I watched a $100M SaaS company nearly implode because they made the channel vs. direct decision based on a board deck from 2012 instead of actual economics.
The CEO had come from Salesforce, where partner channels drove 60% of revenue. He assumed channels would work the same magic for his company. Within 18 months, they'd signed 45 channel partners, built a partner team, created partner enablement programs, and committed 25% margins to partner deals.
The result? $4M in partner-sourced revenue against $12M in channel program costs. Partners were signing up for the commission potential but not actually selling. The company was burning millions subsidizing a channel motion that didn't fit their product, deal size, or buyer behavior.
Meanwhile, their direct sales team was crushing it. Strong pipeline, consistent close rates, efficient CAC. But the company kept pulling resources from direct to invest in the struggling partner program because "channels scale and direct doesn't."
It took a new CFO to kill the channel program. She ran the economics and discovered that at their average deal size ($35K), partner margins made deals unprofitable unless partners delivered leads fully qualified and ready to close. But partners were expecting to hand off early-stage leads for direct reps to nurture—which meant the company paid both partner commissions and full sales costs. The unit economics were catastrophically broken.
Within six months of refocusing on direct, revenue growth accelerated 40%. Not because channels are bad—because channels were wrong for this specific GTM motion.
The channel vs. direct decision isn't philosophical. It's economic. And most companies get it wrong because they optimize for the wrong variables.
The Economic Reality Nobody Talks About
The conventional wisdom on channels sounds sensible: Direct is expensive but high-control. Channels scale faster but require margin sacrifice. Pick based on whether you value control or scale.
This framework is useless because it ignores the only question that matters: At what unit economics does each motion work?
Here's the brutal truth I learned after analyzing hundreds of channel and direct programs: Channel works when partner economics beat direct economics at your deal size and sales cycle. Direct works when it doesn't. Everything else is noise.
Let's make this concrete. Say your average deal is $50K with a 12-month sales cycle. Your direct sales rep costs $200K fully loaded and closes 8 deals per year = $400K in bookings = $50K cost per deal = 100% CAC to ACV ratio.
Now add a channel partner. You pay them 25% ongoing margin, which at $50K ACV with 80% gross margin is $10K per year per deal, or $30K over three years (assuming 3-year retention). Plus you need partner managers, enablement, systems—say $150K per partner manager overseeing 15 partners.
For channels to beat direct economics, partners need to deliver deals cheaper than $50K CAC. But they're getting $30K+ over the deal lifetime, plus you're paying $10K per deal for partner management overhead. So partners need to deliver deals with near-zero additional sales cost, or deliver deals your direct team can't reach.
Most partners can't do either. They pass leads to your sales team, which means you pay full sales costs plus partner margin. Or they pursue the same accounts your direct team could close, which means you're just subsidizing deals that would have happened anyway.
The channel vs. direct question isn't "which motion scales better?" It's "which motion delivers better unit economics for the deals we're actually closing?"
When Channel Economics Actually Work
I've seen channel programs work spectacularly. But they work in specific, predictable scenarios. Miss these conditions and you're burning cash on a channel that will never pencil.
Condition 1: Your product sells into buying contexts where partners have incumbent relationships
Channels work when partners have existing customer relationships in contexts where your product naturally fits. Not theoretical overlap—actual selling relationships where bringing you in solves a customer problem the partner is already managing.
Best example I've seen: A security compliance tool that partnered with managed service providers (MSPs). MSPs had ongoing relationships managing IT infrastructure for mid-market companies. When customers approached compliance deadlines (SOC 2, HIPAA, etc.), MSPs were already in the conversation. Adding the security tool was a natural extension of services MSPs were already delivering.
The MSPs brought fully qualified demand. Customers trusted their MSP's recommendation. Deal cycles compressed from 6 months to 6 weeks. Partner margins were 20%, but deals closed with near-zero direct sales cost. The economics worked beautifully.
Contrast this with a company that partnered with consulting firms to sell project management software. Consultants had client relationships, but those relationships weren't in contexts where project management software naturally surfaced. Consultants had to create demand from scratch, which meant long sales cycles, low close rates, and partner frustration. The channel program failed because partners had to work as hard as direct reps—but for 25% instead of 100% of the deal value.
Condition 2: Partners can deliver leads that convert without your sales team
Channel economics break when partners pass leads that require your sales team to close. You're paying partner margin plus full sales costs, which means horrific CAC.
The channel programs that work give partners everything they need to close deals autonomously: Self-service trials, clear pricing, standardized proposals, deal registration systems, and executive sponsorship for stuck deals.
I watched a collaboration tool nail this. Partners were IT resellers with existing relationships selling Office 365, Slack, and Zoom. Adding another collaboration tool to their stack was natural. They created a partner deal desk that could generate quotes, process orders, and handle procurement in 48 hours. Partners closed deals themselves 80% of the time. The 20% that needed sales support were complex enterprises where partners legitimately added value by navigating organizational politics.
Partner margins were 20-25%, but sales costs were near-zero on 80% of deals. The economics worked.
Condition 3: Partners reach buyers your direct team can't efficiently target
Channels work when they access markets with unit economics that don't support direct sales but where partners already have coverage.
Best case: A company selling $8K deals to small accounting firms. Direct sales didn't work—the deal size couldn't support a $200K rep. But accounting software VARs already called on these firms selling other tools. Adding another $8K product to their portfolio required minimal incremental effort.
The company paid 30% partner margin ($2,400 per deal) but avoided direct sales costs entirely. Partners delivered thousands of small deals the company could never have reached profitably with direct reps.
The key insight: Partners worked because they had infrastructure to reach small buyers at low cost. The company wasn't building a channel to scale—they were accessing existing distribution to reach uneconomical segments.
When Direct Beats Channel Every Time
The conditions where direct wins are equally predictable. Miss these signals and your channel program will underperform no matter how much you invest.
Signal 1: Complex, consultative sales where deep product expertise matters
If your sale requires understanding customer workflows, customizing solutions, or navigating technical objections, partners won't invest the time to develop that expertise unless you're their primary revenue source (and you won't be).
I watched a company try to channel-sell a complex data integration platform through IT consultants. The product required understanding customer data architecture, API capabilities, and integration workflows. Partners couldn't develop that expertise for a single tool when they sold dozens of products. So partners would pass leads to the company's sales engineers, who'd spend weeks in technical sales cycles, then the company would pay 25% partner margin on top.
They killed the channel program and refocused on direct. Revenue per sales rep doubled because reps could close complex deals without waiting for partner handoffs.
Signal 2: Your ideal customer profile is concentrated and reachable directly
If you can efficiently reach and sell to your ICP with direct outbound, SDRs, or marketing, channels just add cost and friction.
Example: A company selling to VP of Sales at Series B+ SaaS companies. There are maybe 5,000 companies in this ICP globally. You can build a list, run targeted outbound, sponsor relevant conferences, and create content that reaches them. Why pay partner margins when your direct team can systematically work the entire market?
Channels make sense when your TAM is too diffuse for direct coverage. Small businesses, fragmented verticals, international markets where you lack presence. But if your ICP is concentrated and accessible, direct is almost always more profitable.
Signal 3: High deal values where sales costs can be amortized
Once deals hit $100K+ ACV, the economics of direct sales become compelling. A $200K rep closing $800K in annual bookings delivers 25% CAC to ACV, which at 80% gross margin with 3-year retention gives you strong unit economics.
At these deal sizes, paying an additional 20-25% partner margin on top of sales costs destroys profitability. You're paying $50K in sales costs plus $20K-25K in partner margin per deal. Unless partners are delivering deals with zero sales involvement (rare at $100K+ deal sizes), the economics don't work.
I've seen companies try to build channel programs for six-figure deals. Partners would source leads, but deals still required sales engineers, custom demos, executive sponsorship, and legal negotiation. The company paid full sales costs plus partner margin. When they killed the channel program, they improved gross margins by 15 points with no revenue impact.
The Hybrid Trap: Why "Both" Usually Means "Neither Works Well"
The tempting answer to channel vs. direct is "both." Run direct for strategic accounts, channel for long-tail. Best of both worlds, right?
Wrong. In practice, hybrid almost always means channel conflict, comp disputes, and degraded economics on both motions.
The core problem is deal registration. Partner brings a lead. Direct rep says "we were already working that account." Who gets credit? If you side with the partner, direct reps stop prospecting into accounts where partners might claim territory. If you side with direct, partners stop investing because they can't trust they'll get paid.
I watched this destroy a company's channel program. They ran hybrid: Direct for enterprise, partners for mid-market. But enterprises had subsidiaries in mid-market segments. Partners would sell to a mid-market division, then the parent company would want to standardize on the tool across all divisions. Who owned the enterprise expansion? The partner who landed the initial division, or the direct team that owned enterprise?
They tried splitting the commission. Partners hated it because they did the work to land and expand but only got half the expansion revenue. Direct reps hated it because they had to support partner accounts without full credit. Both motions suffered.
The hybrid programs that work have surgical separation: Different product lines, different geographies, or different customer segments with zero overlap. If there's any gray area in who owns what accounts, conflict will kill productivity on both sides.
How to Actually Make the Decision
Stop thinking about channel vs. direct as a strategic choice. Start thinking about it as a unit economics calculation.
Run this exercise: For your average deal size and sales cycle, calculate the full loaded cost of a direct sale. Include sales rep, SDR allocation, sales engineering, marketing attribution, manager overhead. Be honest about your actual close rates and sales productivity.
Now calculate what it would cost to enable a partner to close that same deal. Include partner margin, partner manager overhead, enablement costs, and realistic assumptions about how many deals you need to pay full sales costs to support.
Which number is lower? That's your answer.
If direct costs $40K per deal and channel costs $35K, go direct. The 12% savings aren't worth the complexity, conflict, and loss of customer relationship control. Channels need to deliver 30%+ cost improvement to justify the operational overhead.
If channel can deliver deals at $25K cost vs. $40K direct, channels make sense—but only if you're confident partners can actually hit those economics at scale.
The companies that win don't pick channel or direct based on industry norms or what competitors do. They run the economics cold and build the motion that delivers better unit economics for their specific product, deal size, and buyer.
And they have the discipline to kill programs that don't pencil, even when it means admitting the channel bet was wrong.