Good Channel Programs Don’t Come Cheap
Spending on channels isn’t a guarantee of success, but starving programs almost always guarantees disappointment.
By Larry Walsh
Not to start this discussion with a cliché, but it’s true that you must spend money to make money. Capital is the fuel that activates the machinery of business and, with a little hard work and luck, leads to a surplus – or what we call a return on investment.
The channel exists for two reasons: to decrease the cost of sales and to extend market coverage into places where a company can’t sell direct. Without channel programs and reseller partners, vendors would need much larger sales forces than they have now, and that would come with considerable costs.
So, why then are so many channel people surprised, dismayed, and, dare I say, chagrined when told how much a channel program costs?
Spoiler alert: Channels are expensive propositions.
The topic of channel costs has popped up several times in recent weeks as vendors are still working through go-to-market strategies and reconciling their resources for the year. A vendor executive recently asked 2112 a common question: “Which vendors have the best channels?” Specifically, he wanted to know which vendors demonstrate the best performance relative to channel structures and partner performance.
When we started to reply, “Cisco, Microsoft…,” he cut us off. “So, the companies that pour billions of dollars into their channel programs?”
Well, yeah. As stated above, it takes money to make money.
Channel programs need staffing, management systems, support, training programs, resources, and marketing and communications to operate effectively. In addition, channel programs need to discount their products, offer incentives, and provide partners with investments. All of that costs money.
Spending 1.5 percent of gross revenue on channel programs doesn’t seem like too hefty a burden on expenses. For a company like Microsoft, that investment would’ve amounted to roughly $1.65 billion in 2018. For Cisco, the channel bill would’ve come to $750 million. (These are not real numbers; they’re just examples.)
For a new company trying to break into the channel, the initial investment is steep. Figure you need a channel leader (director level or higher), a program manager, a marketing and communications manager, and two channel account managers. The cost for that small team alone is about $1 million in full-loaded compensation, benefits, and overhead costs.
Systems are a big investment for any vendor. The cost of systems for partner relationship management (PRM), ERP, content management, learning management (LMS), deal registration, deal quoting, support and support ticketing, and mobile sales apps runs in the tens to hundreds of thousands of dollars annually.
Channel marketing programs are the investment that keeps asking for more. A single third-party event for partner recruitment could cost up to $100,000 in direct and indirect costs. Program materials – partner guides, white papers, sales battle cards, product specification sheets, Webinars, and white papers – add thousands, if not millions, of dollars in additional costs. If you engage an outside agency and contractors for support, add more dollars to the ledger.
Market development funds and partner investment are a little tricky to recognize on the ledger, as most MDF programs operate on contra revenue. Money from partner sales is set aside for reinvestment. While MDF is not a direct allocation, it will come off the balance sheet, decreasing top- and bottom-line receipts. The average channel program reserves between 1 and 2.5 percent for MDF. So if channel sales are 30 percent of your gross revenue, and you gross $1 billion in sales, the MDF pool is between $10 million and $25 million annually.
Vendors that sell through distribution add even more cost to their channel programs. The conventional engagement model gives disties a share of the sale, sometimes up to 15 percent of the final price. In addition, distributors will ask vendors to fund head count, marketing and training programs, support resources, and events to bolster sales.
Finally, let’s not forget the all-important “margins.” Channel models are shifting and putting more of the profitability onus on partners’ shoulders – particularly in services. Nevertheless, many vendors must discount their product prices for partners from 10 to 30 percent. Even then, vendors offer partners rebates, spiffs, and other incentives to stimulate sales activity.
Yes, channels are expensive, but not nearly as expensive as going to market without them. The average partner sale is about 10 percent greater than a direct sale, even with all the cost of operations and incentives. Channel partners cost money only when they’re productive (when they sell something). Direct sales cost money every day regardless of whether they’re selling, and they carry a higher overhead cost. Channels aren’t just a means of going to market; they allow vendors to operate with variable, nonfixed costs and diminish their risk exposure.
None of this means vendors should simply throw money at channel programs. Channel spending shouldn’t overtax a vendor and should align with goals and expectations. Channels need money to grow, but spending doesn’t guarantee channel success. On the other hand, starving a channel of funding and resources guarantees disappointment, at best, and failure, at worst.
The 2112 Group works with vendors around the world on developing channel strategies, including cost planning and partner compensation planning. For more information about 2112 services, e-mail firstname.lastname@example.org.
Larry Walsh is the CEO of The 2112 Group, a business strategy and research firm servicing the IT channel community. He’s also the publisher of Channelnomics, the leading source of channel news and trend analysis. Follow Larry on Twitter at @lmwalsh2112 and subscribe to his podcast, Pod2112, on iTunes, Google Play, and other leading podcast sources. You can always e-mail Larry directly at email@example.com.