By Larry Walsh
The other day, I had a heated (or what some would call “adult”) conversation about the pressing need for Software-as-a-Service (SaaS) vendors to acquire net-new customers through partners. The person I was speaking with presented this problem as overriding all other considerations. From his perspective, partners either step up in delivering new logos or get passed over.
There’s a lot to unpack from this conversation, and the person I was speaking with raised several good points about the need for net-new customers. He also landed well on how vendors should think differently about how they assess and value partner potential rather than previous performance, a position I completely agree with. But it was renewals and customer attention that got me thinking.
The person I debated took a pretty standard vendor position on renewals. Vendors give up a lot of margin to partners and customers to get the initial sale. Enterprises don’t change applications or systems like socks. They make long-term commitments because many of these packages are mission-critical, and even careful transitions can cause costly disruptions. Customers actively avoid switching to escape the pain and potential negative consequences, but more on that later.
Under these assumptions, many vendors presume renewals are basically automatic and require little effort on the partner’s part. This presumption justifies vendors compensating partners less for renewals than they do for net-new sales. Makes sense, right?
From the partner and customer perspective, this registers as a price increase. Different sales models will have different ways of selling and calculating the exchange of value. The net result, though, is the same: What cost me $X yesterday will cost me $X+Y today, not accounting for inflation. At the same time, vendors may not give partners standard discounts or other price concessions. Instead, they cut partner margins or compensation to align with the perceived low level of effort.
Still, many vendors complain that partners aren’t engaged enough to ensure renewals — that they don’t act on them fast enough or they allow contracts to lapse. They perceive partners as disinterested and apathetic or, as one channel chief said to me, “they’re fat, dumb, and happy.” But actually, partners are often making economic choices based on the value of the return relative to their effort.
Vendors think renewals are automatic, but they’re not, and they shouldn’t be taken for granted. According to our research, 57% of businesses will switch providers if they don’t receive a good experience and valuable outcome. That means what happens after the sale is just as important as what happens before and during the sale.
The sales cycle has three phases: the selling and transaction phase, the usage and experience phase, and the renewal and expansion phase. Getting customers in the door during the first phase is critical. Keeping them grounded and unmoving is the point of the third phase. The decision-making that determines whether they stay is informed during the second phase, and that’s where partners expend much of the effort that leads to renewals.
Partners are the connective tissue between vendors and customers. When vendors are looking at customers for a sale, partners are embedded with them, providing services, support, and guidance on future decision-making and investments. By the time customers get to the renewal period, they’re already prepared to decide what to do and how to think about their experience with the vendor’s product, thanks in large part to partners.
I’m not saying vendors don’t know this happens. They do. But vendor sales organizations are often singularly focused. Business development reps and field and inside salespeople are focused on getting new customers. Customer success teams are focused on providing the experience. And many vendors have renewal teams focused on, well, renewals and retention. Depending on whom you talk with, they’ll all acknowledge the importance of the continuum but express greater concern for what falls within their field of vision.
The vendor bias that partners aren’t doing enough is part of the reasoning behind elevating switching costs, or the high economic trade-offs associated with moving to another system versus sticking with the existing system despite dissatisfaction. A customer may be unhappy with its ERP but reluctant to change to a better system because of the high cost of transitioning and the disruption that comes with it. More vendors are counting on high switching costs to keep customers locked in rather than creating a truly positive experience.
Vendors that diminish the value partners provide in creating positive customer experiences and influencing renewals run the risk of creating switching events. Partners have tremendous influence over their customers’ thinking. High switching costs may be an antidote to churn and help ensure a renewal, but they also create an opportunity for an industrious partner to take the account to a competitor, which will treat it as a net-new opportunity complete with all the incentives and inducements offered to the partner.
As with all things in the channel, there are exceptions to every rule and trend. There are vendors that do a great job incentivizing and enabling partner-led renewals. There are partners that don’t wait for vendor prodding to start the renewal process. And there are plenty of customers that, even with some grievances, will stick with their incumbent vendors. The point I’m trying to make is that vendors cannot and should not be cavalier about the renewal process or the role partners play in maintaining high renewal rates.
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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.