effort into deals that may never convert.

Inquiryenthusiastic phase, easy conversations

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Needs recognitionthe customer starts to picture the change

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Evaluationuncertainty phase, the drop-outs happen here

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Decisionlate, and never guaranteed

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After saleswhere the next sale is actually created

Late drop-out is the signature of innovation selling. It is also why cost per contact and sales-cycle length matter so much: you pay the full cost of the effort whether or not the deal closes.

2 · The four functions of sales management

The deck reduces the management job to four functions, each with its own set of questions.

Function	The questions it has to answer
Setting goals for a sales force	What is feasible? What is necessary? Which products should the team focus on?
Planning, budgeting and organising	Which customers first? How much time per customer? Is additional sales force needed?
Implementing the programme	Is training needed? Who is responsible in which regions?
Controlling and evaluating results	Were the goals met? What has to change?

Sizing, territory design and targets are not separate topics, they are the second and third of these functions. Deciding which customers come first and how much time each gets is territory and account design, and deciding what is feasible and necessary is target setting.

The deck then plots how a sales engine matures, on two axes: how mature the go-to-market strategy is, and how much traction there is on new recurring revenue. The image is a car: develop your sales from a starter motor to a turbocharger to a powerhouse.

The Starter Motor immature go-to-market, slow traction

• Still developing the product and still looking for early adopters
• Hunting the first hero customer, the reference that makes everything else possible

The Turbocharger traction fast, structure still forming

• Proven product-market fit
• Often led by a driven founder with a hands-on sales approach

The Gas Guzzler spending like a grown-up, going nowhere

• A high-cost sales process
• But still struggling to achieve product-market fit, so the money burns without traction

The Powerhouse mature and fast

• A strong product
• Supported by an efficient sales organisation that no longer depends on the founder

The trap in that picture is the gas guzzler: building an expensive sales machine before the product actually fits the market. The order matters, which is exactly what the typical startup sales journey shows.

Ad-hoc marketing and salesthe founders sell, there is no system yet

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E-commerceown website and shop, the cheapest channel that exists

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Inbound sales teampeople who answer and convert the hands already raised

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Marketing teamlead generation, so the inbound team has something to work on

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Indirect salesdistributors and agents, reach bought rather than built

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Outbound sales in key marketsthe most expensive step, taken last and only where it pays

The cheap, scalable channels come first and the expensive, human ones come last. Every step upward raises cost per contact, so each one has to be justified by the accounts it unlocks.

3 · The numbers that tell you whether sales works

Two instruments. The first is a small set of headline metrics with the rough targets the deck attaches to them.

Metric	What it measures	Target given
CAC payback	How many months of gross profit it takes to repay what you spent acquiring a customer	under 12 months
Average contract value (ACV)	The typical size of a deal	growth of 20 percent
CLV / CAC	Lifetime value earned per euro of acquisition cost	around 10 times
Reduction of sales cycle	How much shorter the cycle is getting, in months	30 percent
Growth rate plus EBITDA margin	The combined efficiency rule, growth and profitability added together	above 30 percent

The sales-cycle metric is worth pausing on. A shorter cycle is not just pleasant, it is money: the cycle length multiplied by the cost per contact is what an unclosed deal costs you, and in innovation selling many of them never close.

The second instrument is the pipeline, and the rule is to always know the current value of yours. You weight every stage by the probability that deals at that stage will close.

Stage	Number of deals	Likelihood	Deal value	Current weighted value
Leads	100	5 percent	EUR 180m	EUR 9m
Qualified leads	60	25 percent	EUR 120m	EUR 30m
Opportunities	10	75 percent	EUR 10m	EUR 7.5m
Value of the sales pipeline				EUR 46.5m

The funnel behind it runs traffic, leads, qualified leads, opportunities, customers. Notice that the middle row carries the most weighted value even though the biggest headline number sits at the top: a hundred raw leads at 5 percent are worth less than sixty qualified ones at 25 percent.

4 · Direct against indirect: the basic choice

Direct sales and distribution you own the road

• Manufacturer sells straight to the end customer with its own sales and distribution
• Own field salesforce, own inside sales, own web shop, own stores
• Higher brand reputation and stronger customer loyalty
• More control of the sales approach and of discounts
• You collect far more information and data on the customers
• Potentially higher margins, or better end prices for the customer, because nobody takes a cut

Indirect sales and distribution somebody else’s road

• Sold through retailers, resellers, agents, distributors, wholesalers or system integrators
• Less investment, and initially far less cost-intensive than building direct distribution
• Better coverage of international markets and faster scaling
• Your product can be bundled with other products and services the partner already sells
• You can concentrate your own activities and investment on R and D and production

Control, margin, data and brand on one side. Reach, speed and capital efficiency on the other. Nothing here says one is better, only what each one costs you.

The feedback consequence deserves a line of its own. Direct selling is the only channel that returns raw customer information to you. Every complaint, every workaround, every unexpected use case reaches you unfiltered. Put a partner in between and that stream stops, or arrives second-hand and cleaned up, which for a young product is a genuine loss and not just a nuisance.

5 · Who the intermediaries are, and what they actually do

A channel does much more than take the order. Sorting the partner types by how deeply involved they get is the deck’s way of showing what those extra functions are.

Less involved partners. These are the ones who do no sophisticated bundling or integration, so no complete IT systems, production systems or defence systems, and no extensive added services, so no consulting, training, installation or maintenance. In consumer markets they are wholesalers and retailers, in business markets distributors and agents.

Partner	What it does	What it does not do
Wholesaler	Buys goods in bulk and sells smaller quantities on to retailers. Focused on distribution, meaning storage and delivery. Mainly fulfils orders coming from retail	Does not develop the market for you
Retailer (online or stationary)	Sells to the consumer, online or in a physical shop	Little or no technical work
Distributor	Goes beyond fulfilment and delivery: actively sells on its own account and with great freedom. Owns the products, carries the financial risk of stock, makes its profit from selling. Performs market analysis, finds customers, runs marketing campaigns. Often focuses on one country to build strong customer relationships	Little development work
Agent	A legally independent intermediary that closes contracts on behalf of the supplier, and also handles shipment. Under strong supplier control, does not buy or own the products, is paid a commission on the sales it makes	Often only limited consulting, no development work, no after-sales service

More involved partners. These take on real technical responsibility, and are most common in IT, defence, production equipment and the car industry.

System integrator (SI) builds the whole thing

• Builds a turnkey hardware and software solution for the end customer
• Integrates products and services from several different suppliers
• Usually combines the integration with consulting and after-sales services, where the after-sales part may be handed to a managed service provider
• Often leads with a complex and key part of the system

Value-added reseller (VAR) adds a layer on top

• Primarily uses off-the-shelf hardware and software
• Adds the services around it: advice, configuration, training, support
• Carries many products and sells through dedicated sales and applications engineering teams across industries
• Gives you access to a customer relationship it already owns

Read the list as a menu of channel functions: market analysis, finding customers, marketing, stock and financial risk, storage, delivery, bulk breaking, contract closing, shipment, consulting, training, installation, integration, maintenance and after-sales. Whatever a partner does not do, you still have to do.

The problem of finding the right partner

Handing the work over creates a principal-agent problem, and the deck is unsentimental about it: channel partners primarily do what is good for themselves, and only eventually what is in the best interest of the supplier. In practice that means they:

prefer easy productsshort sales cyclelow CACrepeat purchasesprefer established brandsprefer existing customersnever become experts in the new productdo too little marketingpoor pre-sales and after-sales serviceuse too much of their discount authority

The result is the line at the bottom of that slide: they fail to reach the sales objectives. Every one of those tendencies is worst precisely for a new, unfamiliar, technically demanding product from an unknown brand, which is exactly what an innovator is trying to sell.

6 · The criteria for choosing a channel

The class discussion asks which conditions make indirect or direct more suitable, and tells you to think about three things: the supplier, the product or service, and the target market and customers. The deck then answers along those same three lines.

The supplier: market power and market objectives. Five impact factors are named: brand reputation, channel power, the need to scale fast, the need to reach broad coverage, and working capital. Read together with the advantage list in section 4, they run like this. A weak brand has to sell direct, because partners prefer to carry established names and will not invest in an unknown one. If the intermediaries hold the power over access to the customer, you have little choice but to go through them. If you need broad coverage and you need it quickly, especially across borders, indirect gets you there faster. And if working capital is short, indirect is the affordable option, because building your own salesforce is a large up-front investment while a partner is paid out of the sales they actually make.

The product or service. Here the deck gives one clean summary rule: the more complex, innovative, customer-specific, service-intensive and high-priced the product or service is, the more advantageous direct sales become.

Product factor	Points to direct	Points to indirect
Level of customisation and degree of integration required	Individualised, heavily integrated	Standardised, drop-in
Technological complexity	High	Low
Additional services needed	Many	Few
Price level	High	Low
Position in the product life cycle	New	Old and established

That last row is the one innovators forget. A new product is exactly the case where a partner has no expertise, no reference customers and no incentive, so early in the life cycle you generally have to carry it yourself and hand it over once it has become routine.

The customer market. The deck draws this one as a picture rather than a table.

Concentrated customer base calls for direct sales

• A small number of big customers, regionally concentrated
• Large and important customers get direct sales and distribution
• Customers in domestic or established markets are served directly

Fragmented customer base calls for indirect sales

• A large number of small customers, regionally widely dispersed
• Small and less important customers go through resellers, distributors and agents
• Customers in remote or new markets go through partners too

The same company usually needs both at once: direct for the big domestic accounts, indirect for the long tail and the far markets. That split is deliberate, and it is also where conflict is born.

The sales volume potential, which is the economic version of the same question. Indirect sales through distributors tend to be more cost-efficient at lower sales levels, because most of the sales cost is variable: you pay a margin only on what is actually sold. But beyond a crossover point, which the deck marks as point A, direct selling with your own salesforce becomes more efficient, because the fixed cost of the team is spread over enough units to beat the margin you would otherwise have surrendered on every one of them.

Low volumedistributors cheaper, cost is almost all variable

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Point Athe crossover, the two channels cost the same

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High volumeown salesforce cheaper, fixed cost now spread thin

The crossover moves. A better product, a higher price point or a bigger average order all push point A to the left and make direct selling worth it sooner.

7 · Multichannel, omnichannel and channel conflict

Almost nobody picks one channel. The deck gives three worked structures.

A tool manufacturer runs three routes at once: its own salespeople and its own e-commerce as direct channels, its own centres as a further direct channel, and a partner shop network as the indirect one.

An industrial sensor manufacturer selling mainly to business customers runs twelve subsidiaries worldwide, around thirty independent resellers and system integrators, its own proprietary catalogues, a proprietary web shop in Europe, and listings in third-party catalogues and web shops.

A typical consumer-goods configuration combines flagship stores, an own web shop and retailers. The flagship store is interesting because its job is often not sales at all: it strengthens the brand, generates buzz, shares and viral effects, lets people try the product out and fortifies loyalty. The trend named on the slide is the convergence of offline bricks-and-mortar with online retail, which produces omnichannel retail and D2C, direct to consumer.

The omnichannel patterns are combinations of where the customer finds, buys, pays and receives:

Pattern	Find	Buy and pay	Receive
Find and order online, pick up offline	Own website, whitepapers, simulators, configurators	Proprietary online shop	Pick up at the store
Find and buy offline with home delivery	Showroom, face-to-face advice	Configurator, AR and VR experience in store	Home delivery
Pure online	Own website, affiliates, social media	Proprietary shop or app	Home delivery
Pure offline	Traditional bricks-and-mortar store	Credit or debit card in store	Take it with you
Find online, evaluate offline	Own website, online marketplaces	Touch and see, last questions, final selection offline	Home delivery

Running several channels at once buys reach and convenience, and it manufactures conflict. The deck names three types.

Verticaldifferent levels within one channel, for example your direct sales against your distributor

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Horizontalthe same level within a channel, for example two distributors fighting over the same account

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Multipletwo or more different channels in conflict with each other

Conflict is not a sign of bad management, it is the price of coverage. What management can do is take the overlap out of it.

The levers for managing conflict follow from what causes it, which is two parties chasing the same euro. Split the territory so that partners and your own team do not bid against each other, split by segment or account size so the big domestic accounts are yours and the long tail is theirs, keep pricing consistent across channels so the customer cannot play one off against the other, be careful with how much discount authority a partner gets, and compensate a partner for a deal that lands in their territory even if it closes elsewhere. The deck’s own warning applies here as well: a partner who thinks it might end up competing with the manufacturer will never give the product real mindshare.

8 · Inbound against outbound

This is the second axis, and it is about who moves first. The trend named in the deck is a shift away from outbound field sales and towards inbound office sales.

Inbound sales they come to you

• More passive lead generation
• Self-selection of customers, who find the supplier themselves
• Sometimes also self-service, where customers sign up online without ever speaking to anyone
• Runs on the own website and shop with SEO and SEA, plus owned and earned media such as personal profiles and recommendations
• After the first contact, onboarding happens online or by telephone
• Works if you have a compelling value proposition and plenty of own, earned and paid media

Outbound sales you go to them

• More active lead generation
• Active identification and cold contacting of new prospective leads
• Moving warm and qualified leads towards the purchase decision
• Personal selling in the field, sometimes prepared by email and telephone campaigns
• Works if you have financial resources and qualified salespeople, and it requires back-office infrastructure

Inbound is cheap per contact and cannot be aimed. Outbound is expensive per contact and can be aimed precisely at the account you want. That single trade-off decides most of the argument.

Which one gives the higher ROI? The deck answers honestly: it is undecided, it depends. Three questions decide it. Which approach is better suited to reach your target customers? Which can you afford right now? Which contributes the higher ROI, judged on sales growth and on unit economics, meaning customer lifetime value against customer acquisition cost? The tie-breakers given are that outbound wins if big accounts matter and the financial resources are available, and inbound wins if a strong media presence is assured and self-onboarding is realistic.

For a new business or a startup the deck gives an explicit sequence: exploit the entire potential of inbound first, and add outbound later.

Phase 1exploit inbound fully

Scale up inbound and build the first customer base. Address the target groups most likely to find you and most willing to sign up or order online. Focus on small and medium-sized accounts and accept the lower lifetime value and the higher churn. Go after individual users inside big corporates and use them as a springboard, that is bottom-upcheap, fast, and it teaches you which messages convert

Phase 2add outbound on top

Build an outbound sales team and increasingly address the larger accounts, the profitable and more loyal big fish. But only address the customer groups that cannot be reached through inbound, so use inbound as long as you possibly can. Aim at the top deciders such as the CEO, the CIO or purchasing officers, that is top-downexpensive, so it must be pointed only where inbound genuinely fails

The two axes now combine. Inbound plus direct is your own web shop. Inbound plus indirect is a partner’s web shop or a marketplace listing. Outbound plus direct is your own field salesforce. Outbound plus indirect is a partner’s field salesforce selling on your behalf, which is the cheapest way to buy outbound reach and the one where you control least.

9 · Assessing the value of customers

Deciding which customers first, which is the second function of sales management, needs a way to say what a customer is worth. Three sources of business exist, and they cost different amounts.

Source	Why it matters	The catch
Customer acquisition	The basis for having any customers at all, and it is hard to grow fast without new ones	High acquisition costs
Customer retention	Should be the focus. Loyal customers are often more profitable, and retaining costs less than acquiring	Easy to neglect while chasing growth
Customer recovery	Lost customers can be regained if their experience was mostly positive and if they were loyal before leaving, and re-acquisition can cost less than new acquisition	Only works where the relationship was sound

The methods for valuing a customer from the supplier’s point of view sort along three dimensions: static or dynamic, uni-dimensional or multi-dimensional, and monetary or non-monetary. Contribution to revenue and profit contribution are static, one-dimensional and monetary. Satisfaction analysis and commitment or loyalty analysis are non-monetary. A scoring model and a customer portfolio are multi-dimensional. Customer lifetime value is the dynamic, monetary one.

ABC analysis is the simplest of them: rank customers by the revenue they generate and look at the cumulative share. The deck’s example makes the point instantly.

Rank	Customer	Cumulative share of customers	Revenue in k EUR	Revenue share	Cumulative revenue share
1	Wilke	10 percent	1,488	37 percent	37 percent
2	HGM	20 percent	943	24 percent	61 percent
3	Arcom	30 percent	523	13 percent	74 percent
4	H and T	40 percent	438	11 percent	85 percent
5	Bosch	50 percent	312	8 percent	93 percent
6	Decker	60 percent	166	4 percent	97 percent
7	SZ	70 percent	56	1 percent	98 percent
8	Fabermann	80 percent	43	1 percent	99 percent
9	Ligo	90 percent	18	0 percent	100 percent
10	Derting	100 percent	9	0 percent	100 percent
	Total		3,996	100 percent

The method rests on the observation that in many business-to-business companies about 20 percent of customers produce about 80 percent of total sales. Here the top two of ten customers already account for 61 percent. Its advantages are that it reveals dependency risk on a few large customers or fragmentation across many small ones, that it is simple and uses easily available sales data, and that it visualises clearly. Its disadvantages are that sales volume is an imperfect proxy for value, since revenue is not profit once discounts, service and complexity costs are counted, and that it is static, reflecting only the current picture while ignoring future potential and new customers.

Customer lifetime value fixes the static problem. The value of a potential customer is the difference between the expected cash value of the relationship and the investment required to acquire them.

Step 1, the discounted surplus of the relationship

sum over t = 0 to n of (Rt - Ct) / (1 + i) to the power t

Step 2, subtract the acquisition investment

minus (number of visits * cost per visit) / probability of acquiring the customer

Symbol	Meaning
CLV	Value of the future cash flows of a new customer
Rt	Expected customer revenues in year t
Ct	Expected costs of serving the customer in year t
i	Company-specific discount rate
t	The year, with the year of acquisition counted as t equals 0
n	Estimated number of years the customer stays with the company, and in the second step the number of visits needed to acquire them
k	Costs per visit, which is the cost per contact
p	Probability of acquiring the customer

The deck’s worked example is an industrial goods manufacturer assessing a key account over five years at a discount rate of 0.1. Revenue from physical products starts at 10,000,000 EUR and declines about 5 percent a year to 8,145,063 EUR, plus 80,000 EUR of service revenue every year, giving 45,643,813 EUR of total revenue. Against that stand 1,300,000 EUR of pre-production technology cost and 220,000 EUR of pre-production sales and marketing cost in year one, variable costs of about 29,996,432 EUR over the period, customer-specific sales costs of 3,505,224 EUR, customer-specific fixed production costs of 9,556,445 EUR, associated costs of 700,000 EUR and 250,000 EUR of follow-up cost in the final year: 45,528,101 EUR in total.

Undiscounted, the relationship looks fine

45,643,813 - 45,528,101 = +115,712 EUR over five years

Discounted at 10 percent, it is not

-990,000 + 403,636 + 159,645 + 282,358 + 63,332 = -81,030 EUR

That reversal is the entire lesson of the slide. A five-year relationship that adds up to a small positive number is destroying value once you charge it for the capital tied up in the loss-making first year.

10 · The simulation: managing segments and customers

The session closes with a marketing simulation built on a fictional motion-sensor manufacturer, Marker Motion Inc.

The company. A motion sensor manufacturer with 12 million dollars in sales and 45 employees. It has grown modestly, 5.5 percent over a three-year period, with modest profits, and revenue and market share have declined in the last few quarters before the simulation starts.

The product and market. Inertia motion capture sensors, non-optical, very precise and with a high capture rate, used to create character movement in the film and video-game industries. Customers buy on three criteria: size, battery life and price, with latency also mattering. The market is business-to-business, growing at roughly 5 percent a year, which is not explosive, and there are over 100 general and specialised manufacturers competing, so there is price pressure. The customer base splits into large customers served directly, at 70 percent, and small customers served indirectly, at 30 percent.

The four large-customer segments and the small-customer segment each want something different, which is exactly what makes targeting and channel choice hard.

Large-customer segment	What it wants
Segment A	A high level of sales support and customisation
Segment B	Sales representatives with real market and technical knowledge
Segment C	The least price-sensitive of the four, but with high technical standards
Segment D	Price-sensitive, and buys sensors in bulk

Small customers are price-sensitive, buy in small volumes, are satisfied with standard sensors and want products that are easy to integrate. That profile is the textbook fragmented base of section 6, which is why they are served indirectly.

What the simulation covers: segmentation, targeting and positioning, channel conflict, customer acquisition and retention, competitive behaviour, pricing decisions, investment decisions and the use of market research.

How a round works. You prepare with an industry and company summary, financial data, market research data and customer satisfaction data. You begin with historical financials, industry data, a map of the customer base and your objectives. Then across thirteen quarters you pull the levers: price, discount structure, marketing expenditures, size of the sales force, account management and product customisation. After each decision you receive instantaneous feedback coaching and the budget available for the next period. The standing instruction on the last slide is short and worth remembering: do market research.

Case corner

Formlabs: selling a new 3D printer.

The company. Formlabs came out of the MIT Media Lab and was incorporated in 2011, making it a four-year-old venture at the time of the case. It manufactures desktop stereolithography 3D printers and the resins they consume. Funding history: 1.8 million dollars of seed money in 2011, nearly 3 million dollars from a Kickstarter pre-order campaign in 2012 that produced 1,009 orders, and a 19 million dollar Series A in October 2013. The first printer, the Form 1, launched in May 2013 at 3,300 dollars, suffered laser failures and cracked resin tanks, and was replaced by the Form 1+ in June 2014, with an upgrade offered to existing owners at 800 dollars and later 1,200 dollars. By late 2015 more than 10,000 Form 1 and Form 1+ units had shipped, and the company had grown past 100 people.

The product. The Form 2 launched on 22 September 2015 at 3,499 dollars after 20 months of development. It prints layers as thin as 25 microns and features as small as 150 microns, has a build volume 42 percent larger than the Form 1+, an automated resin cartridge system, touch-screen controls, free Preform software and Wi-Fi monitoring, and can be combined into a corporate print farm. Reliability was the biggest improvement: return rates dramatically lower, print success rates dramatically higher, and few parts that can break, so the company was much less afraid of shipping to places with no support. A survey named it the most wanted printer by 50 percent more votes than the runner-up. There is a 499 dollar service plan, and resins from 150 dollars a litre for standard up to 299 dollars for castable, with a biocompatible resin planned at 399 dollars. Resins carry higher margins than printers, and established players earn as much as 50 percent of sales from them.

The value proposition, in numbers. Printing the reference chess rook costs 1.67 dollars on a Form 2, against 6.00 dollars on an industrial SLA machine and 75.00 dollars at a service bureau. Turnaround is under 24 hours instead of one to two weeks. Upfront cost is 3,499 dollars against 60,000 to 300,000 dollars for an industrial machine, which also carries a mandatory service contract of about 15,000 dollars. One robotics company printed multiple prototypes for 36.28 dollars of resin, against 684 dollars to outsource to a service bureau and 1,085 dollars to a precision machine shop.

The market. Printer sales were expected to reach 500,000 units in 2016 and 5.6 million by 2019, with industry sales possibly reaching 21 billion dollars by 2020. There were roughly 50,000 industrial 3D printers worldwide against more than 20 million CAD professionals, a ratio of 400 to 1; bringing that to the 100 to 1 ratio of office workers to 2D printers would mean a million more machines. North America accounted for 40 percent of printer sales, Europe 28 percent and Asia-Pacific 27 percent, while CAD users split 37 percent EMEA, 33 percent US and 27 percent Asia. Two incumbents led by revenue, at 30 and 24 percent share, with over 100 smaller suppliers behind them, and the listed 3D printing stocks had collapsed from their 2014 peaks. Competitors sold through every possible route: one Dutch rival sold exclusively through resellers, one incumbent sold through online plus CAD resellers specialising in dental and jewellery, several sold only from their own web shops, and one low-cost brand sold through big-box retailers.

The customers. About 95 percent of the customer base are prosumers: professionals who are both the user and the buyer, authorised to spend a few thousand dollars without corporate approval. That is the pivot of the whole case, and it interacts with the price: the Form 2 at 3,499 dollars sits below the 5,000 dollar approval threshold at many large companies but above the 2,999 dollar threshold at educational institutions and the 2,000 dollar threshold at government agencies. Segments are engineers and product designers, an estimated 1 million potential US buyers who need minimal sales assistance, plus higher education, digital artists and architects, jewellery designers, medical and research firms, and dentists, where there are 200,000 US dentists and oral surgeons and 7,000 dental labs, with less than 10 percent using digital modelling.

The channel position in November 2015. The large majority of sales are direct, split roughly half e-commerce and half an inside sales team, with 10 to 20 percent coming through overseas VARs and distributors. Inside the US the printers are available only through the web shop and the inside sales reps. Sales and marketing costs 30 percent of revenue. There are 11 inside sales reps, up from two hired in early 2014 on a 50,000 dollar salary with no incentive pay; at target they now earn 55,000 to 90,000 dollars with base pay at 70 percent of on-target earnings, and the fully burdened cost is 130 percent of base plus commission, against more than 100,000 dollars a year for a typical outside rep. Average sale price is 5,000 dollars, and the sales cycle runs 30 to 50 days. Conversion rates: 15 percent of those who request a free printed sample buy, 30 percent of those who fill in the contact-sales form buy, and about 5 percent of trade-show booth visitors buy. Customer acquisition cost ranges from a few hundred dollars to more than 1,000 depending on the source. Existing partners: a UK partner since May 2014 that represents itself as Formlabs Europe, sells at a 15 percent markup on the US price and takes a 15 percent commission; a German VAR since March 2015 that buys at a 10 percent discount and sets its own retail price; and since June 2015 a Japanese partner with a strong e-commerce platform and a Chinese partner specialising in universities and schools with sub-distributors, both also on a 10 percent discount. Twelve partners in Europe, three in Asia.

The decision. The board wants sales doubled in 2016, for the third year running, and the Form 2 launch produced no bounce. The three options on the table are more channel partners, more direct outbound selling, or simply more marketing spend behind the existing inbound machine.

Reading it with this chapter’s frameworks. On the product criteria, the Form 2 now points towards indirect: it is standardised rather than customised, its technological complexity as experienced by the buyer has fallen sharply, it needs few additional services now that it rarely breaks, and its price point is low. Only its position early in the life cycle argues for direct. On the market criteria the answer is unambiguous: a million potential engineer buyers plus 200,000 dentists, buying one unit at a time across three continents, is the textbook fragmented base, which calls for indirect. On the supplier criteria the brand reputation is strong, which is what makes partners eager, and the need for broad international coverage is high, both pointing indirect; but channel power is weak and working capital is limited. On the inbound and outbound axis the company is deep in phase 1 and, in its own words, inbound had become a crutch because early adopters make easy transactional sales. That is the phase 1 warning made real: inbound has been exhausted for the customers who find you, and the customers who do not find you are untouched.

The obstacles are all economic. CAD VARs earn 40 to 50 percent margins on software while office hardware resellers earn 15 to 30 percent, and Formlabs currently gives its overseas partners only 10 to 15 percent, so on a 3,499 dollar printer there is simply not enough margin to buy a strong partner’s attention. That is the principal-agent problem with a price tag on it: partners prefer easy, established, high-commission products, and the Form 2 would be the low-margin newcomer in their bag. Second, resellers in the US would compete against Formlabs’ own direct sales, especially in bidding, which is textbook vertical channel conflict and would destroy reseller mindshare before it is built. Third, an Amazon listing costs 12 to 18 percent and could cannibalise the company’s own e-commerce, which is multiple channel conflict between two channels that reach the same buyer. Fourth, a 50-person outside salesforce at 150,000 dollars per rep is 7.5 million dollars of fixed cost, which on an average sale of 5,000 dollars needs enormous volume before it beats a partner margin, so on the section 6 crossover logic the company is clearly still to the left of point A for a general field force.

My recommendation. Do not build a general outbound field force, and do not hand the US mass market to a distributor either. Instead:

1. Fix inbound first, because it is the cheapest volume available and it is measurably leaking. Marketing is run as an in-house creative agency with little lead generation, lead tracking or conversion analysis, and nobody knows whether the visitors arriving via the Netflix documentary ever buy. With a 15 percent sample-to-purchase rate and a 30 percent contact-form-to-purchase rate, a few percentage points of improvement on top of the funnel is the cheapest incremental revenue in the company. This is the marketing-automation investment, and it should come before any headcount.

2. Add outbound only where inbound structurally cannot reach, which is exactly the phase 2 rule. The lost sale of 20 to 30 printers to a university because a competitor had a dedicated account manager is not an inbound failure, it is a missing account-management function. Put a small number of account managers on enterprise and higher-education print-farm opportunities, where the deal is many units rather than one and where the approval thresholds mean a real buying process exists. That is direct selling justified by concentrated, large, important customers.

3. Use indirect selectively, where the partner adds something Formlabs cannot buy. Keep expanding Europe and Asia, where partners handle customs, compliance, local language, local marketing and support, and where the reseller network is genuinely stronger. Add vertical specialists rather than box movers: the dental distributor is attractive precisely because dentists rely on a trusted intermediary to vet a new technology and because less than 10 percent of them are digital today, and a CAD reseller with technically knowledgeable salespeople reaches engineers, designers and jewellers who already have a relationship with it. Both need a margin closer to their normal expectation and dedicated enablement, because sales people who expect large commissions on familiar products will otherwise never learn a new one. Refuse the pure box movers: a French e-commerce-only reseller adds language access but is likely to push its existing inventory instead of an unfamiliar printer, and a general office-supply chain reaches a retail audience that is probably not the prosumer.

4. Prevent the conflict before it happens. Segment the channels explicitly: direct keeps e-commerce, inside sales and named enterprise and education accounts; partners get named verticals, named territories and the long tail. Hold a consistent price across channels so nobody wins a deal by undercutting a colleague, and keep Amazon limited to the older model as a review-gathering and reach experiment rather than putting the Form 2 there against the company’s own shop.

The transferable lesson. Formlabs is not choosing between direct and indirect, it is choosing which customers get which channel, and the criterion is the same one from section 6: concentrated, large and complex accounts go direct, fragmented, small and distant ones go through partners, and inbound is exhausted before outbound is paid for.

Worked example

A plausible case: an industrial sensor unit with an end-customer price of 2,000 EUR and a variable production cost of 900 EUR. The choice is between hiring four field sales reps at a fully loaded 120,000 EUR each, or signing a distributor who buys at a 30 percent channel discount and needs one part-time channel manager plus partner support to look after.

	Own direct sales force	Distributor
Price to the end customer	2,000 EUR	2,000 EUR
Price we invoice	2,000 EUR	1,400 EUR
Variable cost per unit	900 EUR	900 EUR
Contribution per unit	1,100 EUR	500 EUR
Annual fixed channel cost	480,000 EUR	60,000 EUR
Contribution at 400 units	40,000 EUR loss	140,000 EUR
Contribution at 700 units	290,000 EUR	290,000 EUR
Contribution at 1,200 units	840,000 EUR	540,000 EUR

Break-even volume where direct overtakes indirect

Q = (fixed direct - fixed indirect) / (contribution direct - contribution indirect)

With these numbers

Q = (480,000 - 60,000) / (1,100 - 500) = 420,000 / 600 = 700 units

Below 700 units a year the distributor wins, above it the own salesforce wins, and 700 units is point A from section 6. Two things follow. First, if your realistic plan for next year is 400 units, hiring four reps is not brave, it is arithmetic you have chosen to ignore. Second, the crossover is not fixed: negotiate the channel discount down from 30 to 20 percent and the distributor’s contribution rises to 700 EUR, which pushes break-even out to 1,050 units and makes indirect the right answer for much longer.

Apply it to your project

1. Write down what your channel actually has to do, function by function: find customers, explain a product nobody has seen before, quote, close, deliver, install, train, support, and sell again. Everything on that list that a partner will not do stays with you.

2. Score your product on the five product factors from section 6: customisation, technological complexity, additional services needed, price level and position in the life cycle. The more of those point to complex, individual, service-heavy, expensive and new, the more direct selling you need.

3. Describe your customer base as concentrated or fragmented. Few big customers close together points to direct. Many small customers spread widely points to indirect. Split it if both are true, which is usually the case, and assign each half its own channel.

4. Be honest about your supplier position. How strong is your brand really, how much power do you have over the channel, how fast must you cover new markets, and how much working capital can you put into a salesforce that will not pay back for a year?

5. Build the crossover calculation before you hire anyone: contribution per unit direct, contribution per unit through a partner, the fixed cost of each, then the break-even volume from the worked example. Compare it with the volume in your plan, not the volume in your ambitions.

6. Decide the inbound and outbound sequence. Exploit inbound to its limit first, aiming at the customers most likely to find you and to buy without help, accepting smaller accounts and higher churn, and land individual users inside big organisations as a springboard. Only then add outbound, only for the accounts inbound structurally cannot reach, and aim it at the top deciders.

7. Pick partner types, not just partners. Wholesaler, retailer, distributor, agent, VAR or system integrator are different jobs with different economics. Then check the margin you can actually offer against what those partners earn on their existing lines, because that number, not your enthusiasm, decides whether they will sell for you.

8. Design the conflict out in advance. Write down which segments, territories and account sizes belong to whom, keep prices consistent across channels, limit discount authority, and decide now what happens when a partner and your own team meet at the same customer.

9. Put the metrics in place from day one: pipeline value by stage and probability, CAC payback, CLV against CAC, average deal size and sales-cycle length. Rank your customers with a quick ABC analysis to see whether you are dangerously dependent on two accounts or drowning in small ones.

10. Set the four sales-management functions running: goals, planning and organisation, implementation with training and regional responsibility, then control and correction. Then revisit the whole channel decision every year, because the crossover point moves as your product, your price and your volume move.

Key terms

Term	What it means in plain words
Sales channel	The route and the people through which a product travels from the maker to the end customer, together with everything done along the way besides taking the order
Direct sales	Selling with your own people and your own shop, with nobody in between you and the buyer
Indirect sales	Selling through intermediaries such as retailers, wholesalers, distributors, agents, resellers or system integrators
Distributor	A partner that buys the goods, owns them, carries the stock risk and actively sells on its own account, often concentrating on one country
Agent	An independent intermediary that closes contracts on the supplier’s behalf without ever owning the goods, and is paid a commission
Value-added reseller (VAR)	A partner that sells largely off-the-shelf products and earns its margin on the advice, configuration, training and support wrapped around them
System integrator	A partner that combines products and services from several suppliers into one turnkey solution and takes responsibility for the whole thing
Principal-agent problem	A partner acts in its own interest first, so it favours easy, established, high-commission products and neglects your new one
Inbound sales	Passive lead generation where customers find you through your website, search and earned media, and may even sign up entirely by themselves
Outbound sales	Active lead generation where you identify prospects, contact them cold and work them towards a decision, usually in the field
Channel conflict	Two parts of your route to market competing for the same sale: vertical between levels, horizontal between partners at the same level, multiple between different channels
Multichannel and omnichannel	Running several routes to market at once, and in retail blending online and offline so a customer can find, buy and receive through different ones
Point A, the crossover	The sales volume at which an own salesforce becomes cheaper than a distributor, because fixed cost is finally spread over enough units
Sales pipeline value	The sum of deals at each stage multiplied by the probability that stage converts, which is what your pipeline is worth today rather than on paper
ABC analysis	Ranking customers by revenue to see the concentration, resting on the observation that about 20 percent of customers usually make about 80 percent of sales
Customer lifetime value	The discounted surplus a customer produces over the whole relationship, minus what it cost to win them in the first place

Test yourself

1. Name the two independent axes of the sales decision and give one concrete example of each of the four combinations.
2. What does a distributor do that an agent does not, and why does that difference matter for who carries the risk?
3. Give the five product characteristics that push a company towards direct sales, and state the one-sentence rule the deck uses to summarise them.
4. A product sells for 1,500 EUR with a variable cost of 700 EUR. A direct salesforce would cost 250,000 EUR a year in fixed cost and yields the full 800 EUR contribution per unit. A distributor takes a discount that leaves a contribution of 300 EUR per unit and costs 50,000 EUR a year to manage. At what annual volume does direct selling become the better choice, and which channel would you pick for a plan of 300 units?
5. Explain the phase 1 and phase 2 sequence for inbound and outbound selling in a new business, and give the tie-breaker conditions that favour each approach.
6. Name the three types of channel conflict, give an example of each, and list three ways to manage them. Then explain why a five-year key account producing 45.64 million EUR of revenue against 45.53 million EUR of cost can still be a value-destroying customer.

Answers

1. Direct against indirect, which is about who owns the relationship, and inbound against outbound, which is about who moves first. Direct plus inbound is your own web shop. Direct plus outbound is your own field salesforce cold-calling. Indirect plus inbound is a partner web shop or a marketplace listing. Indirect plus outbound is a distributor’s field salesforce selling your product.
2. A distributor buys and owns the products, carries the financial risk of the stock, sells on its own account with great freedom, and earns its profit from selling. An agent never owns anything: it closes contracts on the supplier’s behalf, stays under strong supplier control and is paid a commission. So the distributor absorbs inventory and credit risk and in exchange takes real margin and real independence, while the agent leaves the risk with you and costs you only a commission.
3. Level of customisation and integration required, technological complexity, additional services needed, price level, and position in the product life cycle. The rule: the more complex, innovative, customer-specific, service-intensive and high-priced the product or service, the more advantageous direct sales become.
4. Break-even Q = (250,000 - 50,000) / (800 - 300) = 200,000 / 500 = 400 units. At a plan of 300 units the distributor is better: direct gives 300 times 800 minus 250,000, which is a loss of 10,000 EUR, while indirect gives 300 times 300 minus 50,000, which is 40,000 EUR.
5. Phase 1: exploit the full potential of inbound first, scale it up and build the first customer base, addressing target groups likely to find you and willing to self-sign-up or order online, focusing on small and medium accounts and accepting lower lifetime value and higher churn, and using individual users inside big corporates as a bottom-up springboard. Phase 2: build an outbound team, address the larger and more loyal accounts and aim at top deciders such as the CEO, CIO or purchasing officers, but only for customer groups inbound cannot reach. The tie-breakers: outbound if big accounts matter and the financial resources exist; inbound if a strong media presence is assured and self-onboarding is realistic.
6. Vertical, between different levels of one channel, for example your direct salesforce competing with your own distributor. Horizontal, at the same level, for example two distributors bidding for the same account. Multiple, between different channels, for example your web shop against a marketplace listing of the same product. Manage it by splitting territories and segments explicitly, keeping prices consistent across channels, limiting partner discount authority, and compensating partners for deals in their territory that close elsewhere. The key account is value-destroying because the surplus is only about 115,712 EUR spread over five years while the losses are front-loaded, the first year being minus 990,000 EUR; once every year is discounted at 10 percent the customer lifetime value turns negative, at about minus 81,030 EUR.

Revision summary

Tip

The one-minute recap

• Selling an innovation means telling customers what they do not know yet, and customers drop out late, deep into evaluation, so the salesforce spends heavily on deals that never close.
• Four functions of sales management: setting goals, planning and organising, implementing, controlling. The engine grows from starter motor to turbocharger to powerhouse, and the failure mode is the gas guzzler, an expensive sales process without product-market fit.
• The startup channel journey runs ad-hoc selling, e-commerce, inbound sales team, marketing for lead generation, indirect partners, and outbound in key markets last.
• Manage by pipeline: 100 leads at 5 percent of EUR 180m, 60 qualified at 25 percent of EUR 120m, 10 opportunities at 75 percent of EUR 10m, giving a pipeline worth EUR 46.5m. Targets: CAC payback under 12 months, ACV growth 20 percent, CLV over CAC around 10 times, sales cycle 30 percent shorter, growth plus EBITDA margin above 30 percent.
• Direct buys control, brand, data and margin. Indirect buys reach, speed, international coverage, bundling and capital efficiency. Partner types run from wholesaler, retailer, distributor and agent, who do no integration and few services, up to VARs and system integrators, who build turnkey solutions and add consulting, training and after-sales.
• Partners are agents with their own interests: they prefer easy, established, repeat-purchase products and existing customers, never become experts in the new one, do too little marketing, give poor service and over-use their discount authority, so they miss the targets.
• Choose on three sets of criteria: supplier (brand reputation, channel power, need to scale, need for coverage, working capital), product (the more complex, innovative, customer-specific, service-intensive and high-priced, the more direct), and market (concentrated and large and domestic points direct, fragmented and small and remote points indirect).
• The economics: indirect is cheaper at low volume because its costs are variable, and beyond point A the own salesforce wins. Break-even Q equals the difference in fixed cost divided by the difference in contribution per unit.
• Multichannel is normal, and it creates vertical, horizontal and multiple channel conflict, managed by splitting territories and segments, consistent pricing and limited discount authority.
• Inbound is passive, self-selecting, sometimes self-service, and needs a compelling value proposition plus media. Outbound is active cold contacting and field selling, and needs money, skilled people and back-office support. Exploit inbound fully first, add outbound only where inbound cannot reach.
• Value customers before you allocate the salesforce: acquisition is expensive, retention is cheaper and more profitable, recovery is possible where the relationship was sound. ABC analysis shows the 20 or 80 concentration but is static and uses revenue as a poor proxy. CLV discounts the yearly surplus and subtracts the acquisition investment, and it can turn a seemingly profitable key account negative.
• Formlabs shows the whole chapter on one desk: a 3,499 dollar prosumer printer, 95 percent prosumer buyers, a fragmented base of a million engineers and 200,000 dentists, direct sales split between e-commerce and 11 inside reps, 10 to 20 percent through overseas partners, a partner margin of 10 to 15 percent against the 40 to 50 percent CAD VARs are used to, and a board demanding double the sales.

Next: Financial Planning & Projections → - turning the plan into numbers.