“Well, they get a good margin” was the response to the question “What is the partner value proposition?” at one large manufacturer. Margin as defined between the difference between buy price and sell price is probably not the right answer. “Do I offer my partner a profitable business proposition?” is a better question. The right answer takes into account the partner’s entire economic model and how it is changing.
According to 2112’s 2016 Midyear Channel Performance Report, the average partner earns 43 percent of its revenue through the sale of hardware and software products. Nearly four in 10 partners earn more than 50 percent of their gross revenue through managed and cloud services, and the balance is typically made up of professional and consultative services.
When you examine the margins made on products versus services, the dynamics of partner profitability are even more telling. Partner profitability is dependent on quite a number of factors and to understand the value proposition question you need to look at each:
1. How will partners make money with respect to your products/services? In the technology market, reseller margins are getting squeezed as products are maturing and commoditizing. Software is going SaaS, with a very different revenue model. As one “born in the cloud” partner manager once told me, “If they ask how much margin will I make?” then I know they are not the right partners. In this scenario, his partners made money in selling application development and management services and his SaaS offer enabled partners to make more profit at less risk on application development. His SaaS offer was essentially a pass through for the channel partner. He was selling a razor; his partners were selling razor blades. Are you the razor or the razor blade? Or some of both?
If your partners’ business model is shifting toward providing services and consulting around your products or integrated solutions incorporating your product, how are you enabling that shift? Can you measure and express what the service model looks like in terms of topline revenue and margin? For one client, each dollar of SaaS subscription had a nominal margin of 10% but the service component was 1:1; each subscription dollar was accompanied by a dollar of services but with a 45% margin. The services were the compelling reason to partner.
2. How do your channel programs impact profitability? Your channel programs are probably a mix of cost offsets, incentive discounts and rebates. Each have an impact on partner profitability. If structured appropriately they will motivate partners to make the right investments in your business; they will build loyalty and drive revenue.
Cost offsets are programs such as market development funds. Partners are reimbursed for expenses they incur in promoting your products. Training and certification, whether they are provided at no cost or are reimbursed upon completion, are offsets to investments partners need to make to be successful. One partner once told me that they reported the dollar amount of ‘free training’ to their management as a benefit of a partner relationship since it had tangible cost impact on their business
Other programs provide incremental margin through incentives and discounts. Deal registration is among the most common and generally provides additional discount and some competitive protection. Other incentives are often paid on the back end of the sale. These are more difficult to flow to the street and generally reward partner investment in the business. They can contribute greatly to partner profitability for this reason. Volume rebate is one of the most common but vendors also offer rebates for reaching customer satisfaction goals, sales within authorized territories, or other performance criteria.
3. Is there value in your brand and reputation that enables partners to sell more or command a premium?Having a strong brand is part of the channel economic model. Partners sell what customers want. Cisco resellers have been beneficiaries of a strong and powerful brand. When I’ve spoken to Cisco partners in years past, they say they partner with Cisco because that’s what their customers ask for. These same partners often partnered with Cisco competitors that treated them better, offered better incentives and marketing programs and while they appreciated that #2 tried harder, at the end of day, they sold what their customers wanted.
4. Are you providing enablement support to access new markets and technologies? Be sure to articulate the value of these new markets. Partners will gravitate toward growth markets and will align with companies that can help address the opportunity. Traditional partners may need a little help in making the transition to the digital future. Creating enablement training, certification, specializations or incentives that help the transition can be valuable not only to new recruits but to retain current partners and keep them productive. Can you offer sales training for Line of Business Executives? Marketing programs that address the buyer’s on-line journey? API developer support and a platform for partners to commercialize their innovations?
All of these items add up to the partner value proposition. They drive the partners’ economics and ultimately the value proposition in working with you versus your competitors.
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