Channel ROI Isn’t Always ‘Dollars In, Dollars Out’ Equation

Management often challenges channel chiefs to prove the ROI of the channel in a straightforward formula – how many dollars will return to us for every dollar spent? – but channel ROI isn’t that simple

By Larry Walsh

Channel chiefs are under constant pressure to justify selling through partners. Management teams want channel ROI assurances because, from their perspective, reseller partners are just another mouth to feed in the compensation meal line.

Ultimately, channel programs are about revenue generation. This core value proposition leads vendor management to think that channel value comes down to a simple monetary equation: If I spend a dollar on channels, I should get a certain multiple of dollars back.” And, if vendors put channels on the same plane as other revenue opportunities such as products and markets, vendors will look for 5 times to 10 times the investment returns.

Unfortunately for channel chiefs, selling through partners isn’t always the most cost-effective route to market. While some vendors report that channel sales are 10 to 20 percent more profitable than direct sales, many others see channels as more expensive – especially when they consider all the costs to serve in the equation.

Some vendors tell 2112 that the number of people compensated in a channel sale ranges from 6 to 10. In some cases, particularly with international deals, two-dozen people or more could have their hands out for compensation. And what complicates the situation even further is that tracking compensation is often challenging to vendors, despite all the technology at their disposal.

Cutting out partners or not involving partners in the first place is seemingly the most expeditious means of paring compensation expenses and preserving margins. For vendors that don’t have established channels, avoiding partners altogether is a solid means of retaining revenue and profitability.

The problem, though, is this: Avoiding partners means avoiding revenue opportunities.

Yes, the channel is about revenue generation. More important, though, the channel is about market coverage. In my blog, “6 Questions to Ask Before Starting a Channel Program,” I outlined the questions that lead to the justification or need for engaging partners. Vendors need partners to effectively cover markets, deliver solutions and services they can’t organically, build value-add solutions with multiple vendor products, deliver products and services to customers on behalf of direct or co-selling channels, apply specialized skills in vertical markets, and tap into established customer relationships.

Now apply those reasons to the ROI question. Without engaging channel partners, vendors surrender the opportunity to address the total market. Management can easily assume they’ll save money by selling direct, but building and maintaining a direct-sales organization that covers all aspects of the market – geographic areas, customer types, and vertical specializations – requires tremendous investment in staff, training, and support. Channel partners provide breadth and depth of coverage without the fixed-cost expense of direct sales.

Consider this: Partners may get 20 percent of a gross sale, but the sale wouldn’t exist without the partner. And the deal only costs the vendor 20 percent when the partner creates the opportunity. If the partner doesn’t generate the sale, it costs the vendor virtually nothing.

The same logic holds true for fulfillment partners. Vendors use fulfillment partners to deliver, install, integrate, and support their products sold through direct sales or co-selling channels. Those services cost money, but the vendor incurs the cost only when the partner does a job. Otherwise, the partner relationship comes at little expense to the vendor.

What vendor management needs to understand is that channels need a platform on which to build the sales and fulfillment capacity. That initial investment may be expensive, but it’s worth the cost. Without the initial investment in channels, vendors that need partners to cover the market and support customers will find they have a much steeper, longer, and more expensive growth curve.

Ultimately, vendors that build a solid channel foundation – complete with management systems, distribution relationships, training programs, marketing support, and field engagement and relationship managers – will recognize faster customer acquisition and revenue growth than most vendors that sell exclusively direct.

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.