The Value Chain & AIDA Process in the Software Industry
Whitepaper from TBK Consult
Author Hans Peter Bech, M.Sc. (econ)
© Hans Peter Bech 2014 First edition Unless otherwise indicated, Hans Peter Bech copyrights all materials on these pages. All rights reserved. No part of these pages, either text or image may be used for any purpose other than personal use. Therefore, reproduction, modification, storage in a retrieval system or retransmission, in any form or by any means, electronic, mechanical or otherwise, for reasons other than personal use, is strictly prohibited without prior written permission. Published by TBK Publishing® (a division of TBK Consult Holding ApS) Denmark CVR: DK31935741 www.tbkpublishing.com ISBN: 978-87-93116-07-8
The Value Chain & AIDA Process in the Software Industry
Table of contents:
Targeted audience
4
Abstract
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Author
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Acknowledgements
4
What are sales?
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The challenge of the indirect channel approach
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The AIDA process Awareness Interest Desire Action
The value chain
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The AIDA process, the Value Chain and the independent channel partners 12
3
Conclusion
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About the author
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The Value Chain & AIDA Process in the Software Industry
Targeted audience
The target audience for this whitepaper is the board of directors, the CEO and the sales and marketing executives of software driven companies1 with ambitions for achieving global market leadership through a channel of independent business partners. The whitepaper primarily addresses the challenges of software companies with long value chains requiring sales people to engage with B2B customers.
Abstract
This whitepaper discuss the best approach for making and keeping independent channel partners in the software industry productive. The whitepaper uses the business model framework and defines the purchase process (AIDA) of our ideal customers and explains how we must design our Value Chain to accommodate this purchase process. The whitepaper argues that the sales process in reality is the facilitation of the customers' purchase process. A large portion of the sales process can be predicted and prepared for, reducing the sales effort and associated cost-of-sales as well as increasing the probability of winning the business. Finally the whitepaper explains how software companies can identify and define the AIDA and corresponding value chain processes.
Author
Hans Peter Bech
Acknowledgements
Design and lay-out: Flier Disainistuudio, Tallinn, Estonia, www. flier.ee
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Proof reading: Emma Crabtree, ecr@tbkconsult.com
Independent Software Vendors (ISVs)
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The Value Chain & AIDA Process in the Software Industry
What are sales?
This whitepaper is about how to sell2 our software through independent channel partners. We all know that selling is difficult. Making software products is not the big challenge. Making software products that customers really want and are prepared to pay for is the big challenge. Only very few (if any) software products are pulled off “the shelf” by customers standing in line with their credit cards and cheque books ready. We have to make it past the “tipping point” before the market dynamics begin working in our favour generating a pull all by itself. The tipping point is typically around 20% market share. Until we have passed this point we need to push and push and push. When the project involving our software is of a certain size and several people are making the purchase decision, then we need to employ sales people to help the customers. That applies irrespective of whether the potential customers have found us or we have found them. Approaching the market through independent channel partners makes no significant change to how customers purchase software products or solutions. They still need to make absolutely sure that they make the right decisions for their businesses. Such decisions are about picking the right investments and selecting the most appropriate vendors for those investments. At TBK Consult we define sales as “facilitating a purchase process.” Sales should not be wizardry or magic exercised by prima donnas. We must be able to repeat and scale our business processes and especially our sales processes, thus we must define, document, follow and improve them. The first step in applying this “philosophy” is learning and understanding why and how our customers’ purchase our type of software and solutions. Then we need to understand when and why the customers choose us over our competitors.
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That insight is crucial irrespective of whether we are selling directly or through independent channel partners.
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Find, win, make, keep and grow happy customers
The Value Chain & AIDA Process in the Software Industry
word “channel” is traditionally used in the software industry Selling through The to describe independent companies that assume various roles and obligations in bringing a software product to the customers. independent definition is rather broad, since the roles and obligations can channel partners The vary substantially from “simple” reselling to system integration, solution development on top of the software, implementation in terms of consulting, project management, customization, training and support.
Figure 1: Osterwalder's business model framework
This definition collides somewhat with the contemporary business model framework definitions3. In the business model context “the channel” is the way we get to our customers. The role of the channel is to take our brand to the customers4. Thus, a company can operate the channel directly with his own resources or he can assign independent companies to operate some or all of the activities in his value chain5. However, our channel choices have a fundamental impact on all the other building blocks in the business model6. This whitepaper deals exclusively with the process of selling our products through independent channel business partners, which operate in their own name and at their own risk and cost. It is assumed that these channel partners are supposed to find, win, make, keep and grow happy customers for the software vendor’s product(s). Introduced by Alexander Osterwalder in 2010 through his book “Business Model Generation.” http://www.businessmodelgeneration. com
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3
Thus, OEM and white labeling operations are not considered a channel, but rather market segments in their own right. 4
Please see “The value chain” on page 9 Please see the whitepaper “The Software Partner Channel in a Business Model Context” TBK-WIPA-009 5
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The Value Chain & AIDA Process in the Software Industry
As you can see in the business model illustration in figure 1 there are two building blocks connecting our customer value propositions with our customers. The “Channel” building block represents the different routes we can choose (direct, resellers, value added resellers, distributors, value added distributors, implementation partners etc.)7. The “Customer Relationship” building block represents how we find, win, make, keep and grow happy customers. This whitepaper deals with the “Customer Relationships” building block and the impact on the other building blocks.
The challenge of the indirect channel approach
Using a channel of independent companies to sell, implement and/or service your customers has a long tradition in the history of the software industry. For some software companies the channel has been a major contributor to global success, but for most software companies making it work is a constant struggle. When software vendors have been successful in selling their products directly to customers, why do they then fail to repeat this success through a channel of independent business partners? The failure of an indirect channel can normally be traced back to the lack of quality in the channel recruitment activities and in the elements of the channel partner program of the software vendor. We hope this whitepaper will help software companies design their channel partner program8 to address the issues associated with finding, winning, making, keeping and growing happy customers.
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The AIDA process
The AIDA acronym stands for Awareness, Interest, Desire and Action. Elias St. Elmo Lewis9 who operated an advertising agency in the USA coined the AIDA concept at the beginning of the last century. Elmo Lewis helped his clients with advertisements and was obviously passionate about finding the best ways to create Awareness, motivate Interest, grow Desire and spur Action. 7
Please see the whitepaper “Commonly Used Definitions in the
Software Industry Front Office” TBK-WIPA-014 8
7
Please see the whitepaper “Designing Effective Channel Partner
Programs in the Software Industry.” TBK.WIPA-012 9
Please see the whitepaper “Designing Effective Channel Partner
Programs in the Software Industry.” TBK.WIPA-012
The Value Chain & AIDA Process in the Software Industry
In the context of this whitepaper the AIDA process represents the main generic steps our potential customers go through on the route to become our customers. In recent years the term “Customer Journey” has proliferated primarily in web based business models. It is basically the same thing. The “Customer Journey” approach is to map all the potential touch points we have with our customers and how to most effectively engage with them in each touch point with the objective of finding, winning, making, keeping and growing happy customers.
Awareness
“I know who you are.” Potential customers must know that we exist. They must associate us with something specific and relevant to their business domain even though they may not want what we have to offer just now. Without awareness nothing can happen. Neither our independent channel partners nor we can sell anything to potential customers that do not know that we exist. Since Elmo Lewis coined the AIDA term a hundred years ago much has happened. In the context of creating awareness the media landscape has changed completely especially since the introduction of the Internet in the early 1990’s. Despite the growth in communication channels, creating awareness with our target customers is no easier today than it was a hundred years ago. With all the opportunities available and the incredible noise on all communication channels creating awareness remains an art and science in itself.
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Sean Ellis introduced the term “growth hacking” a few years ago 10 indicating the need for being three steps ahead of the general market in using the Internet and social media for generating exposure and business without a million dollar marketing budget. It is beyond the scope of this whitepaper to go through all the options for creating awareness, but if neither our independent channel partners nor we have millions of dollars available for
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The Value Chain & AIDA Process in the Software Industry
awareness building it certainly makes sense to engage a “growth hacker” that can help us find effective ways to create that first awareness. Please note that making a phone call to a potential customer is also awareness building. It is probably the most expensive awareness building activity you can undertake, but in some situations it may still be the most cost effective.
Interest
“Now that I know who you are and what you do, then I am interested in learning more.” This whitepaper deals with software products that require sales people to engage with companies. During our efforts in building awareness we will hit potential customers at all stages of their purchase process and most of them will not even be actively looking for what we have to offer. Stimulating their Interest and thus meeting their needs for information will require a portfolio of fulfilment vehicles11. If we have defined our target market well we can anticipate which kind of information and in which format the potential customers need this information. When sales situations are complex (more than one decision maker) we need to provide information that is relevant for the buying role as well as for the purchase process. E.g. customers without an active need will be more interested in reading case stories about how other customers have benefitted from our products and services than technical whitepapers explaining product details.
Desire
“We have a project, we have the budget and we want to do this.” Getting from Interest to Desire is a step thoroughly discussed in the sales literature. Can we activate the Desire or do we have to monitor the potential customers until the day the Desire is activated from within?
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In some cases we can actually activate the Desire while in other Whitepapers, case stories, product information, fact sheets, conference papers, blog posts etc.
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situations we have to “stand-by waiting12” for the release of the Request for Proposal. Whatever the situation we have to consider how we can ensure that we nurture the process most effectively ensuring that we are selected when the day of Action comes. We can anticipate these processes and prepare materials and activities to stimulate and influence the journey from Interest to Desire.
Action
“We have issued a PO for the project.” Purchase decisions come in many shapes and forms, but this is the moment we have been working towards. The Purchase Order, the contract or whatever forms it may take. The bigger the sale the more likely it will be to be broken down into smaller phases or have escape clauses. Big-ticket sales are often a series of small ticket sales involving numerous activities and tests on the way. We can anticipate these steps as well and prepare for most of the situations. The better prepared we are the more likely can we impact the purchase process itself and steer the deal in our direction.
The value chain
Michael Porter introduced the term “Value Chain” in 197913. As the value chains in the software industry are much simpler than those of other industries TBK Consult has adjusted the concept to include more details on the marketing, sales and implementation processes, which tend to be much more complicated than in most other industries. A sample software industry value chain is illustrated in figure 2.
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Software companies have a huge advantage over their customers. While software companies are engaged in sales projects on a daily basis their customers are engaged in the equivalent purchase projects much less frequently. How often does a company purchase a new ERP, a new warehouse management or HR system? Not very often. We will work hard building our relationships and work on driving the content of the RFP in a direction matching our product and strengths. 13 Porter, Michael E. (1979). "How competitive forces shape strategy," Harvard Business Review. 12
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The Value Chain & AIDA Process in the Software Industry
Figure 2: Sample software industry value chain
The software companies have a unique opportunity for optimizing the sales process including: xx
Fine tuning their ideal customer profiles (vetting out those potential customers that will not make a purchase decision or will most likely chose another vendor)
xx
Identify and optimize the most productive ways of creating awareness (generate leads)
xx
Developing the tools to satisfy interested potential customers (convert leads to active potential customers)
xx
Structure and facilitate the purchase projects helping the clients through their decision making processes (convert active potential customers to real customers)
xx
Managing the implementation projects ensuring deliveries are made on time, budget and quality (converting customers to happy customers that can serve as references for us)
xx
Organizing account management to keep and grow current customers (maximize customer lifetime value)
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We must define a sales process that is the best possible facilitation of the purchase processes that is being executed by our ideal customers. Only this way can we establish a common vocabulary, design actions and tools to be applied in the various stages, have meaningful conversations about the status of the pipeline and produce reliable forecasts. Selling is a process just as any other business process. It is severely impacted by external forces, but that doesn’t mean that we shouldn’t treat selling like any other business process. Understand it, document it, teach it and optimize it.
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The Value Chain & AIDA Process in the Software Industry
The AIDA process, the Value Chain and the independent channel partners
Do we want to leave these issues and challenges to the independent channel partners? Do we as a software company prefer to focus on SPM14 only? Even Microsoft, SAP, IBM, Oracle and all the other huge software companies dare not leave the AIDA process and the value chain completely to their independent channel partners 15. All software companies go through three main stages in their growth to market leadership. Bootstrapping -> Bridgehead -> Scaling
When we are in market bootstrapping at the foot of the growth curve with no brand awareness and no genuine traction in the market we must stand side by side with our independent channel partners learning from what happens in the field. We must help our partners win deals and increase the productivity of their value chains. If we cannot make our partners successful we will not become successful. Leaving sales to the independent channel partners is an approach doomed to failure if our ambition is to make it past the tipping point before our competitors. When we have established our bridgeheads in the various markets we will also have built a repository of “best practices� that we can share with new partners, while we continue to work with our best performing partners on improving the processes even further. We will be more selective on where we allocate field sales resources, but we will never pull back completely.
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In the scaling stage (that never ends) we will still work with selected partners expanding and consolidating our market positions16.
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The Value Chain & AIDA Process in the Software Industry
Conclusion
Although we may engage independent channel partners to assume responsibility for finding, winning, making, keeping and growing happy customers for our software products, we still have to remain on top of the sales process. We must stand side by side with our new independent channel partners in the field closing their first deals and kick starting their business with our products. We must continue to work with our partners understanding the changes in the business environment and continue the optimization of the sales process reducing both the length of the sales cycles as well as the cost of sales ratios.
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Only with successful partners will we be successful.
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The Value Chain & AIDA Process in the Software Industry
About the author Hans Peter Bech has been developing and managing global partner channels in the software industry for more than 30 years. Hans Peter built the partner channels for companies such as Dataco (now Intel), Mercante, Dansk Data Elektronik (now CSC), RE Technology (now Barco), and Damgaard/Navision (now Microsoft). As a management consultant Hans Peter has been providing consulting on channel development and management issues to companies such as Microsoft, Danfoss, Proekspert, Jeeves Information Systems, eMailSignature, SoftScan (now Symatec), Netop, EG A/S, CSC Scandihealth and Secunia. Hans Peter is the author of several whitepapers on channel development and management and he frequently writes articles on the subject. He started his career as a management consultant in 2003 and founded TBK Consult in 2007. Since then he has built the company to its present position with 24 senior consultants in 16 countries. Hans Peter oversees the development of TBK Consult as well as performing management consulting assignments for selected clients. Hans Peter holds a M.Sc. in macroeconomics and political science from the University of Copenhagen. He speaks Danish, English and German and is a certified ValuePerform, ValuePartner and Business Model Generation consultant
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More about Hans Peter Bech
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TBK-WIPA-016