With Renewals, It’s Probably a Good Idea to Pay the Partner

Vendors often question the reason for compensating partners on renewals. The truth: When not appropriately compensated, partners have many options that aren’t in favor of the vendor.

By Larry Walsh

The weather is getting warmer. The last of the snow is melting away. Flowers are sprouting through the soil. Birds are migrating north. And vendors are once again starting to ask why they should pay partners for renewals – particularly for cloud services.

Paying partners for renewals is a perennial question among vendors and, more so, for their management teams. The presumption is that a renewal is or should be virtually automatic. With cloud services, many vendors are selling auto-renewal contracts, which virtually guarantees a continuation of the engagement unless the customer actively opts to cancel.

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Many vendors lower partner compensation for renewals of software and services under the presumption that the sale is automatic and requires no effort on the part of the partner. In some cases – with cloud vendors and carrier services, for example – the partner receives only limited compensation, such as a share of the first year’s revenue or a one-time multiple based on the monthly service fee.

But renewals are neither automatic nor easy. Vendors should think of renewal compensation in probable outcomes or potential pitfalls. If the partner is instrumental in the customer relationship, step-downs or elimination of renewal compensation isn’t a good idea. In fact, it could put the account at risk of discontinuation.

Vendors assume they can retain additional margin by reducing or eliminating partner compensation. Let’s see if that’s actually the case by looking at a handful of renewal scenarios through the lens of a demotivated partner.

Scenario 1: The partner isn’t receiving full compensation for a renewal, so it takes the account to a competitor. Result: The vendor loses all the revenue and margin for that account.

Scenario 2: The partner doesn’t stand in the way of the renewal, but it also doesn’t try to upsell the customer on additional products and services. Result: The vendor’s potential yield is reduced.

Scenario 3: The partner doesn’t engage in the renewal, so the vendor flips the account to a different partner that’s entitled to full compensation. Result: The vendor pays what it would have if the original partner were fully compensated.

Scenario 4: The partner doesn’t engage in the renewal, so the vendor picks it up as a direct sale. The cost of direct sales is often higher than the cost of indirect sales, so the vendor’s cost of renewal is higher.

Scenario 5: The partner accepts the reduced compensation and executes the renewal. Result: The vendor recognizes its desired outcome.

The vendor gets what it wants in only one of the five scenarios. In the other four, the vendor either loses margin (or potential revenue) or loses the account entirely.

Yes, these are relatively simplistic scenarios, but they reflect the negative consequences of demotivating partners by reducing their renewal compensation. Why would vendors not incent partners when, as channel history has shown, partners aren’t very motivated in acting on renewal opportunities? And why would they be when net-new opportunities are more advantageous?

[ctt tweet=”Why would vendors not incent partners when, as #ITchannel history has shown, partners aren’t very motivated in acting on renewal opportunities?” coverup=”bl9UA”]

Vendors have programmatic options for incenting partners to renew contracts. They can reduce renewal compensation by making renewal rates a program status requirement. Or they can throttle renewal rates, paying partners higher rates if they expand the customer engagement.

What vendors can’t do is simply assume partners will accept lower compensation on renewals. The channel isn’t necessarily a source of lead generation; rather, it’s a pool of existing accounts that vendors can tap through partner relationships. If a partner truly owns the trusted relationship with a customer, the vendor risks jeopardizing its renewals by alienating the partner.

Larry Walsh, The 2112 Group

Larry Walsh is the founder, CEO and chief analyst of The 2112 Group. Follow him on social media channels: Twitter, Facebook, LinkedIn.