We talked about getting, keeping, and growing customers. That's the basic hard of customer relationships and hopefully, you're on your way to filling in that section of the business model of canvass by now. Whereas you're going to keep and grow your own customers in your customer segment for your solution. Now let's talk a little bit about channels. Channels are related to customer relationships, but they're not exactly the same thing. A channel is an intermediary. It's a mechanism for interaction with your customer. It's often a third party, but not necessarily a third party and you can use channels for both sales distribution and support. If you look at a typical, physical company, a physical product, physical channel, you'll have the company on the left and you'll have the customers on the right. And you'll have a variety of ways, transmission belts, if you will, to kind of reach your customers Web and online, is a way to reach your customers. You have a website, you communicate with them, you email them. You might have an OEM relationship which is a completely different kind of channel. Where your company actually makes something that someone else manufactures and then that manufactured thing is sold to the customer. In that case, the OEM is the channel, but you don't have much visibility into you're customer. You can't see who they are, you can't see what they like, you can't see what they're buying. It's a very deep channel in that sense. Another kind of channel is system integrators. The system integrator will take what you have and bundle it with services. So let's say you have a complicated enterprise software solution and it requires implementation, professional services, training, all kinds of hand holding to the customer. A system integrator will supply it to you, that's what the system's integrated channel looks like. You might have a direct sales force, that's a kind of a channel in a way. In this case you own it, if your in-house channel. But your direct sales people go out and they sell on your behalf. You have to train them, you have to incent them, you have to figure out how to get them to be productive. And all of that is a channel problem with your own direct sales force. Of course, you can outsource direct sales force as well. A value added reseller is slightly different kind of channel. This is somebody who takes what you do and adds a little something to it and then resells it. So you might sell a computer box, and the value added reseller installs software on it, the operating system maybe provides support for it. So the first level support when someone calls up will go through the reseller. It's like a kind of light version of an OEM plus a system integrator. Finally, they're dealers. If you sell something through retail you have to deal with dealers. They might be your own dealers, in some kind of dealer franchise kind of arrangement that you have or they might be independent dealers who have nothing to do with you. You have to work with the dealers, you have to incent the dealers, you have to figure out what sort of relationship you want to have with the dealers. The dealers themselves may get your product not directly from you, but through distributors. And distributors can also distribute directly to independent retailers. And distributors are an additional element in the channel that you have to worry about. You have to incent them, you have to figure out how to partner with them, you have to solve problems with them, and so on and so forth. So every physical channel introduces a opportunity to reach more customers or to reach them with a complete solution. But it introduces a new entity or a new set of problems that need attention, and that need attention in your business model. Virtual channels are a little bit different, but they're solving some of the same functions with physical channels. On your own website you might have a dedicated e-commerce site. You might have your own catalog, your own merchandising, and your own way for customers to buy and pay for items and then get them delivered. If you have your own e-commerce, that's a channel, you have to worry about it, you have to figure out its problems, you have to solve difficulties for customers both getting things, paying for things, not paying for things, and returning things if they don't like them. So you have the same set of problems that a retailer would have, but they're online and they're embedded in a website. You might sell the same stuff through an app store of some kind. People sell lots of apps for the iOS platform through Apple. People sell apps for the Android platform through Google Play. When you sell through an App Store, you have a relationship with a third party where you are paying them a certain percentage of your take in order to have them sell the stuff for you. But again you have to handle sales, you have to handle returns and you have to now peer through this channel which is a little opaque to you to figure out how it is that the customers are getting value. You might have a two step distribution, you might have a step where you do some stuff online and you do some stuff through a brick and mortar retailer. You find something on the web, you buy it, and then you pick it up in the store. Very common, increasingly common model. You might have an aggregator model. Where you are aggregating stuff from other third parties or you are having your stuff aggregated through a third party. Lead generation tends to follow this kind of thing. You are being paid part of what the aggregator takes in, and you are giving back part to the aggregator for presenting new stuff to the third party. Finally, there's social comments, where people are buying and selling stuff on social sites like Facebook and Twitter. And those have their own rules and their own relationships that you have to have with the channel in order to have them be effective. Flash sales are a new kind of virtual channel that were invented by Groupon or Living Social and other organizations where you have a time limited offer that's fulfilled online and people get a coupon that they pay for. These are all different kinds of virtual channels. The thing about channels is you get and you give. You give in the terms of economics, you have to give something back in every channel to help operate the channel and to reward the people in the channel who are doing work either for you or on your behalf. Looking at a direct sales channel at the top of this chart, you could see that you have goods in a physical world or in a virtual world that cost you something to build. And you have to pay some supply chain to get them. Your profit, your sales, and your R&D all come in the blue area with the difference between what your goods cost you and what you can sell them for. There's a little gap there because you might offer some kind of discount to the customer, but you are basically pocketing all of the blue in that case. In a reseller relationship, you are giving something to the reseller and the reseller takes a cut of your margin. So you got a smaller blue section, less profit, SG&A, and R&D for you. Your cost may be the same, this count may be the same, but you're giving up something. And then if you have a distributor, you're giving up even more. You're got to give up a little something to the distributors as well. The distributor get it from the reseller, the reseller takes their cut and then there is a discount. If you have an OEM relationship, you're giving up even more. In that case, you have your own cost of goods, your own supply chain, and your own profit, but now you are selling that to someone who themselves is going to manufacture it. You are their cost of goods, and they are going to tack on their profit, any distributor relationships they have, any reseller relationships they have. You're going to get a small piece of the pie at the end of the day, and you're going to have to figure out what all those splits are in terms of the money you're giving up in order to do a profitable job of running your business with that particular channel. So we just touched on some of the things about channels here. It's a mechanism for interaction with your customer. It's a way to get, keep, and grow customers. Every channel involves tradeoffs. You're essentially giving up margin, giving something to the distributor, you're giving something to the OEM, you're giving something to the seller, in order to get scale or completeness of solution. It's usually a tradeoff that you have to make because that is the way things are sold in the area from the customer saying that you're selling too. But you should at least know what the tradeoffs are before you do it. The other tradeoff you make in a channel is you give up customer touch in exchange for customer reach. You know less about your customers because you don't touch them directly. You have to do it through a channel, and that means you have to create materials for the channel to use to sell your product and you have to figure out some way to get feedback from the customers through the noise that's introduced by the channel. The reason you dont have much choice is because customers basically had channel habits, they have ways they like to buy things and you probably not going to change that. So if you have an existing solution that sold through a channel kind of relationship, you probably going to have to do a very similar thing in your own business. Hopefully, this material will help you figure out what sort of channels you're going to need in your business model canvas, and will help you get that filled out. Thanks.
