Vocera Case Write-Up

Alice Cheung

SID: 20714873

EWMBA 206

Vocera Case Write-up

What were the approximate costs (including channel discounts) involved in building Vocera’s VAR channel? How do they compare with the costs involved in building a direct sales force? Which is more cost effective? Or does it depend? Explain.

To estimate the cost building the Vocera’s VAR channel, we’ll first need to forecast the company revenue. Information provided in the case, there were 3 Channel Sales Manager (CSM) in 2002, 5 (including international CSM) in 2003 and 9 in 2004. Also, each CSM is approximately bringing in $2M of revenue per year. In short, the total estimated revenue is $6M in 2002, $10M in 2003 and $18M in 2004.

After projecting the revenue, let’s breakdown the cost to build Vocera’s VAR channel into 4 categories:

(1) Channel Discounts

Vocera is providing a 30% discount to all VAR for their products. So, the channel discount cost is roughly 30% of the annual revenue, in another words, $1.8M in 2002, $3M in 2003, $5.4M in 2004.

(2) Training

A core part to make the VAR channel successful is to train and education all the VARs on Vocera product, especially in the early stage. Vocera has invested in building and maintaining a training website, which would cost $15,000 in 2002 to build and $10,000 per year afterward to maintain. Other than training website, right around the product launch time, Vocera also organized 4 training program, which cost $15,000 each and in total $60,000 in 2002.

(3) Marketing & Sales

Although Vocera was not selling their products directly, they still play a major role in marketing. There are 6 major marketing expenses:

• Vocera has spent $4,000 in early 2002 to consult Channel Works and determine a list of “best fit” potential VARs
• Vocera spent around $20,000 each year on collateral
• Vocera spent $35,000 in 2002 to provide VARs partners with information sheets, presentations, handbooks, sales tools and promotional items. Vocera also increased the budget in supporting VARs by 20% in 2003 and around 28% in 2004, which is equivalent to $42,000 in 2003 and $54,000 in 2004
• Vocera also provide a demonstration system to each VARs, which cost $2,000 for each VAR
•  Vocera also provide marketing fund to VARs partner, $5,000 in 2002, $6,000 in 2003 and $7,680 in 2004
• Lastly, Vocera also spent $10,000 per year to implement Paul’s seminar in a box idea, to standardize the marketing materials and easily ramp up sales for new VARs

(4) Employees

Vocera has hired 6 different roles to build the VAR Channel.

• Channel Sales Manager (CSM), cost around $215,000 per manager per year. Vocera has initially hired 3 CSMs in 2002 and later expanded to 5 CSMs in 2003 and 9 in 2004
• Channel Marketing Manager (CMM), cost around $215,000 per manager per year
• Vocera would want to stick with a 1:6 ratio between CMM and CSM ratio, so 1 CMM in 2002 and 2003 and 2 CMMs in 2004
• Inside Salesperson, cost around $144,000 per headcount per year. Vocera estimated the inside Salesperson to CSM ratio to be 1:3, so we assume to have 1 in 2002, 2 in 2003 and 4 in 2004
• Director of Channel Marketing, $322,500 per year (assume the cost to be around 150% of a CSM)
• VP of Sales, cost $279,500 per year (130% of CSM cost)
• Half of the time from VP of Marketing, which would cost half of 110% of CSM ($118,250) per year

The total approximate cost to build the VAR channel is $3,503,800 in 2002, $5,242,850 in 2003 and $8,775,840 in 2004. A detailed spreadsheet is provided in Table A.

Would Vocera have an economical advantage if they decided to sell with a direct sales model? Let’s estimate the cost to build direct sales channel. We can also breakdown the cost into 4 categories:

(1) Training

Although we’re building up an internal sales team, it is still critical to provide them appropriate training, so that Vocera set them up for success to sell the products. I would assume it cost $5,000 to train each new salesperson.

(2) Marketing and Sales

 Assume that it would cost Vocera $55,000 per year to provide marketing materials for the direct sales team, like information sheets, collaterals, presentations, and sales tools.

(3) Employees

In order to support a direct sales channel, Vocera would need to hire several salespersons, director of sales, VP of sales, VP of marketing, a couple installation technicians and a few inside salespersons. To forecast the sales team size, I would assume that each sales would bring in around $800,000 revenue in 2002, $1M in 2003 and $1.5M in 2004. As the product get more mature and position in the market, it should be easier for sales to bring in more revenue. Base on this assumption, we will have 8 sales in 2002, 10 in 2003 and 12 in 2004. Also, I would want to maintain a 1:1 ratio between sales and installation technicians. Since installing the Vocera system is a core part of the product.

• Salesperson, cost around $200,000 each (commission, salary, travel, etc.)
• Director of Sales, cost around $300,000 (150% of salesperson)
• VP of Sales, cost around $260,000 (130% of salesperson)
• VP of Marketing, cost around $220,000 (110% of salesperson)
• Installation technician, cost around $100,000 each
• Inside Salesperson, $144,000 each

(4) Miscellaneous

There is a $90,000 managerial overhead per year to manage each salesperson

To summarize, it will cost is $4,470,607 in 2002, $5,727,160 in 2003 and $7,541,212 in 2004 to maintain a direct sales channel. The detailed cost breakdown is available in Table B.

The following graph has summarized both the direct and indirect channel’s cost estimation, assuming that Vocera will support the same revenue.

[pic 1]

By looking at the graph, we can conclude that:

• Indirect sales channel has a lower fixed cost, in another words, cheaper to setup the channel when the business first launch. In addition, indirect channel has higher variable costs, when sales volume increase, the cost increase more in indirect channel than direct. This is mainly due to the 30% channel discount offered for indirect partners.
•  For direct sales channel, the up front setup cost is higher, since Vocera would need to hire a full sales team, even the sales revenue might not be very high in the beginning. But when the business expands, the variable cost in direct channel is lower.

It’s more cost effective for Vocera to start the business with indirect Channel and slowly build up a direct channel when the business expands.