How to Build Your Channel Rewards Budget
Building a channel rewards program requires you to wear many hats, and none are more important than the role of financial planner. Properly designed, a channel partner incentive program will be self-funding with incremental gross margin on the increased sales volume. Calculating the budget begins with the two most important perspectives of an incentive program:
ANALYSIS OF INTERNAL FACTORS
• Revisit your company/program goals
• Determine if the program will be based on incremental sales, competitive
response, growing market share, new product line sales, or sales enablement
• Identify the importance and profitability of each activity or eligible product sale
ANALYSIS OF DEMOGRAPHICS
• Re-examine your participants base
How many participants? Are they likely to participate?
• Reward selection/value based on assessment
of what it takes to motivate participants
How much is enough? Is there an amount that’s too much?
• Estimate your participant “take rate” for the % of eligible
sales that will be claimed. If channel partners must submit
claim forms for eligible sales, then the take rate might be
20-40%. If eligible sales are automatically reported via a
file download from the partner relationship management
(PRM) tool, Salesforce, or other order management
system, then 100% of eligible sales will be reported, but
only 25-50% might be redeemed for rewards. Research
studies show that when participants do not take actions to
report their sales, then the take rate declines dramatically.
Non-exclusive dealers, partners, or agents might sell ten to twenty different brands. Understanding your brand’s share of a typical rep’s quota is incredibly important. If you have a small “quota share,” then you likely have a small mind share and small heart share. Your promotional offers will need to be richer and your communications great to capture disengaged rep’s attention.
Estimated Channel Rewards Spending
Based on percentage of profit contribution that the incentive program will generate, you can determine how much to budget for your channel rewards:
.5 – 2% of sales
1 – 3% of total gross profit
5 – 10% of incremental gross profit
Assuming an annual salary of $60,000:
For 12-month program: 4% of $60,000 = $2,400 incentive
For 3-month program: 6% of 3-month pay ($15,000) = $900 incentive
• Number of participants
• Percentage of participants achieving incentive levels
• Duration of program
• Average award amounts
• Forecasted results
Channel Partner Reward Budgeting Tips
WATCH GROSS PROFIT, NOT SALES
Many incentive advisors focus on sales as the starting point for budgeting. We think that’s dangerous in complex businesses today with wide-ranging product portfolios, varying product mix, and most importantly, sliding gross margin percentages. Some products have higher ticket prices and higher gross margin percentages (like complex, $50,000 software systems). These support larger incentive payouts. Many commodity products in competitive industries (like computer parts or electronics) have smaller ticket prices with lower gross margin percentages. These make meaningful incentives look more difficult.
LOOK FOR MDF
Today, it has become increasingly possible for resellers to get co-op marketing dollars from manufacturers, for Market Development Funds (MDF), for incentive programs promoting specific products.
This one is complex! For accounting purposes, incentive payouts are viewed by the CPAs as additional discounts off the selling price, hence the name “contra revenue.” This charge against net sales is at the top of an income statement, whereas other sales and marketing expenses are “below the line” of gross profit as SG&A (selling, general, and administrative expenses). Many companies allow contra revenue liberally for rewards, so the incentive sponsor may only need to find budget dollars for the incentive support costs.
If you’re looking for more bright ideas on how to build your channel rewards program, download the full Channel Rewards How-to Guide.