Channel Partner Arrangements

Quick Summary: There are many different channel partner arrangements, and all require detailed definitions.

Abstract:

Most new companies quickly realize that they need help in reaching a large number of prospects.  Word of mouth and past business acquaintances may initially be successful.  However, for the sale of most complex products or services to new unknown customers, working through an organization that is already in place and has established relationships with the customers in the target market is the most effective way to build the business.  There are a number of different types of relationships with significant differences that the company should consider.

Based on the goals and capabilities of both parties and the characteristics of the product or service that will be sold to customers, there is a wide variety of relationships that can be crafted between the company and a potential channel partner.  In general, the relationships fall into one of five categories based on the extent of the involvement of the channel partner.  In terms of increasing involvement they are:

  1. Referral Partners
  2. Sales Partners
  3. Value Added Resellers
  4. Installation and Maintenance Providers
  5. Bulk Distributors

There can be considerable overlap between the categories and, in some cases, multiple partners may be involved in the same sale.  In those cases, clear, previously established guidelines need to be in place to avoid misunderstandings.  The company must, however, accept the fact that if there is more than one partner involved, independent of their role, there will be the likelihood of channel conflict.  Channel conflict simply cannot be avoided no matter how carefully the guidelines are written.

Below are some general descriptions of each of the partner categories along with some ranges of compensation that the company should expect to pay each partner.  These ranges are very general and will depend on many factors.  It is unwise to discuss any level of compensation until a clear understanding is reached as to the level of involvement that each party be expected to provide. Unfortunately, many early stage discussions start out with this issue with “battle lines” established before the arrangement scope is defined.  Paraphrasing an old saying, you need to emphasize that “we cannot set the price until we know the terms.”

A second issue usually brought up prematurely is the issue of exclusivity.  A separate article in this series discusses that issue.

  1. Referral Partners:  These partners, also referred to as sales lead partners, do exactly that, they provide the company name of a potential customer.  Hopefully this comes with an individual contact’s name and title, and some level of introduction to the company.  Retired military generals, government officials, or high visibility private sector individuals often assume this role of leveraging their past contacts.  Many consultants with some industry knowledge and contacts also actively seek these roles as well.  Today, many companies actively sell their customer lists to others as a source of revenue (despite their public denials).  Of all the possible partnership relationships, this one should be the simplest but can actually be the most problematic.  The issue is agreeing on the definition of a sales lead.  A Referral Partner could, for example, send out a bulk introductory email to their entire contact list and expect compensation from the company if any one of those contacts is ever called upon by the company.  A Referral Partner could also expect compensation if the company makes one sales call, perhaps even over the phone, but no sale is ever made.    A Referral Partner may expect compensation after they make a brief introduction to a potential client that they happened to bump into at a trade show.  A Referral Partner might expect compensation even if the company is working with a different individual or division within the prospect’s organization.

The examples listed above show the need for a clear understanding of what constitutes a sales lead. Although contract language can be written to define what constitutes a valid sales lead, including several examples will help avoid disputes at a later date.  Obviously, it is in the company’s best interest to avoid disputes.  A disgruntled, high-visibility ex-Referral Partner could poison a prospect or an entire market sector.

Referral fees can vary from a fixed amount, independent of the value of a sale or could be a percentage amount of the sale.  Percentage payments can vary from three to ten percent.  Just as it is important to define what a referral actually is, it is equally important to define when payment should be made and what the basis of the payment should be.  For example, should payment be based on just the introduction, or when a proposal is submitted to the customer, or when an order is placed, or when the customer actually pays for the product or service?  If the payment is based on a percentage of the sale, what should be included? Should the gross amount of the sale be included, should it include on-going revenue, should it be based on the profitability of the sales, and should it include add-on sales over some period of time?  Again, clear upfront definitions with examples are in everyone’s best interest.

  1. Sales Partners:  These partners, working on their own, or following up on leads generated by the company or a separate Referral Partner, are responsible for qualifying the prospect, developing a proposed solution, submitting a proposal, and closing the sale with terms acceptable to the company.  The scope of these activities can vary widely based on the product or service offering as well as the prospect’s knowledge of the problem being addressed and the company’s solution.  In theory, the company should not have to be aware of the entire process until the Sales Partner delivers a fully executed contract or purchase order to the company.  In reality, the company may be heavily involved in virtually all aspects of the sales process.  Since it is always in the company’s best interest to receive orders, many companies find themselves involved in far more work than intended and documented in the Sales Partner agreement.  It is, therefore, good practice to take into account this situation in the agreement by reducing commissions or charging for any unanticipated efforts required.

The need for clear and concise definitions of the particular terms and expectations as described in the Referral Partner discussion are also required.  Two serious issues that commonly occur with Sales Partners are 1) when will payment to the Sales Partner occur and 2) what are the recourses for commitments that the Sales Partner might have made during the sales process that the company cannot meet during order fulfillment?  A third issue that needs to be clearly understood by the company, Sales Partner, and the customer is when and how will handoff occur between the Sales Partner and the company after the order is placed?

Based on the sales cycle, solution complexity, and the overall value of the sale, commissions to Sales Partners can vary from fifteen to twenty-five percent.  Finally, if a separate Referral Partner and a Sales Partner are involved in a sale, a clear understanding needs to be established regarding compensation.  It is very easy for both partners to expect the company to pay full commissions to both parties while the company may expect the Sales Partner to compensate the Referral Partner out of their compensation structure.  Language in both partner agreements needs to cover this very common scenario.  Independent of the agreement language, expect both parties to request full payment from the company.

  1. Value Added Resellers:  VARs are expected to be responsible for all aspects of the sale and implementation of the product or service after the product leaves the company’s “shipping dock.”  In theory, the company may not even know the name of the end user or be involved in any support activities, relying totally on the VAR.   The VAR, in turn, may work with Referral Partners, Sales Partners, or Installation and Maintenance Partners (described below) in customer fulfillment and support.   The VAR’s “cradle to grave” involvement requires the VAR to have well experienced personnel and the technical and financial resources to take on all of the required activities.  The company is responsible for providing training and documentation and, most probably, marketing support including advertising, collateral material, trade show support and all other generic activities to support the VAR’s specific activities with individual customers.

All of the considerations discussed in the Referral and Sales Partners descriptions equally apply to VAR.  Compensation for VARs can vary from twenty-five to forty-five percent.  Since the company may not be involved in any aspects of the VAR’s specific customer activities, the VAR compensation is typically based on a discount from the company’s standard pricing structure.  Barring a government (ex. GSA contract) or Fair Trade Practice laws, (all of which are well beyond the scope of this article), VARs may set their own pricing to customers in accordance with their agreement with the company.

Although a VAR agreement may seem to be an excellent way for the company to “off load” work, it requires an extraordinary effort to initially provide the material and support mechanisms to help insure the VAR has the necessary tools and expertise to be successful.  The company only begins to reap the rewards for VAR relationships after these systems are put in place and functioning smoothly.  Of course, “smooth operations” will not occur in the first several sales. The company needs to support the VAR during these activities but needs to make sure the VAR is aware that these services will not be the norm going forward.

  1. Installation and Maintenance Providers: These partners, as their name implies, do exactly that.  Under contract from the company or a VAR, they will install and perhaps, provide on-going maintenance support working directly with the customer.  Their involvement may be on a time and materials basis or may be on a fixed-rate basis as determined by contract.  The time of payment for services rendered must also be clearly defined as does the mechanics and payment for post-sale warranty work or other activities associated with the deployment.  Many I&M Partners are local companies that already have relationships with prospects.  In these cases, they may also act as Referral or Sales Partners and may also be VARs.  It is important to clearly define their roles and compensation arrangements.  As an example, through their day-to-day post sale involvement with a customer, they may uncover the need for additional products or services.  Should they be compensated, or should the initial Sales Partner or VAR be compensated? 

Installation and Maintenance complexity varies so widely that a general statement (other than this one) cannot be made.

  1. Bulk Distributor:  This partner category is best suited for the distribution of commodity or anonymous products that require no prior knowledge of the end customers.  Often referred to as part of the “two step” distribution chain, these partners take delivery of large quantities of products from the company and re-distribute them to the end sales channel.  In some cases, they will provide technical support, warranty repair and returns, and re-stocking services for the end sales channel or directly with customers. 

By definition, they will markup their costs to their sales channel partners who, in turn, will mark up their costs to the end customer.  Generalizations regarding compensation and margins cannot be made. In some businesses, margins may be razor thin. While in other cases, margins for all of some of the parties involved can be exceedingly high.

Bulk Distribution Partners may act simply as inventory stocking warehouses or may provide any of the services previously listed for the other four channel partners.  Due to the nature of their business, they probably will have standard agreements and methods of doing business that they apply to all of the companies for which they distribute products.  It is unlikely that they will make special provisions for new companies, especially those that are just starting up their revenue ramp.

 

The comments in the article in this series “Partnerships: Start with a Story” certainly applies to the early stages of discussing a channel partner relationship.  Long before you begin to create and discuss contract language, develop stories of how both companies will interact.  First, discuss how events should occur and who will be responsible for each.  Then discuss what could go wrong or what complications could arise, and how they would be accommodated.  Only after you have come to agreement on how you will interact should you begin the development of a definitive agreement and compensation levels.

Article Number : 5.050305   

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