It’s the end of the quarter, and we need to make the number. So out come the promos! We’ve all heard them before. “Buy 4, get 1 Free”. “Take 2 months stock, and I’ll give you a discount”. “Drop your margin by a couple of points to help us get this deal, and we’ll owe you a favour next quarter”. They’re all designed to bring in revenue, but have you ever stopped to think about the profit implications for partners?
This article looks at the impact of your programs on your channel partners’ financial position. Sometimes you are helping them, but other times, you could be slowly sending them broke. Resellers, Distributors and Vendors are driven by entirely different metrics, and what seems like a great idea for one party may in fact be a disaster for another.
Let’s begin by looking at partners’ business models, their financial drivers, and why they are so different from vendors.
The single biggest difference between a partner’s financials and a vendor’s financials is “Cost of Goods”. Whereas this figure represents 5%-20% of a vendor’s variable costs, it may account for up to a whopping 90% for a partner. That means for every $1.00 they sell, 90c disappears to their supplier.
So it’s no wonder that resellers live by the motto “profit is sanity, revenue is vanity”. And if you are a vendor with a commission scheme that is measured on revenue, chances are your sales force has never had to think about your profit or your partner’s profit model. Which means there will be a disconnect between your language and that of your partners.
So let’s have a look at some of the most common campaigns and the implications for partners.
Drop your price
“Drop your price by a couple of points to help us get this deal, and we’ll owe you a favour next quarter”.
If you are a vendor and you’re measured on revenue, dropping your price by 2% is straightforward – you’ve given up 2% of the money you were going to receive. But if you’re a reseller, and you’re measured on profit, 2% can be a massive drop in your profit. Take the scenario where a reseller is operating on 12% margin, and then drops their price by 2%. If the product is worth $100, then the revenue has simply dropped to $98. But the profit has reduced from $12 to $10. That equates to a 17% decrease in profit (and in commission)! It had better be a REALLY big favour the following quarter to make up for that.
Obviously commercial reality dictates that there will be times when you have no choice but to reduce your price in order to win a deal. When that happens, just make sure you know the implications for your partner, and look for ways to help them increase their margin through additional services.
Take extra stock
“Take 2 months stock, and I’ll give you a discount”.
Companies don’t go broke because they’re not making a profit – they go broke because they can’t pay their bills. You may be making 25% margin, but if your collections (money coming in) aren’t keeping pace with money going out, you will be profitable up until the day you go broke. And the two big drains on cash are debtors (money owed to you by customers) and inventory. And so of course, partners rely on credit (either from the bank or their suppliers) to provide the cash to fund the business.
When you ask a partner or a distributor to take extra stock, you need to be very cognisant of the impact on their cash flow. You may be giving them an extra discount, which of course will provide them with extra margin, but if takes 3 months to sell that stock, they have effectively tied up their cash in inventory for which they won’t see a return.
In other words, if you don’t give extra terms, the profit could be chewed up by the cost of money. Again, you sometime have to do it, but be aware that your actions could tie up your partner’s credit which prevents them from buying anything from you next month.
Free bonus stock
“Buy 4, get 1 Free”.
Most vendors have run some sort of promotion similar to this. The intention is to move a lot of stock quickly, and to incent the partners who are wiling to help you do so by giving them free product that they can sell and make a profit. But what is surprising is that very few people ever do the maths to work out the impact of that margin. And when you sit down and analyse it, programs like this can make a big difference to a partner’s bottom line.
The mistake that a lot of people make when they consider programs like this is to look at them from a revenue perspective (ie. if I buy 4 and get 1 free, I’m getting an extra 25% – just like the Cadbury’s Family Block). But if you look at the profit impact, and it’s a whole other story. For example, let’s pretend a reseller normally sells the item at $100, and makes 15%. That’s $15 profit. Now, if that reseller participated in this program, they would sell the first 4 at $100 and make a profit of $15 each (ie. $60) plus $100 profit for the free one. That equates to $160 on sales on $500 (ie. 32%) So our overall profit margin has more than doubled!
Obviously this has to be tempered against the issue of holding stock for too long (as per the previous section) but partners who manage their stock effectively and take advantage of programs such as this can drastically increase their margins.
Partners today are looking for more from their Channel Account Manager to provide than the odd beer and pizza night. They want a business consultant who understands their business and is able to help them increase their profitability. And that means having a sound understanding the numbers and the impact of your initiatives. So next time you come up with another initiative to increase sales, do the maths. What impact will this have on your partner’s profit margins? The answer might just surprise you.