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048 - Cracking the Code: Compensation Strategies for Channel Partners · Partnerships Unraveled

• 0:07
  Speaker 1: Welcome back to partnerships unraveled, the podcast where we unravel the mysteries of partnerships and channel on a weekly basis.
• 0:14
  Speaker 1: My name is Rick van der Bosch and I'm the CEO and founder at Chennext, and I'm here together with Alex Whitford, vp Parkinson's at Chennext.
• 0:21
  Speaker 1: Alex, how are you doing today?
• 0:23
  Speaker 2: I'm doing really well.
• 0:24
  Speaker 2: My wife just got back from a 10 day trip in Japan, so yeah, I've missed her load, so it was good to have her back yesterday.
• 0:31
  Speaker 1: Awesome, and she brought you a gift, I heard.
• 0:33
  Speaker 2: Yeah, I'm currently wearing new trainers to shout out to me Lufa bringing me a really class trainers from Japan, which is why everyone should check the YouTube channel so they can go and so they can go and see them.
• 0:42
  Speaker 1: Excellent.
• 0:43
  Speaker 1: Another small promo for the YouTube channel.
• 0:46
  Speaker 2: Any way to slip it into the message right.
• 0:48
  Speaker 1: Awesome.
• 0:48
  Speaker 1: We're actually today.
• 0:50
  Speaker 1: We're already in episode four of our series around building your channel, or how to start the channel, and today we're going to talk about compensation.
• 0:57
  Speaker 1: I think this is really one of the number one questions that everybody asked me is a lot of SaaS companies who are building their channel want to build a partner program.
• 1:05
  Speaker 1: Like what margin do I need to give to my partners?
• 1:08
  Speaker 1: What is the compensation for them?
• 1:10
  Speaker 1: I think that's what we're going to touch upon today, maybe to start with, like what is compensation within the channel and why is it so important for both partners, but also for vendors there?
• 1:19
  Speaker 2: Sure.
• 1:19
  Speaker 2: So money is the name of the game at the end of the day and compensation is the way in which you drive that money into the channel.
• 1:26
  Speaker 2: So some types of deals will be a referral led deal, where you're paying commission down to a referral partner, and in other types of deals, they are reselling your product.
• 1:36
  Speaker 2: They buy it a cheaper cost, they add their margin and they sell.
• 1:39
  Speaker 2: And if you get your compensation strategy wrong, it literally doesn't matter how well designed your channel is.
• 1:46
  Speaker 2: Your channel will ultimately die as partners understand that there is a more effective way of making money elsewhere.
• 1:52
  Speaker 2: And so today we're going to unwrap like what are the tips and tricks to get through and build a compensation strategy that's going to give you the cutting edge to allow you to build your channel, because at the beginning it's one of the things that really you can play very well with, because it's one of the things that's totally in your control, and then you can really drive that messaging into the channel to help build and ignite those partnerships and really get them going.
• 2:15
  Speaker 1: Yeah.
• 2:15
  Speaker 1: So maybe we could say it's a bit comparable to sales incentives just as you have within your own company, like how do you drive the behavior of the partner towards the end result you want to get together?
• 2:25
  Speaker 2: Yeah, so a great way of talking about it right and you can absolutely imagine a really good way of disincentivizing all your AEs is to have a commission structure.
• 2:34
  Speaker 2: That's absolutely terrible.
• 2:35
  Speaker 2: All your AEs will end up leaving right, Especially, and the best ones will leave first because they know they can earn more money elsewhere, et cetera, et cetera.
• 2:42
  Speaker 2: And the same is exactly true for your compensation strategy.
• 2:47
  Speaker 2: The best partners know exactly what they're worth and if your compensation strategy doesn't work properly, they will immediately switch either to a direct competitor or just switch away from your products in general.
• 2:57
  Speaker 2: Yeah, good one.
• 3:00
  Speaker 1: I think, when I think about compensation, there's always two things you need to look at first.
• 3:03
  Speaker 1: First of all, look at your full buying and customer journey and look at okay, what are we going to do ourselves and what is the partner going to do?
• 3:10
  Speaker 1: You touched upon it briefly already with referral versus resell, for example.
• 3:14
  Speaker 1: There's a lot more work for a resell partner than there is for a referral partner, and therefore that should also be compensated as such.
• 3:21
  Speaker 1: And you need to have a very clear view on your own metrics financial metrics.
• 3:25
  Speaker 1: So what's your gross margin, what's your customer acquisition cost?
• 3:28
  Speaker 1: And then you can start looking at what the bandwidth is within your margin for your partners to incentivize them.
• 3:35
  Speaker 2: Yeah, and the other thing that I'd be looking at is what are your competitors doing?
• 3:39
  Speaker 2: Right, that's one of the things that's really easy to benchmark.
• 3:42
  Speaker 2: Very rarely are you building a channel in a non-competitive market.
• 3:47
  Speaker 2: Right, you're always trying to compete against someone and one of the levers that you have to pull is offering the partners or your channel more financial potential than they would with your competitor, and especially when you're trying to be disruptive, that's a real lever that you should be pulling aggressively, because that's one of the things that can peak interest of your competitive partners.
• 4:08
  Speaker 2: And, as we've touched on in other series, a displacement or a replacement strategy is a really key strategy, for success is just ripping and replacing and choose a product with your product, but you can also do that in the partner ecosystem, and compensation is a really good mechanism to drive that behavior.
• 4:24
  Speaker 1: And within that compensation.
• 4:26
  Speaker 1: Let's say, we take an example of referral versus resell.
• 4:29
  Speaker 1: There, when you have a referral partner, then they are mainly responsible for bringing in the lead, for example.
• 4:37
  Speaker 1: But then it also depends on like is it a co-sell motion, where the partner needs to be, needs to be along the full sales journey until the product is sold, or is it just give the lead and then your sales team does the rest?
• 4:50
  Speaker 1: Or maybe indeed it's a resell model where the partner is responsible for everything finding the customers, closing them, but also renewing them.
• 4:57
  Speaker 1: And I think those are some interesting things to think about.
• 5:00
  Speaker 1: Also with your margin, it's not just what percentage are you giving, but for how long are you giving that?
• 5:05
  Speaker 1: And also with renewals, for example, like what's the right amount of percentage we need to give to incentivize that behavior?
• 5:12
  Speaker 2: Yeah, exactly the thing that you're dancing around is how easy is it to sell versus how much money am I going to make?
• 5:19
  Speaker 2: Right, partners are constantly analyzing that tool.
• 5:22
  Speaker 2: The more complicated it is to sell, the more effort that the partner has to put into selling, the more money they need to make back.
• 5:29
  Speaker 2: Right, because once that is out of sync, suddenly they're just going to lose interest.
• 5:34
  Speaker 2: That is what you want, and it can be the other way, right?
• 5:36
  Speaker 2: If it's really easy to sell and the partner is making a load of money, okay, well, that's awesome.
• 5:41
  Speaker 2: Right?
• 5:41
  Speaker 2: You're obviously going to get a huge tailwind and driving force, and that might be something you want to do for a period of time to capture a market, but ultimately you're missing potential and you want to win that back right.
• 5:52
  Speaker 2: So getting the balance between effort and reward is critical for keeping your partners engaged.
• 5:58
  Speaker 1: Could you give some examples there of easy to sell versus the money you can make in need, like both on an example of what is easy to sell and how much money should you make them, but also what are the more complex and Sure?
• 6:12
  Speaker 2: So a really key example would be, say, in the IT hardware space, if you're selling by some keyboard and you're tied to a really strong brand, it's a very high-revenue, low-margin product, right, Because there's loads of people, it's a very short-buying cycle, sometimes even just simply bought online, right Versus I don't know a fully integrated, designed product that needs a specific architecture per end user, installation, continuous management and support.
• 6:38
  Speaker 2: You can understand those two buying cycles are very, very different.
• 6:42
  Speaker 2: Those two maintenance cycles are very, very different.
• 6:44
  Speaker 2: The renewal cycle is very, very different and therefore the margin.
• 6:47
  Speaker 2: I would expect to be in the low single digits for one and I'd expect to be making 40, 50% margin on the actual solution plus 100% margin on the services for the installation and maintenance and everything else.
• 6:59
  Speaker 2: And so there you've got two wildly different sales cycles.
• 7:03
  Speaker 2: And if you ask partners, which do you prefer?
• 7:05
  Speaker 2: Sort of depends on the partner, right, If you've got thousands of end users that you're servicing, versus we only have 20 end users.
• 7:13
  Speaker 2: Right, the 20 end users, they're going to want high margin, high complexity.
• 7:16
  Speaker 2: And the broad line partners who service thousands of end users, they don't mind high-revenue, low margin, because they've got the economies of scale to make that work, and then the businesses that do it best blend those two together right, and they're really the gems of partners who've managed to blend high revenue to capture loads of end users, but then high margin to drive huge value into some of those end users.
• 7:39
  Speaker 1: Yeah, I think, indeed if I listen to that it's crucial to make sure that you really look at the big picture.
• 7:45
  Speaker 1: Because if you have a product that has a lot of end user pool and therefore brings the partner a lot of demand, where they can tie the rest of their products with higher margins, or their services et cetera, on top of it, then probably you don't have to give away that much margin because they want to work with you, because it drives their revenue and it brings in demand, and indeed the other way around.
• 8:04
  Speaker 1: If you have a product where there's a lot of work for the partner and it always needs to be sold into the organization of the end user, then probably you need a lot more margin to make sure that you drive that behavior with the partner.
• 8:15
  Speaker 2: So 100%.
• 8:16
  Speaker 2: I think a really good example of this is Microsoft Office 365, brilliant solution.
• 8:20
  Speaker 2: Loads of end user demand, hundreds of thousands of resellers selling that product.
• 8:25
  Speaker 2: Clearly, the margin on that is not significant.
• 8:28
  Speaker 2: However, what Microsoft will tell you is, I think the ratio is about 11 to 1.
• 8:32
  Speaker 2: So for every dollar spent on Microsoft, you can sell 11 more dollars in periphery products, solution and services to really wrap around that.
• 8:41
  Speaker 2: So partners love selling Microsoft, as they should, because the opportunity is wider than simply the Office 365 licensing.
• 8:49
  Speaker 2: That's the door opener to start monetizing that end user at a far greater level and that's what you want to be building.
• 8:56
  Speaker 2: In terms of your compensation strategy, you need to look much wider than your own product and, frankly, microsoft would be missing a trick if partners were making 70% margin on their Office 365 licensing.
• 9:08
  Speaker 2: That would be a crazy move.
• 9:10
  Speaker 2: Microsoft would be making a lot less money.
• 9:12
  Speaker 2: But partners enjoy that balance because they know they can still monetize that solution incredibly effectively.
• 9:17
  Speaker 1: Yeah, indeed, there you get the attach sale.
• 9:20
  Speaker 1: They come in with one product, but then they can bring their full surface and product suite among it to the end user.
• 9:26
  Speaker 2: Yeah, and the really key thing there, it's a door opener.
• 9:29
  Speaker 2: Right, there's an attachment sale which is high revenue, but it's not the leading product.
• 9:33
  Speaker 2: So we've just talked about my sync keyboards.
• 9:35
  Speaker 2: Right, typically that's not going to be a hey, we managed to break into a customer because we sell my sync keyboards, so that's easy to sell, but it's not a door opener, meaning it's less valuable than Microsoft licensing, which is easy to sell but is a fundamental reason why, if you're a Microsoft MSP, someone would buy from you and then you can wrap everything around it right.
• 9:56
  Speaker 2: So there's balance there, but having a really key understanding Of your end users, of the partner process what does the partner need to do and then balancing the complexity of sale versus the opportunity, how easy is itself versus how much money am I going to make.
• 10:11
  Speaker 2: If you get that balance really right, then you're going to be ultimately very successful.
• 10:16
  Speaker 1: Yeah 100% and I think what you start with is not what you have to end with, right in terms of Margin.
• 10:22
  Speaker 1: I think it's crucial there.
• 10:23
  Speaker 1: In the second episode we went into channel strategy, which needs to be highly aligned with your company strategy.
• 10:29
  Speaker 1: Like, if you're, for example, venture back, then you need to generate a lot of revenue in a very short amount of time.
• 10:35
  Speaker 1: Probably you want to go way more aggressive with your margin than when your bootstrapped and you want to, like, grow your channel step by step, and I think that's when you have to start as well.
• 10:44
  Speaker 1: Look at your own business model, looking at, like, what are company objectives and within that, what, for example, may our customer acquisition cost be?
• 10:51
  Speaker 1: If that's approximately 40% of your revenue when you do it direct, then you could consider if you want to go super aggressive, like how close can we get into that level if the partner really has to do everything?
• 11:03
  Speaker 1: So, for example, in the resale model and obviously you need to take into account that you have your channel account managers etc.
• 11:09
  Speaker 1: But that I think that's how you can look at it, like how aggressive can and do we want to go?
• 11:14
  Speaker 2: Yeah, 100%.
• 11:15
  Speaker 2: I think Spotify has never been profitable, right?
• 11:17
  Speaker 2: I think that's one of like the classic examples where VC backed companies are scaling as aggressively as possible to capture a market, and we see that happening within the channel.
• 11:26
  Speaker 2: What's really important is you understand what phase you're in.
• 11:30
  Speaker 2: So I think in the last episode we talked about evolution but not change.
• 11:34
  Speaker 2: So you don't want to be walking your strategy back, but you are absolutely right for a two year increment where you want to really dominate the space.
• 11:42
  Speaker 2: You may choose to incentivize partners to capture the key partners in the market and then over time, once you're starting to hit saturation, you can wind that back and start to drive up your profitability.
• 11:53
  Speaker 2: So don't think it's impossible.
• 11:56
  Speaker 2: I would really stress you want to.
• 11:58
  Speaker 2: You don't want to do it too many times because people that can cause a bit of chaos in the channel, but absolutely to have a first two year plan versus a two to five year plan versus a five to 10 year plan.
• 12:08
  Speaker 2: Yes, your compensation strategy should look very different across those timelines.
• 12:14
  Speaker 1: Yeah, what do you see there?
• 12:15
  Speaker 1: Or have you experienced that like, do you change it for existing partners, or is that really a no go?
• 12:21
  Speaker 2: So typically, yes, right, I'm a big believer that generally, unless there's very, very specific reasons, you want a consistent buying price across all partners.
• 12:30
  Speaker 2: Otherwise, what you do is you protect the very top partners but you also prevent any rising stars from being successful.
• 12:36
  Speaker 2: There's too much.
• 12:38
  Speaker 2: There's too much protection for those top partners and especially if you're a SaaS product and you're in a rapidly changing market, that complexity, I think, can actually stagnate channels.
• 12:49
  Speaker 2: So you do an entire pricing shift, which you know, frankly, is not uncommon, right, fx rates change and there's all sorts of complexities that happen in the global market.
• 12:58
  Speaker 2: But I do want to stress, you don't want to be doing it every year.
• 13:03
  Speaker 2: That's going to seed a lot of chaos into the channel.
• 13:05
  Speaker 2: But if you have a very good reason for it, then, yeah, pricing changes do happen.
• 13:11
  Speaker 1: Yeah, and I think a good way to work around this is with your partner tiers.
• 13:15
  Speaker 1: So if at a certain moment your partner program becomes a bit more mature, you get different levels and in the channel oftentimes it's the classic silver, gold, platinum levels and then the partners in the platinum level they get the highest margin and the best discount on your product and that's the way you could solve for that Like.
• 13:32
  Speaker 1: If you want to change it, then you say, ok, the new baseline is where people get in, that's where they get 10% margin.
• 13:37
  Speaker 1: But I once started with 25% margin for my partners.
• 13:41
  Speaker 1: Probably the partners who do quite some revenue are in the top level and you can kind of like challenge your partners, like, ok, if you want to maintain this, this margin level, I challenge you to get to this revenue level, because then you are in the top level of our partner program.
• 13:57
  Speaker 2: Yeah, and you're rewarding via rebate and MDF spend.
• 14:00
  Speaker 2: There's lots of ways to incentivize that progressional behavior, which is really what you want to do.
• 14:04
  Speaker 2: But certainly I think, when we're talking about building a channel, keep it fairly lean in terms of strategy and then, like you say, over time you can work out where that tiering should look like.
• 14:15
  Speaker 2: But certainly, if I was building a channel from scratch, I wouldn't be building in tears early.
• 14:21
  Speaker 2: I'd be waiting until I have enough data and then I can really go OK, this is gold, silver, bronze or whatever that segmentation looks like.
• 14:28
  Speaker 1: Yeah, I fully agree.
• 14:29
  Speaker 1: Start with, authorize that you know that the partners accepted and that they've done some type of certification, and you can build from there.
• 14:34
  Speaker 1: Yeah, 100%.
• 14:36
  Speaker 1: And I think what's really important as well when you're building a channel is to understand that it's not all about the margin.
• 14:43
  Speaker 1: Yes, it's very important and yes, your partners will compare you to your competitors, but your partners are looking at it from a more of a helicopter view where they don't just look at what margin can I make on your product, but what is the total value of the projects I can run when I implement your product or when I work with this particular vendor.
• 15:02
  Speaker 1: What do you think there?
• 15:03
  Speaker 1: Like we've been talking about lots around multipliers, for example.
• 15:07
  Speaker 1: I think Jay McBain always says it like for every dollar you spend on a certain product, there's an X amount of dollars to be earned for partners around that for services.
• 15:15
  Speaker 1: What do partners find most important there?
• 15:17
  Speaker 1: Yeah, 100%.
• 15:19
  Speaker 2: Again, it will depend on what type of partner right.
• 15:21
  Speaker 2: So a broad liner IT reseller is going to care less about the services than they, you know, than an AV integrator right, which makes the majority of their profit on the services.
• 15:31
  Speaker 2: However, what you want to be designing your compensation strategy is with that multiplier in mind, and then when you take it to channel, it's important you talk about it in that way too.
• 15:42
  Speaker 2: So that second step is the bit that I see that's missed so often.
• 15:46
  Speaker 2: So that 11 to 1 multiplier we talked about with Microsoft earlier in the episode.
• 15:50
  Speaker 2: The reason that's so important, the reason I know that number, is because Microsoft talk about it all the time and it's a way they drive value into their solutions away from the margin that they're offering.
• 16:00
  Speaker 2: Why that's so important is if you just hope that the partner will understand that rather than tell them you're going to look like an inferior product or an inferior compensation strategy, when actually you might be brilliant right.
• 16:14
  Speaker 2: You might go yes, you only make 15% on this, but it takes architecture, design, implementation, consistent management and renewal and all of that's 100% margin and that might be 40% of the total product or the total solution, and suddenly it's not a 15% margin.
• 16:31
  Speaker 2: It's actually a 60% margin solution, but you've got to wrap all of those services in.
• 16:36
  Speaker 2: If you don't take partners through that extra services margin and what they should be charging to end users, they will only evaluate your product on what you tell them.
• 16:46
  Speaker 2: So when you're designing your compensation strategy, ensure you are analyzing the full stack and don't just think about yourself, because actually you're going to sell yourself short in that area.
• 16:57
  Speaker 1: That's what you should really be over communicating.
• 16:59
  Speaker 1: So if you're building your channel and you've, let's say, you're working with five partners and you're starting to build the first business cases with those partners, really unwrap that Like what amount of money did you earn on top of this product in terms of services, etc.
• 17:12
  Speaker 1: Luke, if you can calculate that multiplier.
• 17:16
  Speaker 1: And then if you walk into new partners and you start recruiting them like, communicate that all the time, because that's what gets them really excited, especially if you have clear cases around other partners that actually achieved that amount of revenue with your product.
• 17:30
  Speaker 2: Yeah, and share the wins right.
• 17:31
  Speaker 2: I really love that idea of over communicating.
• 17:34
  Speaker 2: If PartnerX has done this thing and they've sold this service and they've actually thought of a way that they can monetize it even better, share that with the rest of the channel so that we're really building an ecosystem and a community that's trying to deliver two things the best solution to the end user and high profitability to the channel.
• 17:51
  Speaker 2: If you've got those two things working in cadence together, then you're going to be highly successful.
• 17:57
  Speaker 2: But it's so important that cams are thinking far wider than how did we close this deal?
• 18:02
  Speaker 2: How can I sell more product?
• 18:03
  Speaker 2: And it's no?
• 18:04
  Speaker 2: How can we drive monetization into the channel?
• 18:08
  Speaker 2: Because, as we said, how hard is it to sell versus how much money I'm going to make?
• 18:12
  Speaker 2: If we can artificially drive up how much money the partner's going to make by increasing the services opportunity, without you even doing anything, you've got more of a tension of the partner, meaning they're more likely to sell more of your products.
• 18:25
  Speaker 1: Yeah, 100%.
• 18:26
  Speaker 1: And I think the interesting part is that it has two positive effects.
• 18:30
  Speaker 1: On the one hand, they need to partner understanding how they can make more money, which incentivizes them, but also them understanding how they, how your product fits in their solution and their services, because they start thinking about it immediately.
• 18:45
  Speaker 1: Oh yeah, I see it now Like if I'm also, let's say, you bring that business case to them.
• 18:49
  Speaker 1: They see I'm also doing those type of services, so when I sell those services the other way around, I can also attach this product into it to get more margin, to have a wider scope of the project and even sell more services on top.
• 19:03
  Speaker 1: And I think that's the flywheel you want to trigger, because then your partner gets excited about the money they can make and it becomes easier for their sales team because they understand how your product fits in their total solutions.
• 19:14
  Speaker 2: Yeah, and the other bit that I would be touching on in terms of delivering the full value is what your renewal rate is right.
• 19:20
  Speaker 2: So the other piece that you can really touch on is how likely are they to churn?
• 19:24
  Speaker 2: What's your typical lifetime value of a product?
• 19:27
  Speaker 2: And you should know that from your direct go to market motion.
• 19:30
  Speaker 2: And then the other bit is how likely is an upsell, because what partners will bake into is they know okay, we sell this once, we make 15% margin, but year two we're expecting the contract value to double and we're expecting this contract to be sold for seven years, meaning that hang on.
• 19:48
  Speaker 2: Yes, I did sell it once, but I monetized it for such a long period of time.
• 19:53
  Speaker 2: Business owners will absolutely love that because they know typically you only pay the salesperson once, or you pay the salesperson year two to year seven a lot less for the renewal than you would for the initial deal, and they get that continuous monetization and especially if there's services, that can be done throughout the lifetime of the contract.
• 20:11
  Speaker 2: Remember, you want to be over communicating the full value of the opportunity.
• 20:16
  Speaker 2: So definitely don't just stop at year one.
• 20:18
  Speaker 2: Understand how you can continue to monetize that through.
• 20:21
  Speaker 1: That's a great point.
• 20:22
  Speaker 1: I think that's one of the things we hear all the time from our customers as well.
• 20:25
  Speaker 1: Renewals is such a big issue in the channel, so you really need to think how you're going to incentivize in the best, optimal way, and I think I would advise, incentivize it similarly.
• 20:35
  Speaker 1: If the partner is responsible for the renewal, give them the same margin every year, like that.
• 20:40
  Speaker 1: That's what you should incentivize and you should build programs around.
• 20:44
  Speaker 1: How are we going to help partners to do good renewals?
• 20:46
  Speaker 1: How are we going to drive up sales Because that's where the real money in subscription economy is when you end your partner together make continuous impact for the end user and therefore drive renewals and upsells as well.
• 20:59
  Speaker 2: Yeah, to me, I, the renewals element is why it's our businesses of value so highly.
• 21:04
  Speaker 2: And so it's crazy to me that you would short change the partners on their second year, when actually what we can very much see is that if you drive the incentivization into the partner properly, they will chase that renewal and get it done.
• 21:17
  Speaker 2: And if they don't, if they're not getting paid year two guess what?
• 21:21
  Speaker 2: They also speak to that end user all the time.
• 21:23
  Speaker 2: They're probably selling out the product.
• 21:24
  Speaker 2: And if they can't get the monetization year two, I know what will happen, because I've seen it happen time and time again they will start introducing competitors so they can capture that customer back.
• 21:34
  Speaker 2: So for me, if you're going to go down the channel route and I absolutely think it's the most scalable way of doing business you should just be paying partners on renewals constantly.
• 21:43
  Speaker 2: That means you've got to get the compensation package right from year one on onwards, because you can't be overpaying on year one and then underpaying on year two onwards, and then that introduces churn instead, paid less on year one, but talk about lifetime value, so they go OK, I'm only making 15 percent, but I'm going to make 15 percent for seven years and the renewal process is really, really easy and, in fact, we're going to work together to generate upsells.
• 22:10
  Speaker 2: Suddenly, you've got the partner thinking long term, you've got the end user thinking long term and you really are building a partnership that's going to stand the test of time.
• 22:17
  Speaker 1: Yeah, and I think that's one of the things that I always hear from partners.
• 22:20
  Speaker 1: Maybe the margin on itself is not the thing that drives them most, but what they really love is the subscription revenue, because all the partners usually sell their services and it's on a one off basis, but now they also start to build like that more predictable model where they get more and more of that revenue and that's indeed that all comes together in your renewal strategy, because if you don't get that right, then it's just a one off sale for the partner, because the product was sold once, but the year after they need to sell it again or they need to sell a different solution or different.
• 22:52
  Speaker 1: They need to sell different product as such.
• 22:55
  Speaker 2: Yeah To me like in hardware sales.
• 22:57
  Speaker 2: It's a very unscalable way of doing business because you do a great deal and you've got to start again and do another great deal, and you've got to start again and do another great deal and it never ends right.
• 23:07
  Speaker 2: Whereas in that renewables world, ok, I sold a deal and maybe I sold a shed load of services which is amazing because I've made a really lumpy deal but 10% of that value just continues and it means if I do that every month, I get that rule of 72.
• 23:21
  Speaker 2: And suddenly, if I sell one car a month after the end of the year and it renews every month after the end of the year, I've actually sold 72,000.
• 23:28
  Speaker 2: Do that year over year over year.
• 23:31
  Speaker 2: You've got this book of business.
• 23:32
  Speaker 2: That's just massively helping the profitability and I've even spoken to AV Cloud Partners who they know they can sell no more deals and they can keep all the lights on for the entire year because they're just their SaaS margin is just keeping the entire business running.
• 23:47
  Speaker 2: That allows them to be hyper aggressive in the market.
• 23:50
  Speaker 2: If you're speaking to business leaders about that type of profitability, they're going to be so bought into your solution.
• 23:56
  Speaker 2: So you want to be communicating the entire strategy, not just your element.
• 24:00
  Speaker 2: 100%.
• 24:03
  Speaker 1: Maybe last topic regarding compensation for listeners that are thinking about working with distribution.
• 24:08
  Speaker 1: You know a lot about that, like where do you focus on, or what type of margin when you work with distributors, you upload even more work to the channel.
• 24:18
  Speaker 1: What type of margin do you give to the distributors?
• 24:21
  Speaker 1: Like, how should you think about that or construct that?
• 24:24
  Speaker 2: Yeah.
• 24:24
  Speaker 2: So when you give, and you've got to be very careful and this is one of the things that I'll say to the US versus EMEA, because in Europe and in the UK we have a price fixing legislation, so you cannot tell a distributor what to sell out, because that's price fixing, so instead you have to give guidelines.
• 24:42
  Speaker 2: But again, what is the distributor doing?
• 24:44
  Speaker 2: So how much margin expectation do they have versus the work?
• 24:47
  Speaker 2: The same rule is applied If you have hired a very specialist distributor.
• 24:52
  Speaker 2: They are recruiting, training all the partners.
• 24:55
  Speaker 2: They're doing the installation on behalf of the partners.
• 24:57
  Speaker 2: They're doing a lot of work.
• 24:58
  Speaker 2: Their expectation is going to be higher because they are assuming some of the complexity from the partner.
• 25:04
  Speaker 2: And so that is a very different strategy to hey, we're going to give the distributor 10 funded heads.
• 25:11
  Speaker 2: Those funded heads are going to do all the work.
• 25:12
  Speaker 2: So we're actually just hiring a sales team within the distributor.
• 25:15
  Speaker 2: They're going to recruit all the partners.
• 25:16
  Speaker 2: Then we've got loads of cams to go and sort all the work out.
• 25:20
  Speaker 2: Well then my negotiation with the distributor is hey, your margin expectation should be less because realistically, you're not doing the brunt of the work.
• 25:28
  Speaker 2: So that same calculation that you need to be doing with the partner.
• 25:32
  Speaker 2: You need to do with the distributor and you've got a balance.
• 25:35
  Speaker 2: Are we getting the ROI out?
• 25:36
  Speaker 2: And the other bit speak to multiple distributors, really get a steer from them on what's the work that you're going to be doing, what's the value you're going to be providing and what's your margin expectation.
• 25:48
  Speaker 2: Distributors have very, very clear guidelines internally so they will know what they want.
• 25:53
  Speaker 2: You've got to balance that ROI model and if you don't feel like you're getting a good deal and you're building the early onset of your channel, cut distribution out, build your channel for two years direct, and then you can have an understanding to add distributor as your tier two layer to go after the long tail once you've built high value partners.
• 26:12
  Speaker 2: To me, I think that's a much faster way of building a channel initially because you're getting that one to one feedback from partners.
• 26:18
  Speaker 2: So if you're a SaaS platform, that's typically where I'd start.
• 26:22
  Speaker 2: Hardware doesn't work because you need distribution to do logistics and shipping, and so in that instance, that's where distribution is providing one of the primary values and obviously they need to be paid for that.
• 26:34
  Speaker 1: I think that's a good approach and it's first start direct with partners in the tier one model and then eventually, when that is working, you can scale very big, like with distribution there.
• 26:44
  Speaker 1: And maybe for listeners that haven't heard about a funded hat yet, a funded hat is someone who's on the payroll of the distributor but paid by defender right, where you give them the money but they actually hire that person, train that person, etc.
• 26:58
  Speaker 1: Make sure that they focus completely on your specific partner set.
• 27:02
  Speaker 2: Yeah, exactly.
• 27:03
  Speaker 2: So a funded head might be managing partners directly or they're managing the enablement of the distribution sales people.
• 27:10
  Speaker 2: They are there to be effectively a channel account manager for you, but based entirely within the distributor.
• 27:17
  Speaker 2: It's a very low risk model because you're not hiring anyone and based on targets.
• 27:21
  Speaker 2: You can stop paying effectively for the funded head.
• 27:24
  Speaker 2: But it does allow you to get real mind share.
• 27:28
  Speaker 2: I am biased.
• 27:29
  Speaker 2: I've been a funded head so I get it and I think it's a really good way of doing business.
• 27:33
  Speaker 2: But for me, if you can get the right wallet share, the right distributor and the right funded head, that is the trick.
• 27:39
  Speaker 2: You've got to interview Yourself and make sure you're getting the right caliber, but if you do, they can absolutely drive significant and incremental business for you Excellent.
• 27:48
  Speaker 1: I think we shared a lot on compensation today for our listeners.
• 27:51
  Speaker 1: Thanks again for sharing.
• 27:53
  Speaker 1: I hope our listeners liked it as well.
• 27:54
  Speaker 1: If you want to learn more, check out the description of our podcast and see you next week.