Entrepreneurs dream of developing products and brands that become household names. Ideally, business grows steadily, your products are on the shelves of every major retailer and delivered to customers' homes every day, while your profits soar.
Many of the success stories that inspire us go something like this: The company founder developed a product in the garage in his spare time, sold it online for awhile, found a way to make the product go viral, and watched sales climb.
That's certainly one way to do it, but as a business adviser, I tell my clients they should remember that for every story like that one, there are countless others where the business just never gains traction. It's not that the product isn't necessarily good, but attracting a customer base is just really difficult.
An alternative is to consider finding a channel partner. That's what GT Living Foods did when it brought kombucha into the mainstream. Its founder, GT Dave, was making small batches of kombucha in his parents' kitchen and selling it in California health stores. He decided to partner with Whole Foods, which had exactly the customer base the product needed and brought a niche product into the mainstream. GT Living Foods is now estimated to be worth $900 million.
Direct-to-consumer and channel partnerships have their pros and cons. Here's how I see them.
Direct sales offer the ability to build your brand name from the start. It also gives you the opportunity to control your customer relationships, which is difficult to do when you're making a product that carries your partner's name. This model is costly, however, because you have to make significant upfront investments to fulfill orders. You also have to bank on low customer-acquisition costs, and while you control your customer relationships, you also put yourself at the mercy of e-tailers such as Amazon.
Channel partnerships allow you to align with a known entity that may have a significant customer base. Whole Foods was a great partner for GT Living Foods because the stores have loyal customers willing to pay premium prices for healthy products. You don't control your own customer relationships, however, and if the values of your company and your partner's don't align, that can be trouble.
A potential middle ground is a limited channel partnership that ends after a set period. That could give you the opportunity to use your partner's name and customer base to build buzz for a product and then set off to build your own brand.
Channel partnerships aren't right for everyone, but there are benefits that many people overlook to focus on building their brands from day one. In the end, what you really want is growing sales, and knowing your options gives you the best shot of achieving your goals.
Ram Shivakumar is adjunct professor of economics and strategy at Chicago Booth.
This column is part of the Chicago Booth Insights series, a partnership with Crain's Chicago Business, in which Booth faculty offer advice for small businesses and entrepreneurs on the basis of their research.
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