CCC RECAP: The Pros & Cons of Incumbency Protection

Protecting partners of record has both risks and rewards.

By T.C. Doyle

Vendors often extend incumbency protection to their partners inside key customer accounts, but is it a good idea?

On the Channelnomics Community Call for November, Channelnomics CEO Larry Walsh led a lively discussion on the topic. Given the heightened interest in improving renewal rates, the conversation couldn’t have been better timed.

At Channelnomics, we believe that renewals have taken on new importance based on the following market realities:

• Customer acquisition costs (CACs) are high in every tech category.
• The service model depends on high renewal rates of 90%-plus.
• The cost of replacing a customer for any given product is five to seven times higher than the cost to retain one; for services, the acquisition cost is four to five times higher than the retention cost.

One of the keys to understanding the pros and cons of incumbency protection is understanding the customer engagement lifecycle. Channelnomics works with vendors to help them fully understand the renewal process, which is more extensive than they realize. The cycle includes eight stages:

1. 1. 1. Connect
      2. Qualify
      3. Nurture
      4. Present
      5. Negotiate
      6. Close
      7. Engage
      8. Renew

It’s important for vendors to stay engaged with customers throughout the lifecycle, especially at the end, when customer organizations experience a “compelling event” that triggers a decision on the purchase of new goods or services. That event could be one of many things — equipment end of life, a disruptive innovation, a change in economic fortunes, or something else.

Incumbency protection is a common way for vendors to reward partners, increase their program participation, and maintain consistency within an account. In exchange for partner loyalty, vendors may offer discounts, uplifts, and restricted quotes to incumbent partners. Doing so can help smooth the renewal process and protect recurring revenue.

While helpful in many instances, incumbency protection can create problems for vendors when partners underperform or customers express a desire to make a switch. In instances such as these, vendors have found that incumbency protection can create an uneven playing field that stymies competition or gives partners a false sense of security that can lead to poor service.

We believe that incumbency protection is a tool, not a guarantee. While it has proven beneficial for some, Channelnomics generally recommends against incumbency protection to avoid complacency and spur competition. A level playing field compels partners to engage with customers and drive new business.

For more on how incumbency protection works and our views on it, be sure to check out our new primer on the topic: “Incumbency Protection: Weighing the Pros and Cons.” It’s available to CiQ subscribers at channelnomics.com. If you’re interested in learning more about our subscription service, connect with Maddie Frank.

WHAT’S NEW AT CHANNELNOMICS

Several other new content deliverables await CiQ subscribers:

Increasingly Healthy Economy Isn’t Helping Tech Vendors: Concerns of an impending recession are fading fast. Inflation is easing, the prospect of interest rate cuts is growing more likely, and unemployment rates remain low. This paints a picture of an economy that’s not only robust but gaining momentum. Yet a curious trend is emerging in the IT sector. Companies are tightening their belts, as evidenced by job cuts and budget reductions.

Growth Limitations Dampen ‘Smaller Program’ Strategy: At the beginning of the year, many vendors operated under a theme defined by Channelnomics as “conservation and optimization.” To conserve as much cash and mission-critical resources as possible, while optimizing their channels for peak performance, they cut channel budgets, reduced the number of partners in their programs, and increased spending on select, top-performing partners. Unfortunately, the strategy hasn’t worked as planned. While some vendors report increased revenue, many are witnessing declines in their top and bottom lines.

How to Win Your First Six Months — And Beyond: To get you started properly on a new job in the channel, Channelnomics has created a guide that breaks down the important tasks and milestones of your first six months, whether you’re a channel newbie or a seasoned veteran.

WHAT’S COMING SOON

Be sure to check out our website for new content in the coming weeks and months.

REPORTS
The State of AI in the Channel: Channelnomics is working with Dell to define and assess how AI is influencing channel sales, partner programs, and channel engagements.

Channel Forecast 2024: As we do every year, Channelnomics will poll leading channel chiefs and partner influencers on the trends and technologies that impact them most. If you’re wondering what’s foremost on the minds of channel partners and your peers — be it marketplaces, AI, new business models, or changing customer buying habits — be sure to get your hands on the Channelnomics Channel Forecast 2024 report.

PRIMER
The Difference Between Sell-To and Sell-Thru: Channelnomics examines the differences between two commonly embraced go-to-market business models — sell-to and sell-thru. Channelnomics delves into the mechanics of each, their alignment with different partner types, their benefits and drawbacks, and various factors that vendors must consider when choosing which model most effectively aligns with channel and corporate goals.

Be sure to join us next month for tips on partner productivity in 2024. Watch for an invite to our Dec. 19 event at 2 p.m. ET/11 a.m. PT.

 

Channelnomics Community Calls are open to any channel professional and practitioner. If you’re a Channelnomics iQ subscriber looking to request your monthly one-on-one call or schedule your annual channel program review, send an e-mail to Maddie Frank at mfrank@channelnomics.com.