Indirect versus Direct: the Financials

Peter : On Rad's Radar?
| Peter Radizeski of RAD-INFO, Inc. talking telecom, Cloud, VoIP, CLEC, and The Channel.

Indirect versus Direct: the Financials

At Microcorp agent show today, one regional GM was explaining that the corporate mentality is that it is more expensive to sell via indirect than direct. I was flabbergasted.

The reasoning is that on year 2 and 3, when the carrier is still paying commission points, it is losing money. Really?

One: your customer acquisition cost and cost of sales for indirect is only paid if as sale is made.

Two: you pay salary, taxes, benefits, car allowance, cellular bill, office space, unemployment insurance, business liability insurance, and utilities for a direct sales force always! Whether that salesperson makes quota or not. On an average salary of $50K that equates to about $75K (or more) per salesperson.

What about the variables like the expense account, the expense of sales meetings and training, and the Pinnacle Club? Direct sales execs also get spiffs and commission payments.

Three: Hiring. The cost to hire a salesperson is expensive. Depending on the survey, it can be from $4263 per employee to $19K. The cost of hiring an agent is zero. (You could argue there are recruitment costs. I could argue if you had a good product, reputation and did some marketing, you wouldn't need to recruit agents).

So where is management coming up with that indirect costs more? You have large sunk costs in your direct sales model.

Let's examine the commission. If you sold a circuit that you made money on in Year 1, why is it unprofitable in year 2 and 3? Especially with rates falling so fast. Huh?

During year 1, you pay the direct AE the commission and his salary, benefits and perks. You only pay the Agent the commission. You are ahead of the ball game on year 1.

The channel support costs about the same as the direct sales force support, so that's a wash. I just don't see where it is a bad deal to pay commission on year 2 and 3.

I don't think it is a financial decision. I think management doesn't like paying agents year 2 and 3 when the agents become less active for that carrier. I think it's a control issue. And somewhat that agents aren't farmers so carriers don't see enough account management as they would like.

Let's not forget churn. Churn is lower with the Channel. When direct AE's leave, they take their rolodex to the next carrier and take as many customers (and the revenue) as they can to the new employer. Agents won't move customers unless the client asks, theirs an issue, or the carrier stops paying commissions.

My final thought is that the Channel gets you into accounts you just wouldn't get. Period. Government, Enterprise and especially the SMB space.

We are also seeing more telecommunication firms grow with an indirect only strategy - ACC Business, AireSpring, Broadvox to name a few.

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