- March 7, 2023
- Posted by: Larry Walsh
- Category: Ask Channelnomics
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: Am I the bad guy for wondering why I’m paying a partner a commission for an automatic subscription renewal — and with an account that I’m pretty certain isn’t being sold additional services from my company? I recognize the partner believes that the account is their customer, but since the original transaction with the account, I keep paying a commission despite the fact that I don’t see the partner putting in any effort for me. What’s fair in this instance?
Answer: Few things are as divisive in the channel today as commissions on subscription renewals. The topic is as controversial as new and burdensome software licensing commitments imposed by vendors on partners. Given the rise in subscription sales by partners, the issue is likely to become even more divisive among software vendors and their partners.
For context, it helps to understand how things got so fraught.
If you go back a few years to the beginning of the Software-as-a-Service (SaaS) revolution, independent software vendors (ISVs) had to make some difficult decisions when it came to rewarding partners for their help selling to SMB customers. (At the time, many ISVs felt they had the enterprise market sewn up for themselves and started to recruit channel partners to help them penetrate smaller customers with which they had little affinity.)
While various sales schemes were considered, two models prevailed. Some vendors opted to pay channel partners a one-time commission for their help penetrating new accounts, while others embraced a strategy that rewarded partners with monthly or annual commissions paid out over time. (This model was first popularized in the telecom market, which is dominated by sales agents who rarely take possession of the products or services they sell.)
Fast forward to today. Now, many channel partners rely on subscription sales and prioritize vendors that offer lucrative commissions. This includes rewards for subscription renewals that often require little input by a channel partner.
Channelnomics frequently hears frustrations from vendors that believe partners must do something to qualify for a renewal commission. And yet, many vendors pay commission after commission despite no sign of partner engagement. In some instances, vendors are expected to pay commissions on renewals to partners that no longer actively sell their products.
How is this fair? It isn’t. But before taking drastic action to address this situation, consider some possible outcomes of any policy changes.
- Scenario 1: You tell a partner that you’re disappointed in their commitment and reduce their compensation. Possible result: The partner becomes upset and actively works to replace your technology at the customer account(s) with a competitor’s. In this scenario, a vendor could lose all the revenue and margin that it generates from an account.
- Scenario 2: You continue to compensate partners for “effortless” renewals in which there’s no attempt to upsell customers on additional products and services. Result: Your potential yield is reduced.
- Scenario 3: You flip an “effortless” renewal account to a different partner that’s entitled to full compensation. Result: You pay the same commission to a new partner that you would’ve paid to the original partner.
- Scenario 4: You add an “effortless” renewal customer to your list of direct accounts. Result: After tallying up support, transaction, and marketing costs, you see that managing the account yourself is more expensive than paying a channel partner.
- Scenario 5: You set out to the partner a predetermined compensation plan for executing renewals. Result: You get the outcome you wanted all along.
Channelnomics first articulated these scenarios in 2018 and believes they’re as feasible today as they were then.
Channelnomics believes in fair value transfer for all parties, but also recognizes some real-world practicalities that vendors must consider. Chief among them is that channel partners believe the customers they serve are theirs, not yours. If you alienate their affections by threatening to take an account direct or transfer it to one of their rivals, they’ll retaliate by actively working to replace you as an incumbent technology supplier.
This includes partners that buy your technology and blend it into the technology stacks they sell to customers under their own brand (sell-to partners), as well as partners that don’t consume your licenses themselves but instead resell or recommend them on your behalf (sell-thru partners).
To drive more renewals and increase partner engagement with customers, Channelnomics recommends rethinking contracts and adding greater specificity around them. This begins with developing precise rules of engagement that spell out what behaviors determine “incumbency” and what happens when a partner treats a customer as a “lifestyle account” and does nothing measurable to advance your relationship with it. If a partner isn’t actively selling or recommending your technology to its customers, its rewards should reflect that lack of effort.
To qualify for a renewal commission, a partner should be able to prove that it’s an active member of your partner program in good standing (can be measured by how many transactions it’s completed in the past year) and that it’s actively advancing your interests inside an account. This includes unmanaged partners that rely on your distributors and don’t have a channel account manager actively working with them on a joint business plan.
Should a partner fall short of your requirements, it’s best to proactively work with the partner to reinvigorate their engagement with an account. Channelnomics recommends starting this process as early as 180 days in advance of a renewal and following up at 30-, 45-, and 90-day intervals.
To manage renewals, vendors will need more than spreadsheets and e-mail apps. Your partner automation technology and CRM platforms must be tuned to help you recognize which of your partners aren’t actively engaged with specific customers, and to help you communicate their shortcomings via dashboards and collaboration platforms.
With forethought, you can craft compensation programs that adequately reward partners for the contributions they make to your company. The key is specificity.
Partners will accept reduced compensation as long as the rules of engagement are defined precisely and implemented fairly and consistently.
Have more questions? Our analysts have answers. Send your inquiries to firstname.lastname@example.org.