For business-to-business (B2B) suppliers, it’s not always clear when to approach customers directly or when to use channel partners, as few customers buy exclusively direct or through partners. Most companies weighing this choice tend to focus on the relative cost of each channel, or when they will run out of operating expenses to serve directly. These approaches leave money on the table. It’s more effective to quantify the relative profit or lifetime value of customers in each channel, taking into account factors such as services attached, upsell and cross-sell rates and churn or renewal rates.
To resolve the direct vs. indirect channel question, it helps to analyze solid financial data rather than rely on beliefs based on anecdotes. A major technology company did the hard work of assembling and mining sales transaction data from both direct and partner channels, and modeled what the contribution margin for thousands of customers would be if the customers bought only direct or only through channel partners. That created a like-for-like view. It then plotted the modeled data against the size of each customer’s spending with the company. The chart shows the crossover point at which it made financial sense to serve customers directly (to the left of the crossover) or through channels (to the right). After the exercise was done for each region and product group, and compared with customer buying preferences by channel, the provider could confidently set coverage lines for using field account executives, inside sales agents or channel partners. These insights also informed redesigns in channel incentives and partner recruitment strategy.
Justin Murphy and Mark Kovac are partners in Bain & Company’s Customer Strategy and Marketing practice, and Kovac leads the firm’s Commercial Excellence group. They are based, respectively, in San Francisco and Dallas.