By Brian Stoner, ALTR
When companies franchise sales efforts to include the channel—especially new market entrants—they typically see a marked increase in deal registration. Noticed by company executives, this gives the impression that the channel is working.
Underneath that apparent success, a storm is often gathering. Conflict is inevitable as competition turns up between a vendor’s direct sales efforts and indirect channels. Consider that six out of every 10 channel firms indicated in a recent survey that conflict had risen in the previous two years, with 21 percent describing the increase as significant.
Salespeople know, for example, that channel partners need their help with complicated new enterprise solutions. Although they appreciate the net-new opportunities brought to them, conflict emerges when partners are excluded from customer meetings because internal teams at the manufacturer want to ensure deals close. Conflict between partners, too, surfaces when multiple firms are tightly aligned around the same customers and occupy the same position smack in the middle of the IT value chain.
Typically, leads come from partners who have invested in certification processes, and have demonstrated success with customer implementations. However, much of the time and effort they invest is not comped across the board, and smaller channel players are often muscled out at the end by multi-brand solutions providers. There are few options to achieve balance.
It Starts With Control
Control comes into play when an inside sales rep involved in deal registration can manipulate that process. If the deal goes to a bid, they may be able to cancel the deal registration altogether if the rules of engagement allow it. In some cases, they can even choose which partner gets the lowest quote, and it may not be the one that originally registered the opportunity.
Another tactic is to leverage special pricing policies that let the vendor choose which partner wins a deal. These schemes may set a maximum margin that is triggered when deals reach a certain size or when deals are discounted beyond a set point below list price.
In a familiar example, a company determined that if a discount was more than 70 percent, then the maximum margin was only 2 percent. In cases where most deals meet this threshold—which is not unusual—a vendor can maintain a high list-price to control partner margins. Channel partners naturally question why they should continue to engage when the average margin is so low.
Another red flag is when deals are taken directly by the vendor. This typically happens at the end of a quarter, and especially on large deals, in a last-minute push to achieve revenue quotas. The vendor ends up retaining the channel margin for themselves without reducing the price to the customer.
The Case For Stackable Margins
Given the potential obstacles and abuses endemic to the deal registration model, easier and stronger ways are needed to ensure both indirect and direct sales teams are satisfied with the sales process.
One approach is based on an acknowledgment of basic facts about the sales journey itself. Fundamentally, it consists of three distinct phases where a partner can add value. These phases are opportunity identification, technical wins derived from a proof-of-concept (POC) or trial, and of course final transactional success.
The premise is simple. Each channel partner should get paid for the value they deliver through each stage of the cycle by “stacking” the margins they receive along the way. A Stackable Margin program allows partners to benefit appropriately—and transparently—any time they achieve success across the three phases.
Consider an example that uses round numbers for simplicity. A typical deal registration discount might be around 30 percent, a winner-takes-all prize for the closer. Most of the time, partners end up having to provide additional discounts against their own margin, which is why the real margin actually averages around 10 percent.
Adopting a Stackable Margins model would split the 30 percent figure across each activity that added value. An allocation could be 10 percent respectively to opportunity identification, technical wins, and transactional success.
This offers more protection for indirect re-sell or refer partners. For instance, they may register the deal as a net-new opportunity to earn the first 10 percent. If they’re allowed to provide the POC independently and gain a technical win, they earn another incremental share of the deal. Earning the final margin happens when they land the purchase order.
Equitable Multi-Partner Deals
When multiple partners are involved, a breakdown in channel programs often ensues. This is the case where a partner brings the vendor into one of their customers and helps them earn the technical win, but then, when the deal makes it to procurement, they find out that the customer wants to close the deal through a big reseller instead. In the traditional world of deal registration, the party that did all the pre-deal work loses out.
Stackable Margins provide an equitable way to eliminate risk by offering a payout based on the work done by each individual partner. Under the previous scenario, if a channel partner is responsible for both opportunity identification and POC, that effort is recognized with a payout of 10 percent for each of those two stages—altogether 20 percent. Should a big reseller come in at the final transaction stage when the deal closes, they too get 10 percent.
The mechanics of Stackable Margins are uncomplicated in this light. The vendor would incur a reduction of 30 percent off of the list price as their cost on the transaction. The payment to the initial partner can be calculated based on the net purchase price. A simple way to manage this is to pay the partner for the influence margin quarterly in an itemized statement. The payment could also be attributed back to the channel partner salesperson on the account.
There are additional benefits. Should a vendor, for instance, spend a significant sum on marketing to generate leads that are then distributed to partners, they could keep the opportunity identification margin to cover the cost of marketing campaigns and to fund new ones.
Rewarding The Sales Journey
A Stackable Margins approach opts for a non-traditional way of looking at the channel by compensating partners for the work that leads to positive outcomes at each decisive stage of the entire sales journey. Beyond deal registration—usually an all-or-nothing proposition—partners are rewarded for many types of net-new opportunities and referrals.
In practice, there are a few constituents to success. The list price needs to be competitive for the respective market—otherwise, profits may be too low for all parties. Another factor is that enablement for channel partners must be robust enough for them to run sales cycles independently, and lastly, the direct sales team needs incentives to work through channel partners rather than to bring leads in-house.
By definition, the Stackable Margins model is channel friendly. It commoditizes the entire sales journey and reduces the conventional emphasis on deal registration alone with all of its pitfalls. Restoring equity and balance to the relationship between channel partners and vendors, it is an antidote to channel conflict worth considering.