How much do you keep for yourself?
Too many people regard a revenue share agreement with their partners or affiliates as a zero sum game. They think of it as a pie and the bigger the slice the partner takes the less there is left for them.
If this were true then companies would set their sales people’s compensation to zero; after all it’s a zero sum game so why not take all of the revenue?
However this simply isn’t true. It’s not a zero sum game. Every sales organization knows that putting the right compensation package in place actually increases the size of the pie. So, if you pay your sales people a fixed salary only and have sales of €1 million you could conceivably double your sales by adding a 10% commission to your sales team’s compensation.
Everybody understands this simple idea but most instantly forget it when talking to a channel partner or affiliate. All of a sudden defences go up and a confrontational approach to negotiation is adopted. Too often business owners and sales people congratulate themselves after a negotiation where they manage to squeeze an extra 5% out of the channel. The reality here is that it is likely that no value was created and in all probability value was destroyed.
You must give your channel sufficient compensation to motivate them to sell your product. If you don’t they’ll find something else to sell and ignore your product. Give them more compensation and the chances are they’ll sell more of it.
The question everyone negotiating with a partner should be asking themselves is not “How little can I give them?”, rather it is “If I give the channel a greater share will I make more money?”.
Get Realistic About Your Channels Costs
Chances are no one call sell your product or service as cheaply as you can. After all, you know your product the best, you know the end-customer the best and you know how to sell it the best. In just about all cases a channel is going to find it more difficult and more costly to make a sale than you are.
You cannot get your revenue share agreement right without facing up to the reality of how much it costs to sell your product. I personally know SAAS companies that do not recover the selling costs associated with a new customer until well into year two. This is quite typically in the SAAS world which relies on high levels of customer renewal for profitability.
However, these very same companies conveniently ignore this fact when they start setting channel revenue share agreements. 50% of first year’s revenue, dropping to 20% is thought of as generous. THESE PEOPLE ARE MAD. If they can’t sell it for 100% of the first year revenue themselves and it’s their baby, how on earth is it reasonable or fair to expect a half motivated channel to be able to sell it for 50% of that.
Remember, the channel’s sales people have their own targets to worry about. It might be their monthly or quarterly target, or even their yearly target, but it is never next year’s target. So don’t fool yourself into thinking that a percentage of future revenue is going to do anything to motivate them.
You have to structure a deal that at a minimum motivates their sales people and covers the partner’s total costs associated with making the sales (not forgetting opportunity costs). Once you’ve done this ask yourself the question: “Will I earn more money by giving them a greater revenue share?”.
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