• Channel Compensation for Cloud Vendors: What Works Best?

    Clearly, “the cloud” and its impact on the channel is all the buzz for technology marketers.  As it relates to us channel marketers, in its purest form “the cloud” refers to channel partners who sell Software as a Service (SaaS). The challenge is that channels, as they exist today, were founded on traditional product sales with channel partners earning margins on the sale of those products as a source of income.  We are all aware of the fact that successful channel partners today are no strangers to shifting their revenue from product margins to service and related activities. But what if you, as the vendor, are providing that service?

    Before we go deeper on the subject, it is our experience that many marketers are expanding their definition of “the cloud” to address the entire trend toward Managed Services in which virtually everything is offered to end users via some “XaaS” model—hardware included. This expanded definition is despite the fact that the vendor’s product may not be hosted software (for that matter, even hosted software doesn’t have to be hosted on cloud servers). Right or wrong,  regardless of your definition the one question all these marketers’ seems to be struggling with is: “what is the best way to compensate channel marketers for my ‘XaaS’ solution?” One time commissions or recurring revenue, fixed rates or variable, the choices are many.

    Well, like most things in channel marketing, the answer to the best structure is- it depends.  In an attempt to recommend a process for you to discover the compensation model of your dreams, provided below are some questions to ask yourself that will help you structure the compensation model that is right for your unique set of circumstances:

    1)   The BIG question:  “Who owns the client/end user relationship?” Before you hastily respond, consider all the factors:  who is expected to provide ongoing user support/service? Who is responsible for billing and collections? (This is not a small question since most XaaS financial arrangements are based on subscription pricing.) Who is liable for attrition management? Your compensation model should consider their efforts to manage any one or all of these actions. If the answer to all the above is that you are responsible, then your compensation model may vary well consist of a one-time commission on sales or referral. However, their involvement in any of the other areas may warrant a recurring commission model if they are not otherwise compensated by the client for services rendered.

    2)   What is your channel value proposition? This is otherwise known in some circles as “why sell” messaging (as opposed to the more common “why buy” messaging directed to the end user).  I lovingly call this the “Do/Get” value proposition. On the “Do” side of this list are all the sacrifices you are asking your perspective partner to perform, which include any investments in training, personnel or special equipment.  Also included on the “Do” side of this model are all the responsibilities you are asking of them within the “Who owns the client?” consideration set stated previously. Conversely, the “Get” side of the equation represents all the ways that your channel can make money promoting your product—and the potential it yields. Considered here are: a) direct revenue, such as commissions from product sales, b) indirect revenue through add-on services that the partner will be performing to deploy, service, or manage your product and, c) Soft benefits such as incentives, MDF, Leads and other business development assistance. As with any channel value proposition, the “get” side should clearly outweigh the “do” such that the rewards more than compensate for the risk.

    While these first two questions address the real heart of the ideal compensation model, below are additional questions which, when answered, may influence your final model.

    3) How much demand is there for your product? Are you expecting your partners to create demand? Or fulfill demand?  Does your product have broad appeal, or does it only appeal to a niche market?  The ramifications here are obvious so I won’t waste the keystrokes.

    4)   How big is your prospect pool of channel candidates? While at last count there were over 200,000 resellers worldwide within the technology industry, not every one of those resellers are ideally suited to represent your product. If you have to attract new partners and your candidates are few, you’ll have to swing the scales a little more on the “get” side.

    5)   What are your competitors offering? I put this last, because it is last.  In any case, you still have to be cognoscente of how your value proposition will be perceived by partners—particularly if your product category is mature or commoditized and there are competitors knocking on the same door.

    After all these points are considered, if you are one of the lucky ones, your compensation model will be attractive to partners because it provides a clear path to revenue through related sources already performed by the partner. NOT because it relies on sales commissions.  These related revenue streams can be quite diverse and include: service revenues, fees related to deployment or configuration, or margins from sales of related items.  You see, there are two paths to a reseller’s heart:  sell more to existing clients, or bringing more clients to their door.  If you can structure your compensation around either of those, you have it made.

    Craig DeWolf is Vice President of Business Strategy for CCI: Channel Management Solutions.  Craig’s extensive experience spans over 20-years, across a variety of industries and distribution models. This background has given Craig an excellent perspective of the issues facing marketers and their distribution partners, and the solutions that will make them mutually successful.

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