Vendors carefully measure the value of incentives and benefits, but they often overlook the cost that partners incur to earn them.
By Larry Walsh
When Channelnomics works with vendors on developing channel strategies and designing or optimizing channel programs, we always hear what vendors want or expect from partners in exchange for compensation, incentives, and resources. And it's almost always a lot.
What we rarely hear is any consideration of what it takes for partners to comply with those requirements and expectations.
The channel has always operated on a system of “gives and gets.” Partners generate sales and revenue for vendors (the gives). In return, vendors provide discounts, rebates, and access to resources (the gets). On paper, it's a simple exchange of value in support of go-to-market activities.
But there's a catch — or a trap, if you will.
Vendors don't like giving away things of value easily. Partners must earn their status and benefits through compliance with program requirements and demonstrated sales performance. Those that meet the prescribed conditions receive the rewards.
But here's the thing. Vendors establish partnership requirements not only as performance measures but also as barriers to entry, so that only qualified partners can participate in their programs. It's a safeguard against surrendering too many concessions or spending too much on benefits relative to the expected return.
The idea of barriers, requirements, and expectations is not inherently bad, but the benefits have to outweigh the cost of compliance.
Consider this: A vendor may require a partner to maintain at least two certified engineers and two certified salespeople, generate $500,000 or more in annual revenue, participate in quarterly business reviews, submit weekly point-of-sale data, execute quarterly marketing campaigns, and keep certified staff current through monthly continuing education webinars. Individually, each requirement may seem reasonable. Collectively, they create a significant operational burden for partners.
From the vendor's perspective, this may seem like standard fare, but for the partner, that laundry list of requirements represents a growing list of expenses.
First, the partner needs four full-time employees who are trained and proficient according to the vendor's standards. Even if those employees are not fully dedicated to the vendor's products, they still will spend a significant amount of time supporting those sales efforts. Training takes time, and every hour spent learning is an hour not spent generating revenue.
Then there's the submission of POS data, something vendors increasingly demand to fuel their analytics, forecasting, and prospecting engines. Vendors often assume this is an automated process that happens with the click of a button. In reality, though, collecting, organizing, validating, and submitting this data can require substantial effort. Some partners have told Channelnomics they employ teams of six to 12 people solely to manage POS reporting requirements.
The largest obstacle when it comes to program compliance, however, is often the revenue requirement. For a vendor generating hundreds of millions of dollars in quarterly sales, requiring a partner to produce $500,000 annually may seem trivial. But for a partner, reaching that target can feel like an uphill battle.
Once margins and markups are factored in, the partner may need to sell closer to $600,000 worth of product to achieve the threshold. Assuming only about one-third of opportunities ultimately close, the partner must build a pipeline three to five times larger — roughly $1.8 million to $3 million in opportunities. If market demand is weak or sales cycles are lengthy, the cost of generating that revenue may exceed the return, making it difficult for the partner to justify the required investment and operating expenses.
Often, it’s the vendor's fallback position that it’s the partner's responsibility to generate the value-added revenue associated with product sales. These opportunities include attached product sales and partner-delivered services that allow the partner to earn revenue beyond the vendor’s product margin.
And that's true. A vendor isn’t responsible for a partner’s profitability. On the other hand, vendors should ensure that there’s a realistic opportunity for partners to generate sustainable profits.
If the product doesn’t require specialized services, expertise, integration, and/or ongoing support for customers to achieve value, the partner has limited opportunities to generate post-sales revenue. In those situations, the economics of the relationship can become challenging very quickly.
This is what vendors need to consider more carefully. When establishing partner requirements, it’s reasonable to ensure sales performance while minimizing risk, but they must also ensure that the conditions they impose don’t overwhelm partners or prevent them from pursuing profitable growth opportunities.
Effective partner programs strike a balance between accountability and opportunity. Achieving that balance requires thoughtful analysis, ongoing refinement, and a clear understanding of partner economics. Vendors that get it right are more likely to build productive, profitable, and loyal partner ecosystems.
Channelnomics offers its Total Cost of Partnership (TCP) analysis, which quantifies the total opportunity available to partners relative to the cost of participating in a vendor’s partner program. The analysis provides vendors with the insights and guidance needed to develop balanced economic equations within their partner relationships. For more information, contact us at info@channelnomics.com.
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Larry Walsh is the CEO, chief analyst, and founder of Channelnomics. He’s an expert on the development and execution of channel programs, disruptive sales models, and growth strategies for companies worldwide.
