SOFTLETTER: They Vant to Suck Your Blood: Oh, No! God Protect Us! It's the Attack of the Channel Vampires!

They Vant to Suck Your Blood:
Oh, No! God Protect Us! It's the Attack of the Channel Vampires!

Before going further, we feel obligated to tell you that if you are involved, or plan to be involved, with channel marketing and have not yet read the marketing development funds (MDF) section in The Product Marketing Handbook for Software you have not done your due diligence. To the best of our knowledge, the Handbook is the only unbiased source of information that provides a comprehensive look at these programs and ranks them for estimated effectiveness and cost. Combined with this series of articles, you'll be better prepared to minimize the inevitable blood loss that occurs when you deal with the wonderful world of distribution and MDF.

The shameless plug over, it is time for us to begin our journey to the haunted abode of those grim, blood sucking fiends, the Channel Vampires. As we stride down a gloomy path that legend tells us leads to their haunts, we spy before us a vast castle looming above the gathering fog. Drawing near this ancient edifice, we see a vast wood and iron door on which is mounted a giant brass knocker shaped in the head of gargoyle.

Advancing upon the doorway, we grasp the knocker and attempt to pound it hollowly against its wooden surface. Hmmm. Seems to be stuck. Uh, oh. What's that slot next to the knocker? Hmmm. There's a little sign above the slot that says…"Insert Coins Below." Coins? Do we have enough?… check your pockets…no…wait…my change purse…yes…that should do it. Clearly, this is the abode of the Channel Vampires.

After inserting more than just a few coins into the slot the knocker unlocks and we pound on the door. What seems an eternity passes before the entrance swings slowly open. There, standing before us, is the castle's owner, a thin, wasted looking individual wearing a fairly powerful after shave. He is dressed all in black and his hand is held towards us. An attempt to proffer a firm handshake is greeted with disdain. What is it he wants?…oh. Right. Sorry.

After placing several bills into our host's cadaverous palm we enter the castle. As we stand nervously in a vast anteroom, the master of the house regards us somberly for a moment, then speaks the first words of the evening. His words echo eerily in the empty hallways.

"Good Evening. Velcome to Castle Channel. Ve've been vaiting for you. Vhat can ve do for you?"

We stammer in reply that we've heard great things about the ability of the channel to move retail, VAR-based and enterprise software out to buyers and have come to inquire about terms and conditions. Our host snaps his fingers.

From a shadowed corner of the room a figure glides silently forth. He is improbably tall, possessing a ghoulish face and long slim fingers tipped by razor sharp nails. As he approaches us we notice…that…his…hand..is... stretched…out. Sigh. More bills crease pale palms. Boy, there's already been a lot of blood sucking taking place and no one has even gone near our necks!

"Max Shreck here is our retail specialist" our host states. "He'll give you the skinny on on how much blood needs to be withdrawn from your financial carotid artery before you can expect to put a shrink wrapped box on the shelves of Castle Channel. When's he's done, we'll have other bloodsuckers take you through VAR and Enterprise programs requirements." With a polite bow, the master of Castle Channel bids us adieu and strides silently away, leaving us in Max's care.

"OK guys," Max begins. Here's how you've been probably told it works. In the old days you went to a distributor and made your pitch. If you could demonstrate end user demand and had decent financials and a good business plan, you might get in to an Ingram or Merisel. You gave them between 30 to 50 points off SRP, then they turned around and resold the product to the reseller, holding onto about 8 to 10 points. The resellers in turn sold the product at what they thought the market would bear. As you know, many companies no longer bother assigning SRPs to products so now it's mainly a cost plus world, though some companies still hold onto SRPs. Good for promotional purposes in some cases.

Cost plus works by you creating a distributor price which is calculated backwards from your estimated street price. In turn, the distributor resells the product to the reseller and holds on to about 8 to 10 points. The resellers in turn resell the product at what they think the market will bear.

"Uh, cost plus sounds like pretty much the same thing as the SRP system," we state.

"It is. Don't interrupt me again. Now, these days before you go to someone like Ingram you first go to an aggregator like Global Marketing.

"What did I say? about interrupting me? Yeah, an aggregator. If you're a small fry, Ingram doesn't want to have its marketing and sales time burned up with the little people. Guys like Microsoft, of course, don't have to deal with them.

The aggregator will setup your account with Ingram for a $5K fee. Then they'll charge you $1.5K per quarter to manage your account. They'll also take 10% of your action. Any questions?"

"The aggregator will setup your account with Ingram for a $5K fee. Then they'll charge you $1.5K per quarter to manage your account. They'll also take 10% of your action."

"Now that we've got that straight, you should also be aware of some other things. For instance, many distributors will charge you 5% to ship to chains." Max reaches into the pocket of his greatcoat and pulls out a distributor invoice. "For instance, note this 5% surcharge for shipping a box of software to J&R Music World."

"Well, rumor has it that Ingram is planning to add a $3 to $4 buck shipping fee on every unit of software they handle in their warehouses."

"It might be only $1 or $2. Remember, you can negotiate all this stuff. Your leverage increases with demand for your products."

After a few minutes rest we've recovered from our first bloodletting at the hands of the Channel Vampires and are ready to continue our dark journey through the fiendish world of marketing development funds (MDF). Straightening up in our chair we look around for Max, but he's gone. In his place is a thin, cadaverous figure dressed in eveningwear and a cloak. Embroidered on the pocket of his dinner jacket is an elaborate "N."

The fiend smiles suavely. "No. My name is Count Net-to-Zero. It is a pleasure to make your acquaintance. You have something for me, I believe" he says, holding out a white-gloved hand.

We stand up and attempt to place some twenties in his palm but he frowns in distaste. "I prefer rebate coupons."

"Hmmm. A serious breach of etiquette. Perhaps you'd care to make a more direct contribution to Castle Channel?" he says, looking meaningfully at our necks.

"After you've told us about the latest trends in net-to-zero programs we'll be sure to rush out and buy the latest version of Windows XP and all the promotional add-ins" we say hastily. You'll get every coupon, all the bar code cut outs from the boxes, and the original receipt. A value of over $400 dollars!

"That will be satisfactory. Now, let us discuss net-to-zero programs. As you know, these became a promotional mainstay of the channel in the late 90s. They are exactly what they sound like product giveaways, though the customer is still responsible for paying sales tax, if any. Over the years the programs have expanded in popularity and scope and they're now a retail standard, particularly in the office superstores like Staples and Office Max. Some of the most elaborate net-to-zero programs seen were built around the release of Windows ME and XP. The ME rollout at Staples was supported by a net-to-zero consumer bonanza that gave away around $350 dollars in hardware and software.

Net-to-zero programs are fairly straightforward in their structure. For example, for a retail software SKU with an SRP of $29.95, a reseller might provide either an "instant" rebate of $5 or a coupon fulfilled by the reseller. The publisher fulfills the balance of the purchase price, excluding sales tax. The actual details of a particular program my vary; for example, the publisher may rebate the entire amount, but the two-tier structure is the more popular since it allows the reseller to position themselves up front as a good guy.

These promotions ave a "two fanged" rationale. The first is to drive traffic to the retailer's locations and make money on either sales of a "primary" product anchoring the net-to-zero promotion or on impulse purchases from customers lured into the stores.

The second is to allow publishers to advertise their products at a low price, build an installed base, create customer loyalty, build sales momentum, and hopefully, by making the fulfillment process as painful as possible, discourage people from actually using their rebate coupons and hold on to as much cash as possible.

"From the viewpoint of the resellers, they work well. They work so well in fact that all the major resellers are constantly looking to "encourage" publishers to participate in these programs and it is rare for a week to go by without seeing somebody somewhere running a net-to-zero on something.

"Here the news is not so good. Most publishers will tell you that they see no sales momentum from participating in such programs; once the promotion is over, sales immediately slump. Few retail publishers I have ever talked to claimed to see much increase in customer loyalty or felt that the programs did much to build an installed base. Some publishers feel that participating in a net-to-zero program makes the most sense for and end-of-life product. Rather than recall inventory and dispose of it through a liquidator, pushing it into buyer's hands may make sense. Remember that many products bought in a net-to-zero program tend to end up as shelfware or are bought by low level retail "scroungers" who promptly turn around and sell the products online or bundle them with cheap white box PCs sold at weekend computer shows.

As for advertising, most net-to-zero advertising consists of a thumb nail picture of a box with single line of text beneath it. CompuUSA thinks this is worth $22K per week. It will be hard to find anyone who believes this is an effective way to build product awareness but the channel obviously disagrees.

Another issue is the percentage of rebates returned by customers. Many publishers have counted on low fulfillment numbers but this is big mistake on any anything over $20 dollars. Count on 80%+ of buyers returning those coupons. And on big net-to-zero programs such as the Windows ME program, where people have gone to the trouble of literally filling up a shopping cart with freebies, expect to see similar rates for even the $5 throw ins. Once a customer sits down and begins to process all those slips of paper and cut out all those bar code labels they get on a role and become very intent on making sure they get back every last dollar they handed over at the register.

"They often feel they have no choice, particularly the smaller ones attempting to establish their products at retail. Most major resellers change their product mixes every three months and are not afraid to hint that refusal to participate in a net-to-zero may result in a decision to drop a publisher's product."

"The whole thing sound gruesome! What can software publishers do to soften the effects of net-to-zero on margins and profitability?"

"Well, one thing to remember is that in return for participation in a net-to-zero you should ask for relief from other MDF "bites" on your bank account. For example, Staples' $15K per year "shelving fee," which they charge for putting your product on…a…shelf, would be a good candidate for negotiation. Also, if you can afford it, consider building a "lite" version of your main SKU and offer that as net-to-zero sacrifice. Sales of your main product will still suffer while the program is running, but you may, particularly if you have a sufficiently aggressive E-reg program built into your product, be able to upsell X% of your lite buyers to your full product over time."

After our encounter with Count Net-to-Zero we were feeling faint yet again (the sight of bleeding, financial or otherwise, usually has that effect on us). When we were feeling better we noticed the Count was gone. In his place, towering almost seven feet high, was a giant figure. His was a gruesome visage, crisscrossed with numerous surgical scars. We recognized him almost immediately.

"Hey! Aren't you the Frankenstein monster? What are YOU doing here? Isn't this the Castle of the Channel Vampires?"

The monster snorted in contempt. "Effete aristocrats. You think every visitor to Castle Channel hands over the loot willingly? Sometimes some real muscle is required to persuade visitors to act 'reasonably.' Particularly in the case of vendors catering to the enterprise and high end markets" he said, flexing his huge biceps and looking at us meaningfully.

"Wow! You sure are in shape. Do you work out a lot?"

"Actually, I'm borrowing these arms from Hulk Hogan. Now, let me tell you about some serious MDF programs, not those little retail pin pricks. But first, don't we have some business to conduct?" The creature held out a giant misshapen hand, imperfectly sewn to its massive forearms.

"What would prefer? Money or coupons?"

"Batteries, actually."

We opened up our cell phones and silently handed the power cells over.

"Terrific! Now, some of the channel's favorite MDF programs revolve around hardware and software vendors sponsoring national sales meetings and one-on-one conferences with major corporate customers.

Several things about these. The first is cost. It's not uncommon for a distributor or reseller to hit a vendor up for $100K to attend a "meet the customer" event. And it's always suggested the vendor show up with some nice "tsotchkas" for the guests."

"You mean pens and coffee mugs?"

"Try leather jackets and free trips to Europe."

We gulped. "That's expensive!"

"No kidding. But if you're actually meeting with corporate big shots, it can be worth it. Now, what you have to particularly careful of is the attendee roster. Lot's of times software publisher have forked over the big bucks to meet with senior VP and top IT types only to have mid-level managers with no signing authority and even glorified AA's show to these meetings.

Of course, if these vendors were smart, they'd have asked for a roster of attendees beforehand and compared the roster with some research on the companies attending and titles of the people they'll be meeting with. And if you're smart, you'll insist of having input on the attendee list before participating in the program. Oh, and make sure you know precisely how long these meetings are supposed to last. We've cases where vendors were scheduled for ten-minute sessions with "customers." Just long enough to hand over the leather jacket and leave."

"What happens if some flunky shows up at a meeting instead of the promised big shot?"

"You should be prepared to raise Holy Hell. That's something we understand around here. You won't get your money back, but you can extract a "make good" promise from the channel for participation in a similar program in the future. But make sure they don't try to foist off some useless "co-op" advertising program on you in lieu of what you initially paid for."

"Where else are the big bucks blown, oh Dread Creature of the Grave?

"These days we prefer the term 'reconstituted person.' Or 'life-force challenged individuals.' Sporting events."

"Uh, OK, oh Life-forc…Sporting events?"

"Yup. For instance, distributors love to sell box-office-seat-for-the-season programs to vendors. For instance, you buy a skybox for New York Yankees games for the year and get to bring your top clients for some serious schmoozing."

"Well, that sounds OK. Expensive, but if you're selling some pricey CRM or ERP packages it might make sense."

Yeah, but distributors ALSO like to sell the same box seats to 10 other vendors simultaneously. Good luck brining your customer to a fall game between the Yankees and the Boston Redsox when they're one and two in standings."

"Doesn't the distributor TELL the vendor what they're doing?"

"If they ask. Several times. And ask very specific questions. You also should be aware of charitable events."

"From what we've been hearing, we don't think that's something the channel focuses on much," we mutter.

"They don't, but YOU may find yourself doing so. Distributors and resellers like to invite large vendors to sponsor charity events-help the homeless, save the kids, pet the puppies, that sort of thing."

"Sounds rather nice."

"It may be, but it's hard to see how such events contribute to saving the black in your bottom line. But you need to be careful of exactly what you're agreeing to when you sign up for such galas. In one case, a group of vendors found out they'd agreed to both sponsor a charity event and paint a bunch of houses in bad neighborhoods."

"Gosh! I bet they were real happy about that."

"They were thrilled."

"Did they go?"

"Why do you think I'm here?"

"Did the distributor send their people to paint houses?"

"You're joking, right?"

"This all sounds nightmarish."

"Thank you. Now, another favorite tactic of the channel is setting up meetings with international subsidiaries. The reseller or distributor flies in their people from all over the world and invites you to meet with them. The supposed object of all this globe trotting? Drumming up some international business."

"What's wrong with that?"

"Nothing, but you need to realize that if you're participating in such an event, you're paying for everything. Plane tickets, hotel, meals, everything. Not a dime comes out of the distributor's or reseller's pocket.

Also, it often doesn't make sense to spend a lot of time meeting with these people. International subsidiaries usually are no more interested in building demand for your products than domestic ones. What's the point of paying for T&E for 20 people when maybe two or three may be relevant to your product or market?"

"Well, we'd like to thank you for your time, but we think it's time we were going."

"Say, would you like to meet the Wolfman before you leave? He works here too."

"Where?"

"Accounts payable."

"Errrr, no thanks but we will be eternally grateful for the offer. Farewell!"

Quickly we retraced our steps and left the dread abode of The Channel Vampires. We have learned much and survived with our necks and souls intact. Of course, our wallets and cell phones were not so lucky. We hope you have learned something from our journey into the darkness and are better prepared to deal with the horrors that await you if you venture into the dark climes of the channel.

Or at least have a tourniquet available!

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