Evolution of sales models in a changing economy

Short note.

For many years, large computing companies have fielded large sales forces, and large reseller forces to provide more sales firepower to their revenue generation efforts. These require personal interaction to buy something.

Sun has recently decided to go almost all reseller. Feedback from some of our mutual customers indicates that some customers don’t like this. The flip side is that large sales forces require large expenditures of capital … people cost money to hire.

But the growth of the webconomy has done something interesting to sales. You can now buy your high performance computing and storage online. This effectively lowers the cost of each sale, while making the sales process more efficient, and generally faster. Well not completely, but almost. It also pushes the problem of systems engineering back onto the buyer. Something that the may be willing to do, or not.

Concurrent with this, the cost of systems have been falling. Apart from the fancy label with a well known name, and the nice industrial design of the case, precisely what value exists within the so called name brands versus the lesser known brands? Real innovation tends to occur in the latter group. Real repackaging in the former.

But falling prices tend to reduce margins. Margins that make the reseller model work. So resellers are being squeezed. Vendors can’t sell their own kit for under their costs for any significant length of time (yeah, I know, some do … and it says something about the value of their systems relative to their competition … their value is the inverse of their price) without a dramatic impact upon the bottom line. Have a look at Dell to see the impact of “aggressive” pricing (yes, that is a euphemism) upon their margin, and how happy the street is with that. Remember, your 401k or pension may be tied up in their (and others) stock, so while you like the lower prices, understand that it has a real cost to the company owners (which ironically may include you), which will impact decisions that the company makes about its product mix going forward, and how it sells.

When systems have 100+% margins, it isn’t too painful to give 30% to resellers. Let them go sell it. It costs you less than hiring a person and having them do this for you. You lose their complete attention, but the resellers are about as efficient as an internal sales organization, so you can allocate your costs appropriately.

When systems have 10%-ish margins, the 30% reseller model is broken. To minimize the cost of sales, you have to sell it on-line, and remove humans from as much of the process as possible. The webconomy is this model. Lower margins, faster sales.

No, you can’t be loss making and make a profit on volume, the mathematics just don’t work out. You have to be disciplined enough to walk away from bad business (bad pricing, ludicrous/onerous T&C, …). This is very hard for many sales people. Oddly, it is easier for the online stores.

I do believe that the sales model is rapidly evolving. I am thinking about this in part due to an internal product effort that you may hear about soon. We call it (internally) “ΔV”. Don’t know what its external name is yet. Already have people looking at including it in their offerings. We are worrying about how to make it work for everyone.

Sort of prisoners dilemma in a sales model.

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