Ultimate Guide to Creating a Channel Partner Commission Structure
Creating a structured plan for partner incentives is a great way to keep your channel partners motivated, moving, and improving daily. Channel partners supplement your in-house direct sales teams, adding additional indirect sales reps to your company’s salesforce and driving revenue to your bottom line.
Today, we’ll look at how a good commission program can attract potential partners, how to create such a commission structure for your channel partner strategy, and how to manage your commission program. We’ll also examine various channel programs such as value-added resellers, affiliate partnerships, and referral partnerships.
Types of Channel Partnership Commission Structures
Understanding the nuances of the different types of channel partner commission structures will help you choose the one that best fits your company and its needs. Setting a transparent commission structure incentivizes resellers and providers, encouraging them to increase their own sales and refer new customers to you. The result is an increase to your own customer base.
Today, we’ll examine the different types of channel commission structures, their unique characteristics, and their benefits and challenges.
A commission-only structure is a good fit for companies incentivizing their channel partners to focus on sales and revenue generation, and minimize fixed costs associated with salaries or wages. It can also be attractive to partners who are motivated by the potential to earn a high commission based on their sales performance.
This commission-only style typically consists of the channel partner receiving a percentage payment based on the sales price of the product or service sold. It does not include any base salary.
This structure is often used when a company seeks to incentivize partners to generate more revenue across multiple product or service lines.
It's important to note that some partners may prefer a more stable income with a base salary or hourly rate, and others may not be comfortable with the uncertainty of earning commission only. Therefore, it's important to carefully consider your options and consult with your partners before implementing a commission-only structure.
Revenue commission is a type of commission structure in which a channel partner is paid a pre-determined percentage of the revenue generated by the sales they make.
In other words, the commission is based on the total amount of revenue generated from the sale rather than just the profit or margin on the sale. Revenue commission can be attractive to channel partners who are motivated by the potential to earn a higher commission based on their sales performance.
This is one of the most frequently utilized commission structure for affiliate marketing partners using e-commerce as the primary transaction type. A simple percentage payout of the total cart value is easy for most e-commerce platforms to calculate and report on.
Gross Margin Commission
Gross margin is a similar commission structure to the revenue commission, as it is calculated on the generated gross revenue, which considers the profit of each sale, including the price and cost.
This type of commission structure can be beneficial for companies that are focused on maintaining a strong profit margin, as it incentivizes channel partners to focus on selling high-margin products or services. Gross margin commission can also be attractive to channel partners who are motivated by the potential to earn a higher commission based on their sales performance.
The tiered commission is a popular commission type where a channel partner is paid a different commission rate based on their sales performance or other specific criteria. This can effectively motivate and incentivize partners to achieve higher levels of performance and sales.
In a tiered commission structure, each partner’s commission rate increases as he or she achieves higher sales or other performance metrics.
For some companies, the top tier of this commission is “uncapped,” meaning once the tier is reached, there is no limit to the number of sales a partner can receive benefits on. More on this later.
Combining the revenue and tiered commission structures results in the multiplier commission model, one of the most elaborate types of structures. In this model, revenue commission is multiplied by a commission percentage or rate of the quota.
For example, a partner might receive a base commission rate of 5%, but if they sell a product with a profit margin of 30%, their commission rate is multiplied by a 3x multiplier to give them a 15% commission for that product.
It’s worth noting that the multiplier commission plan can be a fairly tedious process to design and implement.
Draw Against Commission
In a traditional draw-against-commission structure type, a sales rep can draw their commission early, just as the name says. Then, as they earn their commission, they repay the draw. The draw is typically a fixed amount that is predetermined by management. The draw is considered a loan or cash advance that must be recollected by repayment or debiting future commission payments.
When applied to channel partners, this structure can effectively provide them with some income while building their sales pipeline.
Channel managers might even create a draw-against-commission enablement program where the loans are forgiven if resellers use the funds for specific purposes. This is a creative way to provide them with funds to pay for sales team training on using the partner portal, update e-commerce listings, and add “authorized reseller” branding on print materials, social media, and other digital collateral.
Tips for Building Your Channel Partner Commission Structure
As you see, there are many ways to create a commission plan, but regardless of which structure you follow, the following steps are critical in building a successful model.
In the following steps, we’ll look at the channel partner ecosystem and how your commission-based sales model can drive customer success and retention and keep your partner retailers working hard on your behalf.
1. Set a Channel Partner Program Goal
Setting a clear and measurable goal for your channel partner program is crucial to its success. In setting your goals, you should first define your overall business goals using the SMART framework (Specific, Measurable, Achievable, Relevant, and Time-bound). Then engage your stakeholders, including your in-house sales team and other key players, and secure their buy-in.
It’s worth noting that not all goals are about bringing in more revenue right away. Channel partners open doors to new audiences, so think about setting goals and offering commissions based on non-sales events, like bringing in brand new customers or market segments.
Your channel partners will want you to clearly the goals you’ve set for them, how best they should achieve them, and the partner enablement strategies you are putting in place to make it possible.
2. Select a Sales Commission Structure Type
Earlier, we covered the different sales commission structures that exist. Knowing which plan best fits your company and its financial situation is important. Ask yourself if your company can afford to give commission payouts in advance or if they should be distributed after the customer pays. Determine if your products have varying margins to support gross margin commissions or if a revenue model is better. And consider how the goals you’ve decided upon influence your program’s commission structure.
If you find yourself unsure, or perhaps on the fence between two options, you can always select select different commission structures based for different channel types. For example, your affiliate program may have a different structure than a distributor network.
3. Set KPIs and Goal Measurement Methods
Setting key performance indicators (KPIs) and establishing goal measurement methods is crucial in ensuring the success of your channel partner program. Here are some KPIs to know when setting and measuring goals:
- Partner-Generated Revenue: This key metric measures the total sales revenue generated by your channel partners. Comparing this to your overall revenue is important.
- Gross Margin: This metric measures the profitability of your channel partner program. It considers the total revenue generated minus the cost of goods sold (COGS).
- Sales Growth: This metric measures the percentage increase in sales revenue over a specified time period and can be used to evaluate the performance of your channel partners.
- Customer Acquisition: This metric measures the number of new customers acquired by your channel partners, and is frequently used as a metric to establish tiers or bonuses.
- Deal Registration Conversion Rate: This metric measures the percentage of deal registrations that are successfully converted into closed deals and can be used to evaluate the lead quality of your referral partners.
- Market Share: This metric can be used to measure the percentage of total sales revenue in your industry that is generated by your channel partners versus your other pipeline sources (such as in-house teams and other marketing strategies.)
- Customer Satisfaction: This metric measures the level of satisfaction of your customers with your products and services and can be used to evaluate the performance of your channel partners in transparently describing your product and delivering a positive customer experience. This is especially important when evaluating value-added resellers (VARs) and managed service providers (MSPs).
- Partner Recruitment: This metric measures the effectiveness of your partner recruitment efforts and can be used to track the number and quality of new partners joining your program.
By monitoring these metrics and KPIs, you can assess the performance of your channel partner program, identify areas for improvement, and ensure that your channel partners are effectively incentivized and rewarded for their contributions to your business.
4. Consider Involving In-House Sales Positions
In many organizations, in-house sales reps do not interact with channel partners. That’s fine, and it works. However, your in-house team are experts in your product, and it wouldn’t hurt to pass some of that knowledge and support to your channel partners, if reps have the time to do so.
To incentivize them, consider building a commission plan for related in-house sales positions, including channel managers, sales managers, sales team, etc., that tie a portion of their success to supporting successful partner sales.
This works exceptionally well with referral partner programs. With these programs, your partners receive a commission when they refer a customer to you, and they buy something. This process depends on the partner using their credibility to endorse your brand and then on your in-house sales rep to close the deal. A partner relationship management (PRM) system like Relevize tracks the sale and ensures credit is given where it’s due.
5. Set Quota Timelines
One of the last steps in building a commission structure is to set a date or timeline for each goal or commission tier. When you planned out your SMART goals above, remember the timeliness factor? This is where that comes into play. Any experienced sales manager knows that if you give your sales team an unlimited amount of time to achieve a goal, that’s how long they’ll take. Traditional time measurements are recommended for ease of understanding and tracking, such as monthly, quarterly, or annual performance goals.
With sales goals and commission rates defined; partner enablement plans in place; KPIs established; and timelines determined for goal measurement and commission payouts, you’ll be in a good place for channel partner program rollout.
6. Offer Seasonal Rewards Programs
Looking for a little extra motivation for your channel partners at certain times of year? Seasonal rewards programs are your best bet.
Setting up sporadic, time-based rewards programs for your channel partners provides an added incentive for partners to help you achieve your program goals and maximize sales performance. This is especially useful during new product launches or seasonal timeframes.
There are many types of rewards you can offer for seasonal incentives, including:
- Cash bonuses
- Bird-dog bonuses (rewards for the sale of a specific product)
- Gift cards
- Discounts on your products or services
- Invitations to exclusive events
- Non-monetary rewards such as recognition or awards
You’ll want to determine how seasonal rewards are structured on top of the general commission structure. Remember that these rewards should be based on special achievements, such as top channel sales, best team performance, or most sales of a specific product during a season. Another consideration is how often such programs should be implemented, and how they will be communicated to partners.
How to Maximize Your Commission Structure Results
We’ve seen commission structures across countless businesses, and are happy to share some of the best practices we’ve noticed for creating and managing channel partner commissions.
Keep the Commission Structure Simple
As you determine your commission structure, it’s important not to overcomplicate things. Yes, you want everyone involved in the sales cycle and commission structure to be onboard and understand it, but you also want to ensure it is easy to understand.
If you’re using a tiered or otherwise complicated structure, you may even want to work with a graphic designer to create a visualization of how your commission structure works.
It’s important to note that your legal department will probably want to fill the partner agreement with lots of details that turn your simple structure into pages and pages of legalese. That might be necessary from a legal standpoint, but communicating how the structure works to your partners in a lot of legal language can drive away potential partners.
So when talking to potential partners, keep it simple. If they have questions for the legal department, you can always set up a call at that point. (Most won’t.)
Communicate Goal Progress in Real Time
In-house sales reps rely on dashboards for real-time reporting to track their progress toward their KPIs, target and stretch goals, and overall company performance. Your team members are likely using a customer relationship management (CRM) system from a software company like Hubspot or Close.com. Still, it’s unlikely that you’ll want to invest in licenses for your channel partners on such a system. The channel partner equivalent to a CRM is a partner relationship management (PRM) system, which allows for real-time reporting without the added expense of per-partner licenses.
When working with your channel partners, it is important to communicate goal progress regularly, ideally using real-time reporting. It is always best for all the channel partners and salespeople alike to be informed of the progress. This will help them understand exactly what they have yet to accomplish and motivate them to reach their goals.
Offer Uncapped Accelerators
Uncapped accelerators are rewards that kick in when a channel partner surpasses their performance targets, typically in the form of additional commission or bonus payments. The "uncapped" aspect means there is no limit to the additional reward a partner can earn for their exceptional performance. As mentioned above, this can also be the “top tier” of a tiered commission structure plan.
To set up uncapped accelerators, take the established clear performance targets associated with your standard reward structures. Then, determine what additional incentives you will offer when your partners exceed their performance goals and how those incentives will be calculated.
You don’t always have to provide uncapped accelerators as monetary rewards, either. Some companies reward partners in their uncapped program with added recognition, including a priority listing on their website’s partners page. This often reinforces their strong performance with more leads and gives other partners a goal to strive for. You also encourage continued performance by making the priority partner status dependent on maintaining superior sales.
Utilize Channel Sales Managers
Channel sales managers (CSMs) play a critical role in managing a company's relationships with its channel partners. CSMs are in-house team members who are responsible for building and maintaining relationships with partners, providing them with the support they need to succeed, and ensuring they meet their sales targets. They are also responsible for onboarding new partners and ensuring they understand your commission structure.
Channel sales managers also serve as an important connection between channel partners and in-house team members. Not only are they the ones to receive partner requests for things like marketing collateral, end-customer support documentation, and process clarifications, but they will be the first to hear about commission questions, payment workflow challenges, etc. Often, CSMs are able to do their jobs best when provided a channel partner management tool, like Relevize.
Regularly Review Your Commission Structure
Keep tabs on your commission structure over time. Make sure that the goals and commission tiers you’ve set are attainable, or your partners may become frustrated and end the partnership.
When reviewing, start by analyzing partners’ results and successes for the time period. Look at your sales data, KPIs, and other metrics to identify areas for improvement.
Specifically, look for goals that are reached by all or most partners. Are they too easy? What about goals that partners can’t seem to come close to reaching—are they too difficult to reach, or do your partners perhaps not have the tools or materials they need to reach them? Remember that different partners have different target audiences, so some may excel in some areas that others do not.
Make calculated decisions on where to provide more enablement and assistance, and where to adjust your program goals. When making changes to your commission structure and goals, we advise communicating those changes out well in advance, as this may be met with a strong reaction from partners.
Make Channel Partner Program Commission Payouts Easy
Remember that channel partners are an extension of your sales team, but unlike in-house sales reps, they don’t rely on you for a regular paycheck. Therefore, it’s important to keep channel partners motivated, adequately compensated for their sales efforts, and paid on time and easily.
Some partners will have relationships with multiple providers, coming to the table with some prior experience. In our free eBook, The Secrets to Building Strong Channel Partner Relationships, you’ll learn that not only are your partners are very likely also promoting your competitors. Growing your channel partner program requires understanding what channel partners want out of the relationship. Establishing a solid and rewarding commission structure is vital to attracting and retaining high-performing partners!
Relevize helps channel partner program managers better manage their partners. With Relevize, you can manage leads, automate emailing and scheduling, and track sales activities to ensure credit for each closed deal is properly managed. Sign up for a free demo of Relevize today and get your partner program rocking!