Hello CROs, We Have a Problem

That problem isn’t partner discounting; it’s the special pricing imposed by sales reps who want to win on price and not value.

By Larry Walsh

Hello, chief revenue officers. We need to have a conversation. If your average profit margins are shrinking, you may want to look in a different direction than your partners. The more likely source of your margin compression is your sales and pricing teams.

To sell through and with partners, vendors must make investments in incentives, enablement, and demand generation. The most obvious manifestation of those investments is discounts – the price reduction given to partners on the products they sell on your behalf.

On top of that, partners need to make money. They will – and are entitled to – set their prices for products they resell. Yes, you can establish something along the lines of “published prices” or akin to MSRP, but the partner can and will charge whatever their customers will pay.

Some sales and operations managers look at discounts and the partners’ ability to mark up prices and wonder if they’re being left on the wayside as suckers. If the partner is getting a certain discount and then has the ability to mark up the sale price by as much as 100%, isn’t the vendor suffering an unreasonable loss relative to the price at which they could sell direct?

The issue is particularly poignant when you consider that 85% (more or less) of channel sales go through nonstandard pricing (NSP), aka special pricing, by which the vendor increases the standard discount to win business. NSP gives vendors and partners an added weapon when in highly competitive deals. Ironically enough, NSP is really more the “standard” given the frequency at which it happens.

Sales and operations managers will sometimes believe partners are gaming special pricing to amplify their discounts and augment their profitability. NSP discounts can bring the partner price down as much as 65% off list. The concern is that partners will then mark up the street price to the customer by 100% or more, leaving the vendor responsible for bearing the cost of sales acquisition while the partner gets an unfair share of the profitability benefit.

It’s not an unreasonable concern. By law, vendors cannot regulate reseller street prices despite the confusion it may cause customers. The best vendors can do is establish best practices, guidelines, and – in some cases – published prices to level customer expectations and cap what partners can charge.

The issue of partner pricing inflation, though, is often a convenient excuse. What we need to look at isn’t as much the volume of special pricing deals as it is the originating source of the sale and who’s driving the customer engagement. Many of the sales through partners originate with inside and outside sales teams. In many vendor organizations, direct-sales teams originate as much as two-thirds or more of all sales through the channel. Salespeople, by policy or necessity, will bring partners into opportunities to either influence or fulfill an opportunity.

Now, this is where things get interesting. The sale price is often driven by the direct-sales team, not the partner. In such situations, vendors will draft teaming agreements with partners, prescribing the terms of the deal. When doing teaming agreements, direct-sales teams often negotiate the sale price with the customer. The teaming agreement will prescribe the partner’s share, which is often substantially less than the standard discounts plus incentives.

In other words, teaming agreements give the partner little room or opportunity to mark up product and service price. Further, the special pricing origin isn’t the partner; it’s the direct-sales reps and pricing operations.

Vendors often complain about partners’ poor sales skills and capacity. They’ll say that they’re too reliant on vendors to uncover and drive sales to close. And that leads to the criticism that partners get paid too much for doing too little. Add special pricing and markup concerns and you have an ideal scenario for blaming partners for average sale prices and net margin compression.

The truth is that vendors have far more control over pricing than they often realize. Because of NSP and teaming agreements, partners rarely have the opportunity to sway customer pricing to their benefit. Most of the margin for vendors and partners is surrendered through the NSP process. Partners often report working with less than 10% above cost as a result of the teaming agreement process.

To put all of this into perspective, consider this teaming agreement scenario: The partner’s effective margin is $20 with a 20% standard discount on a $100 product sale. However, if the vendor imposes a teaming agreement with NSP and then discounts 55% and the partner can mark up 10%, the effective earning to the partner is $4.50.

In essence, the problem with NSP and margin compression isn’t always the fault of the partner. In many cases, direct-sales teams competing on price to win business and close revenue faster are more to blame for pricing erosion than greedy partners. The lesson for sales and operations managers is to look internally at sales practices before – if not concurrently with – an examination of channel pricing effectiveness and partner compensation.

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 lmwalsh@the2112group.com.