Devinator

A typical Mfr/VAR discounting relationship ranges from 10-35% depending on the VAR’s partner level and the type of product being sold (access points, management platform, support services, professional services, etc).  These are not Aerohive’s exact numbers, so please don’t think that’s what I’m saying.  If you’re interested in being an Aerohive VAR, we have a nice little 2-page PDF file with all of the discount info on it that we’ll send you.

A high-tech manufacturer will typically use one or more of the three distribution models, but it’s important to note the golden rule of channel sales: DON’T COMPETE WITH YOUR CHANNEL!  This is a big no-no.  If a manufacturer sells direct, it should make sure its channel is OK with it, and they’re only likely to be OK with it when the manufacturer is selling a different set of products through each distribution mechanism.  In other words, when the manufacturer is selling some items direct and some items through the channel, the channel might be willing to ignore the situation.  The reason for the big no-no on selling the same products direct and through the channel is that manufacturers have an unfair advantage in the market against the VAR since their COGS (a fraction of List) is much lower than the VAR’s COGS (the discount level offered by the manufacturer).

A manufacturer might use different distribution models in different markets.  For example, in the US, a manufacturer may choose a one-tier model, while leveraging a two-tier model in Europe.  This may make sense since there are dozens of countries in Europe, each operating under different legal and cultural rules.  One or more VADs in each country have relationships with the VARs in that country, and therefore the manufacturer doesn’t have to have a large head-count within that country to achieve significant sales.

Now that I have given you a massive amount of context, let the cryning (my wife’s combination word for “crying and whining”) begin. 

BS Strategy #1: Cutting out the Channel Partner

This strategy is used by manufacturers that either: 1) Are too big to care about an individual channel partner, or 2) cannot survive without every last drop of revenue.  Another commonly-used term used for this strategy is “Going Direct.”  When a deal is so big or so key (as in ‘high-profile’) that a manufacturer wants to win it at all costs, they will sometimes cut the VAR or VAD/VAR out of the relationship and talk directly to the end-user (customer).  This is done by the manufacturer to offer a significantly-lower price to assure that the manufacturer wins the business.  This is death.  This will cause channel partners to seek partnership with different manufacturers. This strategy will cost large manufacturers a pile of money in the long run, and it will put smaller manufacturers out of business straight away. 

Just imagine if you were a VAR, and after working your butt off night and day, you landed a whale of a prospective customer (“prospect”).  You gave it 100% to win the business, and then, after you registered the deal with the manufacturer (in order to protect this account from other VARs working for the same manufacturer), the manufacturer stepped in and took the customer away from you - completely cutting you out of the deal.  How would you feel?  PISSED!  This rarely happens more than once to a VAR before they switch manufacturers, but there are, for some reason, cases where a manufacturer will do this to a VAR over and over before the VAR will finally partner with a different manufacturer.  It’s kind of like battered wife syndrome I think, and it just plain sucks.  The Mfr/VAR relationship is a partnership, and it should be built on respect and cooperation. 

If the manufacturer wants to go lower on the price, in order to “win at all costs”, then wouldn’t it be smarter to lower the VAR’s price for this “one off” deal so that the VAR still maintains the customer relationship, makes a healthy profit, and still gets to offer value-added services?  That way, the manufacturer and VAR are working together to win the customer’s business, each sacrificing something.  Handling it this way is a win/win/win situation.  Going Direct is BS.

BS Strategy #2: Price Hikes with Deep Discounts

Suppose, as a manufacturer, I priced a set of golf clubs for $1,000 List Price, my COGS was $200, and I don’t sell direct.  That’s a fairly normal List Price for top-notch golf clubs these days, right?  Then, the Golf Superstore (a very nice outfit by the way), asked to carry my clubs in their store.  As the manufacturer, I agreed to give them a 30% discount from List Price because they could sell lots of my golf clubs.  They buy the set at $700, and they sell them at $1,000.  Everyone wins. 

Then, “Mom-n-Pop Golf” moves in next door to every Golf Superstore, and they want to carry my golf club lines also.  I agree, and offer them a slightly different cost of $750 per set (because they don’t have the brand name of the Golf Superstore and aren’t likely to sell as many sets).  They agree, and then they sell my clubs at $950 per set.  As they sell more, I agree to further discount their cost to $700.  They’re happy, and now of course the Golf Superstore has to drop their price to $950 to match Mom-n-Pop Golf…who responds by dropping their price to $900.  You get the picture, right?  It’s Capitalism.  It’s commoditization.  It’s how it all works.

Suppose instead that I didn’t like this model of selling my golf clubs, and opted for a different model.  Instead of setting the List Price to $1,000 (normal), I set it to $2,000, sold my clubs to Golf Superstore and Mom-n-Pop Golf for $500, and then told them to sell the set at $700 to crazily undercut the competition.  What does this model achieve?

1) The manufacturer makes less money on each set, so they hope that the crazy-low price sell more sets.  If they don’t sell more sets, quickly, then they’re toast because they won’t have enough profit to operate their business.

2) The customer base looks at the $2,000 List Price at Golf Superstore and thinks, “Are their clubs really twice as good as everyone else’s?  If so, why are they selling them at $300 less than everyone else’s?  That doesn’t make sense.”  Their next move is to do a little homework, which means finding out what Mom-n-Pop Golf, Internet-based resellers, and eBay sells this set for.  $700 everywhere.  OK, so the $2,000 List Price is deemed misleading hype, the manufacturer is deemed a crook, and their clubs are now seen as “cheap” instead of “less expensive.”  The customer then goes with golf club vendor-B instead.

Some Wi-Fi infrastructure vendors are now using BS Strategies #1 and #2, and I gotta tell you, it makes me want to puke.  Of course, as a competitor, I should probably rejoice that those manufacturers will soon be out of business.  What do you think?