A Company’s Questions:
Why do I need to give any Federal reseller more than five points off MSRP?
Why do they deserve any discount?
Why should one reseller get a price advantage over other resellers?
Is it legal to provide different pricing to different resellers?
Throughout my career, I have had to answer these questions multiple times. They are fair questions, and it only goes to underscore the differences between commercial and federal sales. These questions highlight the main differences in selling into the Federal market. The Federal customer does not normally procure goods and services directly from an OEM. To do so, the Federal Government would have to make an “Open Market” purchase. As a general rule, contracting officers shy away from these types of transactions because they introduce significant risk to the government. They are also significantly more onerous to the contracting officer than working with Federal resellers with contract vehicles. The Federal reseller with the appropriate contract vehicle provides the simple mechanisms needed to expeditiously close the transaction.
Most medium to large companies have a well-defined and developed channel program. This program explicitly defines the relationship between the OEM and the resellers that want to partner with the OEM. Most mature channel programs define the standard discount structures that resellers can obtain while closing business for the OEM. They also define how a reseller can obtain additional special pricing for an opportunity they are providing special value for, how to register an opportunity with the OEM, and how the reseller can leverage marketing development funds (MDF) provided by the OEM.
The Federal reseller’s business model is based on the contract vehicles they own and the discounted pricing that the channel program allows them. The Federal reseller may spend millions of dollars and thousands of hours, along with a significant amount of pain and angst throughout the bidding process and hopefully being awarded a Federal contract vehicle. This is a huge barrier to entry to the Federal reseller market and a barrier that does not exist in the private sector. A single contract vehicle has been known to take years to be awarded, even sometimes going unawarded. The effort to bid on these contracts is overwhelming and involves a reseller partnering with multiple OEMs and potentially thousands of products for which to build pricing sheets. There are nights and weekends of pricing, writing, and sweating to compose the response to this request for proposal from the Federal government. But once awarded, the contract vehicle can be worth hundreds of millions of dollars in revenue if they are leveraged appropriately.
Now, we will delve into the three ways OEMs view Federal resellers for product sales in the Federal market.
[REMINDER: This is the view of the OEM – NOT the Federal reseller]
Some OEMs view the Federal reseller simply as their fulfillment arm. We will call them a Fulfillment reseller.
In this case, the OEM would allow the Fulfillment reseller to complete a financial transaction using the Fulfillment reseller’s contract vehicle or other vehicle. This method expects minimal interaction between the Federal customer and the Fulfillment reseller. The OEM is driving everything in this model. Often the Fulfillment reseller does not know who the customer is until the final bid. Additionally, the Fulfillment reseller has almost zero knowledge of the OEM product or service.
Bottom Line: OEM gives margin to the Federal reseller only to use their procurement strategy to close business with the Federal customer. This margin is generally between 2% – 5%.
The Fulfillment reseller provides no value except for the path of least resistance to close business with the Federal customer. Most Federal resellers will cringe if you tell them they are only a Fulfillment center, but in this case, it’s true. They provide almost ZERO value except for the contracting piece.
While this model is not the most valued relationship for the OEM, it is sometimes the only way to close a deal. In many instances, the OEM does not have a formal relationship through their channel program and can decide the percentage off the list to give to the Federal reseller. My experience has shown that this is generally valued at a 2% – 5% additional discount. However, I have seen it as low as 0% and as high as 12% based on various factors.
An example of this type of transaction would be when I was working at a company selling into the Intelligence Community (Federal sector). The customer absolutely wanted my product. They suggested I use a small business 8(a) set-aside through which they could procure my product and services easily. I did not know the Federal reseller they pointed me to. I had no relationship with them, but I needed to close the deal. I reached out to the reseller with the contract vehicle, and they were very happy to help with the transaction. When my company (and I) went to get all the paperwork completed between the company and reseller, the reseller demanded additional points off the list to use their contract.
Bottom line: We negotiated terms for this one transaction which we compromised on the discount. In general, you can expect the OEM and the reseller to leave these deals frustrated.
The OEM believes that the reseller was given a gift and they should not look a gift horse in the mouth. The reseller knows the investment it took to win the contract vehicle and that the OEM is between a rock and a hard place. Suppose there is no other business in the pipeline, and the OEM cannot find other ways to partner with the reseller. In that case, the reseller generally has the upper hand, and the OEM generally completes the transaction, although they are unhappy with the deal. This can be extremely frustrating.
Another way that OEMs view Federal resellers would be what I refer to as a symbiotic relationship or quid pro quo. Effectively you are saying, “I need you, and you need me.” This is an example of an OEM’s channel program becoming highly effective.
2. OEM Primes the Pump
There are many factors for this view:
- New product on the market
- Federal reseller has thousands of products to sell (not just yours)
- OEM not established in the market
- OEM needs to provide the best possible margin to the reseller
Many OEMs think they have the best product on the market. They say to themselves:
“Why wouldn’t any Federal reseller want to add this to their portfolio of products? My product is the best. It kills the competition. Heck, it practically sells itself. The reseller would be privileged to add this product to their line card and sell it.”
That might even be the case. But that is not how this sales process works.
I laugh to myself when I hear people say this because I know the reseller’s perspective. I imagine an OEM visiting a large Federal reseller. They walk off the elevator to the sales floor, and a bulletin board is staring them in the face.
Let me explain what the reseller sees when you walk in the door with your new “widget” that “almost sells itself.” They say to themselves:
- The OEM has no market penetration
- The OEM has no MDF to help the reseller sales floor
- The Federal reseller is already making a good margin on the companies they are working with
- The OEM is trying to establish itself in the Federal market (and probably wants to push someone else out, which means a harder sale)
- The reseller will have to take the time to learn ANOTHER product
- The reseller will have to learn another OEM pricing and proposal process
- I could actually keep adding to this list…
I have seen this throughout my entire career, especially since I have worked with so many start-ups. Some companies do not understand why you need to give registration to the Federal reseller. The company looks at it like you are just giving money away for no reason. The company also thinks that since no other product like yours or yours is better than what is currently on the market, the Federal reseller is lucky to have your product to sell. While that may be true, it is only half the truth. The other half of the statement should be, “We would be lucky to have the reseller focus their salesforce on our product.”
I have been with even larger companies where I have also had to begin this process. The company was or had been well-established but NOT in the Federal market. The products were awesome, but the Federal reseller had no interest because they hadn’t heard of the company. Or the margins were not there to offset their lower margin – high volume business they live off of.
You can still be very successful when you create a beachhead. Get just one Federal reseller salesperson successful and illustrate the margin they can obtain by just one opportunity… the rest is magic. It spreads like wildfire if you maintain the presence and pressure to continue the marketing effort. One storage company took this approach with the US Army before the Second Gulf War and saw huge success. They crushed it and eventually became what I would call the de facto standard for US Army storage for tactical units.
So far, I have shown you how hard you can work to “give” business to an undeserving reseller. While this happens all the time, it is not the way to build a successful business. The best way to build a Federal reseller ecosystem is what I like to call “The Sweet Spot!”
3. Federal reseller Brings OEM (YOU!) Opportunities
THE SWEET SPOT!
This is absolutely the best way for the OEM and the Federal reseller to view each other and work together. Depending upon how large the Federal reseller is and the contract vehicles they own, this scenario can be very lucrative to both the OEM and reseller.
The easiest way to describe this approach is to find a reseller that works as hard as you do and spend some time developing a business strategy that you can both execute. Then you simply execute. Both the OEM and the reseller will bring deals to each other, and both will work in tandem to bring their individual deals to a close. When there are challenges, the team regroups and assigns the appropriate resource to close business. The key is that everyone does their part to close business.
There are great reasons for an OEM and the reseller to do this:
- The reseller can add capabilities to build a more compelling capability to an overall solution (last article – link)
- The reseller can use their base of customers and salespeople to call into more accounts
- The OEM can help the reseller by providing a customer list for the reseller to call
- The OEM can help create a marketing campaign for the reseller to use with their existing customer base
- Quid Pro Quo – I give you one, you give me one. Both the reseller and the OEM get twice as many deals
- The OEM can leverage the reseller’s large sales force, and the reseller can leverage the OEM’s simple proposal process and engineering support. It is easy to close deals this way.
- Again, I can keep adding to this list….
This does not happen overnight. This is a very focused effort by the OEM sales team to keep in front of the Federal reseller. You have to focus your attention on their efforts explicitly. It is not hard, but it definitely takes your time and effort to be successful.
Opportunity Cost: What could I be doing instead of getting this campaign going?
This can fill your pipeline very quickly and efficiently. But the OEM has a lot of work to do. Do more with less. Now you are expanding your sales force and leveraging their sales force to build your pipeline.
But remember, you must keep the margins “healthy” for the Federal reseller to maintain a selling focus on your products and services.
What type of marketing campaign am I talking about here:
- OEM sales build the emails to be sent to their customers
- OEM trains the Federal reseller’s sales teams on the content of the campaign
- OEM builds the proposals
- OEM provides registration to each customer to whom the Federal reseller sends quotes
- OEM maintains communication with the Federal reseller for progress
- As Federal customers call the OEM for answers, direct them to the Federal reseller for quotes
This is a never-ending process. You have to keep in front of it. It can be highly profitable for the Federal reseller and OEM, but it must be symbiotic. It is NOT easy. BUT it can be a lot of fun. Everyone loves success. The OEM (Sales, Marketing, Engineering, Channel, C-Level) must be in a single mindset to effectively execute a Federal reseller strategy.
The OEM needs to focus on the long-term results of this strategy. As I said – It does NOT happen overnight.
Leadership, planning, and knowledge are the keys to successfully building this market vertical.
These are three ways OEMs view resellers. We all need to work together to provide our customers with the best price for the best capabilities.
Please comment on this article.
- What is your experience working with federal resellers?
- Is there another way that an OEM and Reseller can work together that is not mentioned?
- What is your worst experience working with an OEM or a Reseller?
- How do you build a symbiotic relationship with a new partner?
I LOVE TO HEAR YOUR FEEDBACK, SO PLEASE COMMENT BELOW!
NEXT ARTICLE: I will be directing my attention to “The Side Effects of the Federal Budget Process on Federal Product Sales.” I hope you will join me.
BLOG 9: The Side Effects of the Federal Budget Process on Federal Product Sales