What Does It Cost to Manage an Indirect Channel?

You would think the answer to this question would be straightforward. It’s not. No two companies are organized the same way, account for costs the same way, or use channels the same way. Also, many companies are reluctant to share this information. Consequently, building a large database of comparative costs is virtually impossible. Trust me . . . I’ve tried. Nevertheless, over the years I’ve collected bits and pieces from my clients.

To make sense of channel management costs it first helps to understand the different types of channel structures. I’ve found that these vary from formal structures, typically with a centralized management team, to informal structures, typically managed ad hoc by the regional sales force. I mostly see the formal structures in the technology industry. They tend to have channel tiers (e.g., Gold, Silver, Bronze) with benefits tied to a comprehensive set of partner sales, marketing, training, certification and support programs. Also, if large enough — e.g., over roughly $100M in indirect channel revenue — they usually have separate direct and indirect channel salespeople (assuming the company sells directly).

I see more of the informal structures in the industrial market, where, arguably, product and market trends are less dynamic. These informal structures often eschew tiers, but may offer varied discounts to partners based on sales volume (rather than functional performance). In many of the informal systems the same salesperson that sells directly also manages the indirect partners in his/her sales region. In general, the informal structures have lower costs because they have a less comprehensive set of programs and fewer people tracking and managing these programs. Unfortunately, in these informal structures the direct and indirect costs are blended; allocating the costs would take a team of accountants (and arbitrators) a very long time.

So, I’ve looked at the more formal structures. What I’ve found based on my informal surveys is that the (centralized) channel management team costs the company about 0.75%-1.0% of indirect channel revenue. This includes salaries, benefits, systems, overhead, consulting/research and other expenses. These are costs associated with the (non-sales) people that manage the tiered structure and all the associated programs. These costs include management of any co-op/MDF fund programs, partner portals, other channel communications, deal registration programs, training and certification programs, annual partner meetings and/or advisory boards, channel research projects, etc. The actual monies paid out for co-op/MDF funds would add another 0.5%-1.0% on top of the management costs. In addition, companies incur the costs associated with the channel account managers (CAMs), e.g., the quota-carrying sales team. The salaries, commissions, overhead, and travel expenses of the CAMs adds another 3%-8% (of the indirect channel revenue). This sales cost estimate varies more due to the use (or not) of wholesalers and the presence (or not) of large dealers or retailers (where economies of scale push down the selling expense).

These numbers still exclude some important cost categories associated with indirect channels, most notably inventory, shipping, insurance, technical support, etc. Still, adding the figures I do have, means that managing indirect channels costs roughly from 4% to 9% of the revenue generated from these channels. In informal channel structures, I’m only guessing, but I think the figure could be as little as 2% (through OEM channels, for example), but more like 4%-5%.

If you’d like to discuss, debate or share your figures (I’ll sign an NDA!), please drop me a line.

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