Not too long ago, no one knew what Google was. It was a small company that did one thing very well, but its future as the world’s most pervasive brand was far from cemented. History shows Google owes much of its early growth to channel partnerships. Ironically, these partners included better-known sites AOL and Yahoo, which it would go on to dwarf — and now it makes billions as a channel partner for thousands of smaller brands. When it comes to leveraging partnerships for revenue and exposure, Google is the ultimate success story.
It’s also a testament to the opportunity younger companies have to grow exponentially and gain exposure by partnering with the right brands. But finding the right partners and landing the right deals isn’t so easy. And if it’s done wrong, it can be fatal, maybe even turning an erstwhile partner into a potent competitor. TrialPay is a prime example of a company that nailed this challenge. Led by CEO Alex Rampell, it gives consumers the chance to try out other products or services for free when they are buying something else. Several key channel partnerships allowed TrialPay to sprint from zero to 10,000 clients in two years, and fend off a number of competitors.
To win in some categories, you often need to win the longtail, says Rampell. That’s where channel partners come in, powering up distribution to reach the customers who would never find you otherwise, and who are too expensive to reach through conventional sales and marketing models.
What to Expect from Channel Partners
Imagine you’re Hilton. Of course, you want customers to call you directly to book their stays. Then you keep all the money. But you’ll miss out in the long run. Hilton often books the majority of its rooms through channel partners like Expedia, Orbitz, travel agencies like Carlson Wagonlit, American Express, and airlines that cross-promote hotels. The bet is that a customer making an airline reservation will decide they need a hotel room too. And it pays off, Rampell says.
This trade-off — sacrificing a little bit upfront for more revenue later — is how companies often turbo boost customer acquisition. In this sense, every new customer is worth a certain amount. You may have a lifetime value of $2,000 to GEICO, or $1,000 to Comcast, for example. And these companies will always pay a percentage of this value to get more customers like you.
“These type of channel deals are important for virtually every company,” says TrialPay’s Rampell. “Even though Dropbox depends heavily on word-of-mouth growth, it’s huge for it to be installed on every Samsung phone. That’s a massive channel partnership for them. It grows the business beyond standard sales and marketing models."
TrialPay is in an especially interesting spot because it depends on other brands for its growth. Its business model is literally to add a feature to other e-commerce sites. It also launched in a very competitive space and had to make sure it formed the right connections to succeed. So the question is not just how can you find partners, but how can you find good partners? This is where Rampell and his company have excelled.
Start Small and Grow from There
“My whole philosophy around business and selling is that you really want to start off with a very tight vertical,” Rampell says. “The area I knew well was consumer software. Just like how Facebook and Mark Zuckerberg started with what they knew — Harvard. We started with software and expanded concentrically outwards. That’s what generated the network effect needed for the business to take off.”
Rampell cites a story he heard from Netflix CEO Reed Hastings. “Many years ago, I was asking him why he wasn’t expanding Netflix to Canada. And he said, ‘Because we can still grow 10x in the U.S., and until we don’t think we can grow any more, it doesn’t make sense for us to expand.” This is the lesson Rampell likes to apply to business in general, and when TrialPay launched in 2006, his team set out to win the software vertical first. They just had to find the right partners.
When Rampell says he started small, he means it — kicking off with friends and family. He knew the head of WinZip, a software company that made it easy to send large, encrypted files. Along with a few other companies, he got Winzip to use TrialPay. That way WinZip could make money from the millions of people who used its service but would never pay by having those same people try or buy something else (e.g., shop at Gap, get WinZip for free).
“At a certain point, you might have a few big customers, but then you need to start reaching out to the little guys,” Rampell says. “If you can get 100,000 clients to pay $500 a year, that’s $50 million a year in revenue. You’re much better off than getting one big client to pay you $50 million a year.” Channel partnerships are the best weapon for reaching these longtail clients that will gradually make up the bulk of your revenue.
For TrialPay, the channel strategy made all the difference. It had a robust marketing team sponsoring conferences, sending out newsletters and direct mailers; it had a commissioned sales team signing up new customers; and it bought Google Adwords. All to get customers into its self-service channel. But this wasn’t enough. TrialPay needed to reach new eyeballs.
So Rampell and his team made a list. Who were the partners that could deliver them the hottest new leads? Companies on common ground.
“We’re a payment company,” Rampell says. “We try to put offers and discounts and deals around people who are already buying things as opposed to people who are just browsing or searching. So we thought, okay, we need to work with people who are selling things online. We’re not looking to work with the Huffington Post.”
They ended up with a roster of web merchants and the companies web merchants work with. “We walked through the whole thing. Web merchants need domain names. They need web hosts. They need commerce software, accounting software. Those were all potentially good partners for us.”
Once they had this list, it became crystal clear the type of partners they should be working with to reach these people and brands.
The key thing to think about is complementary goods and services. It's the most important thing.
“Why did Pepsi buy Pizza Hut? Because Pepsi is high-margin sugar water and they wanted as many deals with restaurants as possible. That’s why Coca-Cola locked down McDonald’s for many years. That’s a huge distribution partner for Coca-Cola,” Rampell says. “Hilton wants to make sure it’s on Hotels.com. You want to look at all the complementary goods that people are buying when they might be buying your product. That’s the best place to think about channel partners or prospective channel partners. The closer they are, the more complementary they are, the higher chance they’ll be bi-directionally relevant.”
Those last two words are key. They can turn a mediocre channel partnership into a lucrative, mutually beneficial relationship. A deal where a startup makes millions might be amazing for the startup and completely irrelevant for the multi-billion dollar conglomerate on the other end. The best channel deals are relevant to both sides.
The Best Types of Partners
There are roughly two types of channel partnerships. They can be plotted on a spectrum: the easiest to get being referral partnerships, and the most difficult being full integrations. Integrations, of course, have the best chance of being bi-directional — more on that later.
Companies just getting started with channel partnerships should focus on getting a strong referral program in place, Rampell says.
“I remember the first channel deal that we did with Web.com,” he says. “It was a leading web hosting company, and we figured anyone who’s selling something online has to have a web hosting company. We thought, ‘Okay, let’s go to Web.com and say we’ll pay you a bunch of money every time you send us a customer that signs up for TrialPay, because we know that of your customers, maybe 20% of them are selling something and would be great clients for us.”
When it comes to referrals, Rampell recommends targeting partners that aren’t growing quickly, especially if you’re a small startup.
“If you’re growing 1,000% year over year, the last thing you’re going to want to do is partner with some small company and send your customers over to them. You’ll focus on extracting more value and building more value for your clients. So we definitely went after those partners that seemed to be growing more slowly.”
Deeper integrations are more difficult to land for a similar reason. The company asking for the integration can often run away with all the value, leaving the partner with nothing. For example, Rampell says, it would have been dynamite for TrialPay to land a partnership with PayPal. “If every merchant who signed up for PayPal automatically got a TrialPay account, we’d have hundreds of thousands of clients, but that was pretty unlikely, because what would be in it for them?”
Going back to Hilton, you may be able to convince an airline to endorse you on their website or in their in-flight magazine. Even better, you could get them to add a little check box next to your ticket purchase button saying “Do you also want to book five nights at a Hilton Hotel?” In this instance, the airline also benefits because they are potentially providing a helpful service to their customers.
“For a partnership to succeed, you need to be a needle-mover for your partner,” Rampell says.
TrialPay found this match with Download.com. The latter was looking to pursue new opportunities and revenue models, and Rampell and his team identified the site as a great source of network effects, which could send more traffic to FTD and Netflix (two of TrialPay’s advertisers, which consumers would interact with to get, say, a free copy of WinZip). As a result, TrialPay could increase its pricing. It seemed like a win-win.
How to Evaluate a Deal
While Download.com seemed to be a perfect fit, TrialPay looked at several similar opportunities on the same scale. To compare them, they used a basic matrix with feasibility on the x-axis and possible benefit on the y-axis. They plotted potential partners in these quadrants and went after the ones with the most benefits that seemed the most feasible. Seems simple, but, as Rampell says, many startups don’t go through this exercise.
“We had the problem that we had too many potential channel partners. There were thousands that we could talk to. There are thousands of web hosting companies, domain registrars. It doesn’t stop, so we really had to think carefully about which ones to focus on."
Which ones have the highest chance of closing?
Using this matrix, Rampell and team put the idea of PayPal on the back burner, as well as Intuit because the benefit for TrialPay probably wouldn’t be that high — most people using Quickbooks probably aren’t online merchants (and likely TrialPay customers). There were also the domain registration sites like Tucows and Register.com that could be very feasible to pull off but weren’t quite as core to TrialPay’s customer base.
Download.com emerged not only because of the likelihood of the deal, but because it had a wealth of relationships with companies TrialPay was looking to reach but hadn’t so far. “We were ecstatic about potentially partnering with them because if they could distribute TrialPay even from a referral perspective we would reach 60,000 merchants we’d never be able to reach on our own — or at least reach profitably.”
Other Advantages
Striking a deal with Download.com didn’t just represent more revenue either. It had the potential to enhance the defensibility of TrialPay’s business. “If we could get integrated into Download.com, we’d prevent any of our competitors from doing the same. It would become a competitive advantage for us,” says Rampell.
In this way, channel partnerships can solve many classic business problems. “For example, Hilton is competing with 18 different hotel chains,” he explains. “But if they become the preferred and/or exclusive hotel provider for Delta, or American Airlines, or on Expedia, it locks out a lot of other hotel chains. Eventually they might even be able to start charging more for their rooms because they have the channel locked up. That’s how you build equity value.”
Revisiting the Dropbox example, by linking with Samsung, the company has elbowed out Box and any other cloud storage competitors on the most popular mobile devices in the world. Even being a “default” can have value, since it’s what most consumers will try first.
As for TrialPay, it faced four competitors when it was first starting out. Since then, it’s bought one and is the dominant force in its market.
Pricing and Channel Conflict
Pricing is something startups need to keep top of mind when they start architecting a channel strategy, Rampell says. In order to land fruitful partnerships, you have to make sure you aren’t competing with brands on price. He gives Best Buy and HP as an example.
“When a retailer like Best Buy finds out that one of the brands it sells, like HP, is selling its computers for a lower price on HP.com, Best Buy is going to be quite understandably upset,” he says. “We didn’t want to make WinZip, for instance, a worse deal because it was now being served through Download.com instead of TrialPay directly.”
But this doesn’t mean that channel partners can’t be offered different economics. Hilton might decide that it’s going to pay American Express more than Orbitz for every new customer acquisition. “But it’s important that every Hilton hotel room that’s $200 a night is actually offered for $200 a night on either AmericanExpress.com or Orbitz.com. If it isn’t, then you create a massive channel conflict problem.”
It's almost impossible to build a successful channel if it turns out your partner is offering different terms to the end user.
Rampell’s advice: Make pricing a major part of the conversation with any partner. And get creative with the economics behind the scenes if you need to. “Manufacturers always want products to be sold at the same price across their different distribution channels, whether it’s Walmart or Target. But it’s no problem if Walmart pays a lower price per unit than Target.”
For all of these reasons, it was critical that TrialPay set up its partnership model so that Download.com got compensated for new client referrals, but no end customer (software or app company) was paid less as a result.
Once You Have a Success
Good channel partnerships beget more of the same.
“Once we knew that Download.com was going to work out, our business development team went to every other download site on the planet, including many that you’ve probably never heard of,” Rampell says. “And it was even easier to get to them because we could say, ‘Download.com is one of our biggest channel partners. Do you want the same deal? We can pay you a lot.’”
Not only did Download.com give TrialPay distribution defensibility in the software vertical, it kicked off an aggregation effect. “We ended up getting almost every major consumer software company as a channel partner,” Rampell says. “And more importantly, many many more minor software companies started using our service as a result.”
Ultimately, the most valuable channel partnerships are the ones that get users turning up at your door directly.
“A direct relationship with a consumer is always the most valuable,” Rampell says. In order to get there, though, you need the slingshot and momentum of other well-known partners. Often many more, depending on the business you’re in. When done right, you prove you’re reliable and gain the name recognition to create a flywheel, and people start coming right to you.
Just look at Google.
Alex Rampell is the co-founder and CEO of Trialpay. Previously, he co-founded consumer anti-phishing company FraudEliminator, which was acquired by McAfee in 2006.