- November 7, 2023
- Posted by: Larry Walsh
- Category: Blogs
‘Cut and focus’ approach taken by vendors in early 2023 isn’t paying off as expected.
By Larry Walsh
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. Channel partners tell us they’re facing significant headwinds when selling to both new and existing accounts. Across the board, profitability is under pressure.
The “cut and focus” strategy — intended to wring more growth out of fewer partners — looked good on paper. If you clear the way for fewer partners with proven performance and contributions, you could potentially get more returns for less investment, right? Not necessarily.
Partners — even the top-performing ones — have limits to the growth they can achieve, even under normal circumstances. If a vendor invests in the top 5% of partners that are already growing at a 20% annual rate, reducing the number of surrounding partners won’t necessarily result in a doubling of the growth rate. To grow their businesses, partners must invest. Even with more support from vendors and less competition, partners can absorb only so much risk, leading to a cap on potential growth.
Furthermore, vendors may overestimate the potential for fewer partners to deliver on their corporate objectives. Channelnomics has spoken to several vendors about their expectations in this regard. For instance, if a vendor needs to grow by 20%, each partner should aim to grow by at least 20% — or so the logic goes.
The flaw in this reasoning is the lack of uniformity. Not every partner can grow at the same rate, and 20% growth for a small partner contributes differently than 5% growth for a large one. In addition, for a vendor that aims for 20% overall growth, the top-tier partners must exceed revenue expectations to compensate for the lower or negative growth rates of smaller or underperforming partners.
To return to growth, vendors must engage with more partners in their programs and nurture relationships beyond just those in the top tier. The average partner manages 250 accounts. If a vendor signs up a new partner, and that partner converts 10% of its customers to the vendor’s products or services, the vendor gains 25 new accounts. Multiply that by 100 and the vendor secures 2,500 accounts. The math is straightforward.
The concern arises when a partner doesn’t generate any more business beyond the initial 25 accounts. This is a distinct possibility, as not every partner prioritizes aggressive sales. Many resellers and service providers are satisfied with modest growth and stable revenue streams. Vendors must stay focused on their primary objective: capturing net-new accounts. If a partner doesn’t seize the opportunity to grow, a vendor should continue to invest in those that do perform and contribute.
While working with fewer, high-performing partners may seem sound in theory, the reality is often different. Vendors must persistently seek new opportunities to broaden their channel reach and enhance productivity, steering clear of natural speed limits and performance bottlenecks.
Larry Walsh is the CEO, chief analyst, and founder of Channelnomics. He’s an expert on the development and execution of channel programs, disruptive sales models, and growth strategies for companies worldwide. Follow him on Twitter at @lmwalsh_CN.