Feature Article - July/August 2020

Ready for the Green Light

Channel Partner Incentives Set to Adapt in the New Normal

By Joe Bush

Smith said the exploration phase's key quest is to understand the target audience's capacity for increased sales. Some customers have greater room for growth, for example, so it's important to segment the customer base to figure out where the best returns are.

"It could be across the board and everyone can participate, or you can make very specific invitations or very specific criteria to target a benefit to a specific customer segment," said Smith. "You can be very surgical about who participates."

Neeley said before the strategy and tactics begin, stakeholders must know the program goals, roles of the people you need to influence and the budget. For instance, he said, if the goal is to get a new product into the marketplace, a company has to get the attention of the channel partner but make it aware of the new product and its benefits to its customers.

"That means spending more resources on communications and training," said Neeley. "Compare that to a goal of increasing market share for a well-known product that is currently in second place. To achieve that goal, you might focus program participants on targeting users of a competitor's products and switching to yours."

Neeley said it's much different getting the time and attention of a company owner to gain inventory space for a new line than it is to encourage a phone rep to offer customers who ask for one brand of paper if they're willing to substitute another.

"The role of participants who can influence your goals is key to your strategy and tactics," he said. "Participant income is also key to the award investment you'll need to incent the new behaviors."

Neeley uses a simple formula to think about award payout and its impact on behaviors. He said that to drive performance, participants need to see an opportunity to earn 3% to 5% of their total program period compensation. For example, a participant earning $100,000 annually would require an opportunity to earn $750 to $1,250 during a quarterly program to capture their discretionary time and attention.

"This doesn't mean everyone in the program has to earn this much, just that participants must see this as an earning opportunity based on achieving a reasonable and attainable goal," he said.

A different Neeley scenario highlights how to choose which channel partner personnel would make the most impact on a company's goals. Suppose a company wants distributors to boost purchases by 10% from July 1 to December 31. The distributors are non-exclusive, and most carry a competing product. Most also split their purchases between the company's product and the competitor's. Each distributor location has a manager responsible for buying inventory for their location. That manager could most directly impact the location's purchases fastest.

The incentive program might set a goal for each location manager based on their past purchases and reward them for achieving and exceeding that goal based on their purchases between July 1 and December 31. On average, the goal is 10% over their previous purchases, but that could be adjusted based on the manager's total volume with the company.

"It's easier for someone currently doing lots of business with you to grow by a smaller percentage increase that translates to big volume," said Neeley. "In contrast, a location doing a smaller volume with you might need to grow a larger percentage to justify the award payout to the manager."

In this simple example, managers achieving their goal might earn $750 in points redeemable for awards. Neeley suggests including some additional stretch levels to encourage greater participation—110% of goal earns $1,000 in points, 120% earns $1,250.

Back to Smith's methodology after exploration, envisioning and execution. Envisioning includes concepts for the program based on the partner profiling, while execution includes marketing communication and onboarding.

Smith said if the target for motivation is a partner principal, the rewards should be for the entire company, such as education or training or reinvestment in the partner through equipment purchase discounts, for instance. If the target is commissioned employees, rewards should involve recognition, entrance to a club or status, or travel with a partner on a trip during which they're recognized.

In concert with targeting of personnel to best reach a goal, a company must decide in which segment of its customer base to invest its efforts. Smith divides customers into 20-60-20 groups: the top 20%, the middle 60%, and the bottom 20%. The top 20 has to feel like it's appreciated and not being ignored while a company tries to get more from the middle 60, said Smith.

"That middle 60 has that capacity to shift additional purchases or there's a lot of discretion on where they're going to end up pushing their future purchases," said Smith. "They're giving me lesser volume (than the top 20), lesser frequency."

Smith said profiling is crucial in prioritizing focus. He gives an example of a customer that spends $250,000 yearly on equipment, but just $100,000 with the company Smith is advising. He knows from profiling that the customer has a capacity of $100,000 that could be switched to Smith's client.

An example strategy, said Smith, would be to offer a reward point for each dollar the customer spends up to a goal set by the program, then 5 points for each dollar spent once the goal is attained.

"I'm willing to invest in that because my incremental gross margin will cover the reward value as a percentage," said Smith. "It's about understanding who your customers are and evaluating what their capacity is and putting together an incentive and communications to really engage those customers to give them a reason to shift more of their purchasing power to you."