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GTDC: Two-tier model offers vendors highest returns

Working with distribution and resellers rather than opting to go single-tier or direct is the best go-to-market strategy for vendors

The classic two-tier model, where the skills and assets of distributors and resellers are used, is the best way for vendors to get higher returns from their go-to-market strategy.

Research from the Global Technology Distribution Council (GTDC) issued ahead of its summit next month should provide some cheer for those that argue the case for the value of distribution.

The industry organisation has issued its latest Distribution’s edge: An economic analysis of routes to market for ICT products and services report, which returns to research that was originally released a decade ago.

The report looks specifically at the contrasting benefits of going direct, using a single-tier model, or opting for a two-tier go-to-market strategy.

The report made the point that choosing to go direct – something startups often do to try to keep control of the sales process – was more expensive and limiting than working with distribution, which could reach customers via a wide network of resellers.

Those choosing to operate direct also faced high selling, general and administrative (SG&A) costs, limits to scaling caused by staffing levels and challenges getting to small and medium-sized enterprise (SME) customers, it said.

Cons listed for the single-tier model included the age-old issue of handling conflict over which customers are direct and which are indirect, as well as having to get on top of compensation plans and partner rewards.

“This study reaffirms the economic value that distributors provide tech vendors and partners, year in and year out”
Frank Vitagliano, Global Technology Distribution Council

The partner-led model is not without issues, however, with the prospect of higher enablement costs and the chances of it being harder to get pipeline visibility, but the benefits are significant, with a large reach to market on offer and the chance to work with an established and sharp set of channel businesses.

“The findings paint an intimate picture of go-to-market strategies in our industry, including some nuances many people likely don’t know or understand,” said Frank Vitagliano, CEO of the GTDC.

The Global Technology Distribution Council will be using the research to underline the benefits of distribution and challenge the ideas some of those firms that might think it is more cost-effective to go direct. It will also be discussing the findings in more detail at its summit on 10 November.

When comparing the economics of different go-to-market models over the past decade, it is clear that the two-tier model has continued to provide good economics around all aspects of going to market.

“It’s important to recognise that these are all elements discussed daily within IT companies around the globe. As a result, the takeaways from this report should resonate just as strongly as the ones we discovered 10 years ago,” said Vitagliano.

“This study reaffirms the economic value that distributors provide tech vendors and partners, year in and year out,” he concluded.

Benefits of a two-tier model

  • An increase in earnings before interest, taxes, depreciation, and amortisation (Ebitda) by 18% (to nearly 50% of total revenue) for one $1bn-plus hardware developer.
  • Over 34% more revenue after five years – with less than half as many full-time equivalents (FTEs) on payroll – for one hybrid technology company.
  • A sales productivity per employee improvement of 150% (to ~$5m) for one enterprise software company.
  • A reduction of selling, general and administrative (SG&A) costs to just 7% of revenue for one emerging enterprise software company.

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