Friday, May 4, 2012

Clouding the Importance of Incentives in the Channel

One essential area that is undergoing change in the channel is in the area of incentives, in part due to rapidly changing business models ushered in by the Cloud.  The Cloud is way too overused and can mean many different things depending on the audience.  For this post, let's focus on partners that are faced with needing to move to re-occurring versus transaction revenue models.

Incentive programs are important because in the channel, employees at the point of impact are not employed by the vendor company and are not going to share the same level of commitment unless given an incentive to do so.

In addition, incentives drive incremental channel revenue and profit, encourage new solution adoption with partners, establish a competitive differentiation for your channel program, and increase partner loyalty. In short, incentives programs strengthen vendor relationships with partners.

Whether a vendor is selling traditional software or hardware — or is expanding their solution set with more services offerings — incentives remain key to channel success. Traditional transaction-based revenue models are giving way to recurring revenue models: vendors know this and partners know this. In a Darwinian channel, those that adapt, survive. That means we are seeing more partners with multiple revenue streams — both transaction-based and subscription-based — as they begin to morph their business model.

How should incentives programs adapt to the changing landscape?

First, incentives programs need to reward partners on the true value of a sale. Incentives programs are designed to drive positive partner behavior, strengthen loyalty and ultimately, increase sales. The recurring revenue model doesn’t change these goals, however, the methods used to influence behavior need to be adapted. Rewarding partners throughout the entire partner lifecycle is an effective way to capture their attention, maintain engagement, as well as promote and drive revenue.
Partners should be incentivized for subscription-based (cloud computing) sales based upon lifetime value of the deal rather than unit price; this is the true value of the deal. All vendors need to do is replace the word “price” with monthly, quarterly or annual recurring revenue in their sales compensation model. Then they have the ability to accurately calculate rewards that are proportional to partners’ sales.

Second, Vendors need to integrate individual and company rewards into a single points-based system, and design the incentive scheme around partners, individuals and teams; ensuring that all stakeholders derive tangible benefits through earning and redemption opportunities that align to the partner’s business model, and generate an incremental shift in the desired partner behavior. Because the end goals for both individual and company level incentives are the same — loyalty and a surge on incremental sales — an integrated approach is cost-effective for vendors. In addition to this very obvious benefit, a unified approach to incentives builds deeper relationships with target accounts (partners), a necessity for effective complex services and solution selling.

Incentives for the Next-Generation Channel

Clearly, incentives for a channel populated by hybrid partners — those who pursue multiple revenue streams — and vendors who also are expanding their sources of revenue, will remain an integral component of channel programs. There is no need to start over or redesign incentive programs every time the channel landscape evolves. A focus on the true value of a sale means that as the channel changes, only variables used to calculate the value of sales need to be modified to keep an incentives program timely and relevant.

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