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Incentivizing Channel Partners: Key Parameters and Best Practices

Incentivizing Channel Partners: Key Parameters and Best Practices

Incentivizing Channel Partners: Key Parameters and Best Practices

Executive Summary: This article provides a comprehensive overview of channel partners, their significance in sales, and their role as an extension of a company's sales team. It also delves into the key parameters to consider when defining commission percentages, like overall cost of sale, payout frequency, tier structure, and communication.

Channel partners collaborate with manufacturers to promote and sell their products or services. They leverage their expertise and industry connections to reach more customers.

However, they’re just that! Partners, in other words, an extension of your sales team.

So, how do you incentivize their sales?

In this article, we’ll explore who channel partners are and their common types. We’ll then learn the incentive structure of channel partners and four key parameters to consider when creating one for your company.

Let’s get started.

Who Are Channel Partners?

Channel partners are independent individuals or organizations that collaborate with manufacturers to sell their products or services – acting as an extension of the company's sales team.

The manufacturer provides the partner with products, marketing materials, training, and support. In contrast, the partner leverages their expertise, industry connections, and market knowledge to promote and sell the products to customers.

What industries employ channel partners?

Channel partners can be found in both B2B (business-to-business) and B2C (business-to-consumer) sectors.

They are commonly employed in various industries, including:

  • Technology
  • Software
  • Telecommunications
  • Manufacturing
  • Retail
  • Distribution

Successful sales partner models vary depending on the industry and specific business goals. Some examples include:

  • Value-Added Resellers (VARs): VARs enhance products with additional features or services before selling them to customers.
  • System Integrators: These partners combine various technologies and solutions to create comprehensive systems for customers.
  • Independent Sales Agents: Agents work on a commission basis and represent multiple manufacturers, offering their products to customers.
  • Referral Partners: These partners refer potential customers to the manufacturer and receive a commission or referral fee for successful sales.

9 Common Types of Sales Partners

Companies can collaborate with various types of sales partners to promote and sell their products or services. Here are some common types of sales partners:

1. Sell to partners

Typically, refers to selling products or services to businesses or individuals who act as channel partners or resellers. These partners, in turn, sell the products to end customers.

2. Sell through partners

Selling through partners refers to the sales approach where a company leverages its partners' sales and distribution channels to reach and sell products or services to end customers.

3. Sell with partners

A collaborative sales approach where a company and its partners work together to sell products or services to end customers jointly.

It involves a close partnership and coordination between the company and its partners throughout the sales process.

4. Sell for partners

These partners are individuals or independent agents who work on behalf of a company or product manufacturer to sell their products or services.

These sales representatives, often called channel partners or sales partners, act as an extension of the company's sales team and are responsible for driving sales and generating revenue.

5. System Integrators (SIs)

SIs are partners that specialize in integrating and implementing complex systems for customers.

They combine hardware, software, networking, and other components to create comprehensive solutions tailored to business needs.

6. OEM Partners

Original Equipment Manufacturer (OEM) partners integrate a manufacturer's products or components into their products or solutions.

They often rebrand or white-label the products to sell them as part of their offering.

7. Value-Added Resellers (VARs)

VARs are independent businesses that add value to products by incorporating additional features or services.

They purchase products from manufacturers and customize, integrate, or bundle them with other solutions before selling them to end customers.

8. Distributors

Distributors purchase products in bulk from manufacturers and then sell them to retailers or resellers.

They often have an established network of retailers or resellers and handle logistics, inventory management, and order fulfillment.

9. Consultants

Consultants provide specialized expertise and advice to customers regarding the manufacturer's products or services. They may recommend and facilitate the purchase of specific products to meet the customer's requirements.

How Does Partner Incentive Structure Work?

Partner incentive structures are designed to motivate and reward channel partners for their sales performance and contribution to the company's revenue.

These structures typically include various incentives based on predefined criteria, such as commissions, bonuses, discounts, or other rewards. Here’s a quick look at them:

1. Percentage of revenue generated

The partner receives a certain percentage of the total sales revenue they generate through their efforts.

This varies based on industry norms, profit margins, the complexity of the sales process, and the value of the products or services being sold.

2. Commission structure

Many incentive programs use tiered structures, where partners are categorized into different levels based on their sales performance.

Higher-performing partners are placed in higher tiers and receive greater incentives. This approach allows top sellers to earn the most and encourages others to strive for higher sales targets, and promotes healthy competition.

3. Frequency of payout

While the specific frequency may vary depending on the company and industry, it is common for partner incentives to be paid biweekly or monthly.

This ensures that partners have a steady income stream and can rely on these incentive payments to support their financial needs.

4 Key Parameters to Consider When Defining Commission Percentage

When defining the percentage commission for channel partners, it's essential to consider various parameters to ensure a fair and effective incentive structure.

Here are some key factors to take into account:

1. The overall cost of sales

The commission percentage should be set to allow for a profit margin after considering the overall cost of sales.

To do so, you need to consider two important questions:

What percentage should each deal get?

Typically, companies compare the partner commission structure with the On-Target Earnings (OTE) percentage of their full-time sales employees (FTEs). The partner commission should try to stay within that range or slightly higher to maintain equity among the salesforce.

A common range for commission percentages is 15-30% of the annual contract or revenue generated from sales. However, assessing what percentage your company can afford to allocate from the overall revenue is essential to ensure sustainable profitability.

And what percentage can you afford to give from your overall revenue?

If the product or service implementation requires significant time and resources from the partner, it may justify a higher commission percentage to compensate for the additional effort.

Additionally, evaluate the ease or difficulty of selling the product.

Factors such as being in a new market, a new category, or having a new product can influence the commission percentage. Higher commissions may be warranted in more challenging sales environments to incentivize partners effectively.

2. Frequency of payout

The frequency of commission payouts for channel partners can vary based on several factors:

  • Sales cycle: If your sales cycle is shorter, more frequent commission payouts may be appropriate to maintain partner motivation and cash flow. Conversely, if the sales cycle is longer, you may opt for less frequent payouts to align with major milestones or the completion of specific stages.
  • Size of deals: Take into account the average deal size. If your business primarily closes larger deals, it may be feasible to have less frequent payouts since the commission amounts would likely be substantial. For smaller deals, more frequent payouts can be beneficial to provide regular income for partners.
  • Time between closure and invoice collection: If your payment structure is based on invoice collection, consider the time it takes for invoices to be paid by customers. If there are significant delays in invoice collection, it may be necessary to adjust the payout frequency accordingly to ensure partners are not left waiting excessively for their commissions.

However, biweekly or monthly payouts are commonly adopted frequencies for partner commission payments.

Biweekly payouts offer more frequent cash flow for partners and help maintain their motivation. On the other hand, monthly payouts are suitable for businesses with longer sales cycles or larger deals, as they align with regular accounting cycles and provide a consistent income stream for partners.

3. Tier Structure

Tier structures allow you to differentiate rewards and recognition based on partner performance.

While implementing it, keep these points in mind:

  • Aim to have three tiers, each representing different levels of performance and contribution.
  • Ensure that the top tier of partners does not comprise more than 10% of your total partner base.
  • Set performance thresholds for each tier based on historical partner performance data. If you lack past sales partner data, consider using internal benchmarks and provide a buffer of 30-50% to account for potential variations in partner effectiveness compared to your own sales team.
  • Offer additional benefits to include non-cash rewards such as trips, gifts, or other exclusive privileges.
  • Ensure that the incentive structure is designed to be aspirational for all partners. Make the top tier achievable but challenging, motivating partners to strive for higher performance and rewards.
  • Once you have all the structure, conduct a scenario analysis to assess the potential payout amounts in different sales outcome situations. This helps you estimate the financial impact of the incentive structure and ensure it aligns with your budget and revenue projections.

4. Communication

Communication and deal tracking can be challenging when sales partners don't have access to your core Customer Relationship Management (CRM) system. This often leads to the use of spreadsheets for deal logging.

To address this issue, consider the following solutions:

  • Implement a dedicated system where sales partners can log their deals directly.
  • Incorporate an approval workflow so each deal goes through the necessary review and approval process before commission payments are made.
  • Provide sales partners with access to view their commissions to help them track their earnings.
  • Enable sales partners to run simulations and analyze potential earnings based on different scenarios – providing them with a clearer understanding of their earning potential.

Use ElevateHQ to Implement Partner Incentives Successfully

ElevateHQ is a commission automation tool suitable for small to medium-sized businesses. You can use this powerful tool to streamline communication and collaboration with your sales partners and ensure accurate tracking and management of partner-driven sales activities.

It offers a centralized solution that allows sales partners to:

  • Track commissions: A unified dashboard that lets you keep a tab on commission earnings.
  • Log deals: Use custom objects to log their deals directly in Elevate, making it a system of record.
  • Perform What-if analysis: Simulate possible scenarios to see your potential earnings.
  • Set up audit trails: Users can set up audit trails, approval flows, override rules, and access controls to ensure compliance and accuracy in the commission process.

Key Takeaways

Channel partners are valuable assets in driving sales and expanding market reach for manufacturers.

That’s why while designing the incentive structure, you need to carefully assess parameters like commission percentages, payout frequency, and the implementation of the tier structure.

Once done, you’ll be able to motivate and reward your partners while driving sales growth and fostering long-term partnerships.

Make payouts right every time with ElevateHQ

Move from manual to automated and error-free commission calculations with our platform.

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