By Steve Murphy
Starting any project or initiative with the end in mind is good business practice. The good news for incentive program designers and managers is that few endeavors lend themselves to such a clear perspective as to what constitutes measurable success.
Start with your ROI in Mind
For many years the ROI for partner rewards or any channel incentive program could be calculated on the back of an envelope or a bar napkin (and often were): the net margin from incremental sales (or insert any behavior that leads to that outcome) less the cost of the program over the cost of the program.
For example, let's say you plan to grow a $50MM line of business by 20%. To do so, you need to generate an additional to $10MM in sales. Assuming a net margin of 35% results in $3.5MM net new margin or profitability and the incentive program costs are $500K then the return is 6:1 or 600%!
Unfortunately, it's not as easy as it appears on a napkin. What happens if growth is half of what you forecast while your incentive costs are 90% of forecast: then the ROI is less than half: or 289%! A handsome return but not nearly what your CFO was anticipating. Drop below 5% growth and the ROI could become less than break-even.
Let's continue with the assumption above that the total incentive program costs = $500K. Assuming the cost of actual rewards = 80% of the overall program costs which leaves you with $400K in reward value or 4% of the incremental revenue of $10MM. How can you get the most impact from the budget available?
Making it Rewarding – And Easy to Do Business with You
To be effective, rewards need to be big enough and well communicated to get a channel sales reps’ attention.
For direct sales incentives (non-channel) the non-commission, non-salary incentives typically run as much as 8% of a sales employee’s total income. Adapting that model to the channel is not a straight- forward exercise – after all the revenue generated by your product or service is only part of their overall compensation.
What that percentage is varies widely – it’s not a completely linear equation to set the reward value. The point here is that not indexing the reward potential to the income level of your target audience can be a major mistake. Set the incentives too low – and no one will pay attention; set them too high and you’ll risk overspending. Worse yet, you can create a dependency that will be hard to break in the future. Global marketers should pay particular attention to the ‘reward value’ in regions with large variances in partner reps earning capacities.
Reward Desired Behaviors Over Outcomes
If not designed properly, rewarding only incremental business can create unneeded complexity, increase administrative expenses, reduce adoption and even erode trust – the exact opposite of a desirable outcome. So how do you incentivize growth without “overpaying” for existing business? One way is focus on rewarding behaviors that lead to incremental sales.
- Design your incentives to reward incremental revenue by focusing on the behaviors that lead to net new sales over repeat/renewal business
- Reward incremental steps to the sales not just the sales itself
- Allocate your budget for sales rep rewards to spread across the sales cycle to increase engagement
How might that play out? Let’s go back to assumptions above where 4% of incremental revenue is being rewarded and create a simple rewards budget scenario. Rather then offering a reward for closing a net new deal consider allocating that same 4% to invest in:
- 10% in enablement rewards to promote partner reps certification and/or skills development
- 40% in registration rewards to promote early visibility to partner pipeline by rewarding approved deal registrations.
- 50% sales rewards for incremental sales validated as by the deal registration
Rewarding deal registrations ensures partner sales reps are rewarded while they are engaged with the process. The optimal registration reward value of course would need to be adjusted for the close ratio of approved deal registration.
Again, be sure to make it easy to take advantage of each offer. Keep the program simple, communicate the rewards clearly and automate the process as much as possible.
Bio: Steve Murphy, Founder and Managing Director of Channel Matters, provides channel marketing consulting for technology go-to-market teams in global channel and alliances organizations. A contributor to channel marketing program design, development and deployment for leading technology companies – AMD, Apple, Cisco, Citrix, HP, IBM Intel, Microsoft, NetApp and Oracle - he is a recognized expert in the design and development of channel incentive programs that deliver results