ASK CHANNELNOMICS: How Do My Discounts Compare?

At Channelnomics, we field questions about best practices, partner strategies, and channel programs every day. In this series, called “Ask Channelnomics,” we answer some of the questions we receive most from vendors.

Question: As a channel leader, I’m wondering how I’m doing when it comes to the discounts offered to partners. More specifically, how do my discounts compare to those of my competitors?

Answer: Here’s a better question: Does it matter?

Consider this: Discounts are contextual. You offer partners 10% off the reference price (MSRP). One competitor offers 13%, and a third offers 20%. It seems unequal, right? And the vendor with 20% has the advantage in attracting and engaging with partners.

But now let’s look at the math to see how these discounts play out in the “real world.”

Everyone is equal in terms of gross margin to the partner relative to their respective reference price.

Now, let’s make the discounts equal.

The product price has more to do with the margin recognized by the partner than the discount rate. Always has. Always will.

Front-end discounts matter a lot to partners as part of their sales process. The discount gives them room to negotiate prices with their customers, but it doesn’t necessarily influence their overall profitability on a per-transaction basis. For that, we must turn to total economic impact.

For this discussion, we’re going to say there’s a “value-add” opportunity in professional services. The gross margins on partner-led professional services are between 40% and 60%, so we’ll say that the net value-add is the gross profit from the attached sale. If the product sale triggers or drags a high-value-add service, it can have a significant accretive effect on the partner’s per-transaction profitability.

In our scenario, we’ll assume the value-add profit is twice that of the product MSRP. The partner profitability with the value-add would look like this.

You may have the lowest front-end discount, but you have an equal real-dollar margin on the sale. However, if you have better value-add opportunities, you could have a higher economic impact on the partner. In this example, the total transaction profit recognized by the partner is $580 – 34% greater than the competitor referred to as Vendor B.

Math is easy when you’re conceptualizing scenarios. Conditions on the ground make a world of difference. Every market, customer segment, and product combination will yield different results, but the goal is still the same: to drive up the total economic impact, which will yield greater value for the partner than the initial front-end discount.

Additionally, you may not have the highest price. But that doesn’t mean you should raise prices or discounts. Say you’re Vendor C. You raise your price to $200 and keep your discount at 20%. This makes you less profitable. If you raise your price and lower your discount, you take a benefit away from partners. Again, in the best-case scenario, the focus is on total economic impact.

Unfortunately, total economic impact isn’t always recognized by partners. The average partner will look to those raw discount numbers and compare vendors regardless of the math. Teaching math is incumbent on you – the channel leader – when selling partners on the value of your relationship.

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