Rethinking Channel Economics

We unpack why channel economics are shifting and how that change is creating real friction between vendors and partners. We get practical about what actually drives partner behaviour, how partners protect profitability, and why simplifying programmes often beats adding more incentives. 

• Channel economics changing fast as buyer expectations shift and AI tokens emerge as a transaction currency 
• Vendor margin pressure driving scrutiny of channel investment and partner payouts 
• Discounting as a sales tool rather than partner margin 
• Partner profitability coming from value-added services in the channel Goldilocks zone 
• Channelnomic's ROCKER methodology to define the partner mission and diagnose program fit 
• Customer experience as a scalable growth lever through partners 
• Relationship with the partner manager and ease of doing business outranking incentives 
• Testing incentives to reduce leakage and prove outcomes 
• Program posture framed as playing offence versus playing defence 
• AI automation risks when it replaces human relationship work 

Channelnomics - https://www.channelnomics.com/

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Transcript

Maciej 0:53

Hello, welcome and thank you for tuning in to Channel Voices, the podcast for future channel leaders, where we learn the ins and outs of partner ecosystems through casual conversations with channel professionals from a variety of industries, partner types, and geographies. My name is Maček and I'm your host. Larry Walsh, welcome to Channel Voices. Hey, thanks for having me. Thank you for joining me, Larry. Would you mind introducing yourself quickly, telling us a little bit about your channel background, please?

Larry Walsh 1:45

Oh uh, okay, it's people who know me, this is talking about myself is probably my least favorite thing to do, but I'll give it a shot. So I've been in the channel now for 20 years. Uh or coming up in 21 years. Uh, and I remember it vividly because I started it on the 4th of July in 2005. And it's uh it's been a journey, to say the least. You know, I started my channel career at Var Business, uh, which is under a company that was uh that is now the channel company, uh was the the publisher and editor-in-chief of uh of an online channel magazine called Channel Insider for a while, and then I started Channel Nomics. And uh Channel Nomics is has evolved over the years uh since we were founded in 2010, but we focused primarily on channel research, market trends, um deep analytics and probability modeling, uh, and translate all that into strategy, program development, and go-to-market optimization. And so we we're the um, I like to say that we broker in intelligence and information uh to enable channel teams to do their jobs better, but we're also here to provide the the hands-on support to help make uh channel programs you know first establish them and then run them as best as best the vendor can.

Why Channel Economics Are Shifting

Maciej 3:11

Fantastic. Thank you. And Larry, especially recently, you've been talking quite a bit about you know, rethinking channel economics. When you use that phrase, what exactly do you mean and what has changed most in the last few years?

Larry Walsh 3:29

You know, it's an interesting question you ask. I mean, you know, because it it's kind of ironic. We named the company channelics because of the crossover between technology and the technology channel and business, but channelomics also applies to any industry. We do focus mostly on IT. We're agnostic like that, so we we're versed in every go-to-market model there is. But the economics are changing and they're changing rapidly. Um, right now we're in a phase where the things that used to make vendors and partners money through different uh indirect relationships, it's getting harder to do that on both sides of the relationship. Um, at the same time, the customer expectations are changing. What they're looking for, what they need, how they buy, those motions and their thinking around that are also changing, changing substantially. And over the next several years, you're gonna see more of a move towards using things like the tokens that are used as the as the economic drivers behind AI to become more of a currency in the transactions. You know, so are we buying licenses or are we buying tokens? Um, we need to take a lot of that into consideration, but the reality is today is that there's such an imbalance between what the vendor community thinks they're getting for their investment versus what the partners think they're getting for their investment, and where they're aligned and divergent is really causing the friction within the channel today. That's why we spend so much time talking about it and researching it.

Inflation Margin Pressure And Discounts

Maciej 5:05

Gotcha. Thank you. From from your point of view, like what are the biggest economic pressures that vendors are maybe feeling in in their channel motions right now, and how are those showing up in the in the partner programs and maybe incentives, especially as as we're talking about those economics?

Larry Walsh 5:24

Oh wow, you you really don't uh ask easy questions now, do you? All right, so at all risk of getting myself in trouble. Um we are in an inflationary period. Uh and and it's not really inflation, tech inflation is not happening necessarily just because of the cost of rising cost of inputs. Um, yes, that is happening. That you know, you can see that uh going on with uh the microchip uh the memory chip shortage that's causing an inflationary knock-on effect. But there's also another one, which is there is such high expectations for technology companies to deliver high returns that that's also driving up their cost, their pricing, their margin, uh their margin discipline, or at least what their margin expectations are. And so when they start falling out of sync, what it's what do the vendors do is that they start looking, well, where can we contain our cost, our margin compression? And sometimes that happens more times than I would than I would like happens within the channel. They look at the channel and say, well, what are the partners actually doing to get this? Uh, and they also conflate and confuse uh what they're giving as discount as partner margin. That's rarely the case. Discounting is a sales tool, uh, markups is how partners make money. If they're not getting, if they're not, if they're not, if they're the ones selling the paper, then that's how they make money. If they're not selling the paper, then they're basically to a referral, and the re and the strike price determines what the return, what that, what that referral rate or that commission rate is. And then you get back-end incentives, which is about profitability, not necessarily about compensation or you know, commissionable compensation. Anyways, all this adds up to is that the vendors are getting under a lot of pressure to cut their their channel investments to help you know reduce costs, improve their or maintain their their margins, and that's having an impact on the partners. And the partners feel that squeeze because they can't necessarily pass that what what they read as a cost increase on to their customers.

Maciej 7:32

Right. And that was going to be my follow-up question in as in as it pertains to the partner community. Because that squeeze is definitely very well felt by them. With with that in mind, like how would they make more money? How can they generate that additional revenue if it isn't through those uh through those margins, especially in today's market and the inflation that you mentioned earlier?

Larry Walsh 8:00

Well, it's always been the same, the same driver has been from, like I said, going back my 20-something years in this business, recognize that on day one, we I know it's not in vogue today to say value-added reseller or bar, right? You know, we still use it, but you know, it's sort of like, oh no, there's solution providers, there's service providers, they're you know, whatever, whatever we want to label them. But there is some creative value added on top by them to on top of the of the vendor product and the vendor service, they it allows them to generate revenue. That still is the case today. One of the first things I learned when I came into this business was where there's mystery, there's margin. And so the optimal zone for where the partner can make money uh by through these value-added options, whether it's a managed service or a professional service or some other consultative service, there's a there's a definable zone where the technology is not so complex that the vendor can only do it themselves, and not so simplified or commoditized where the customer can do it on their own. In that zone, we call it channel the channel goalilocks zone. Within that zone is where the partners have the optimal opportunity to make money through add-on services.

ROCKER Methodology For Partner Mission

Maciej 9:23

Going back to those situations where vendors really, you know, can't afford to invest as much in the channel as they as they used to. Like if when you're sitting down with you know a vendor executive team that are really worried about partner profitability, like what are the you know, the first two, three questions that you that you typically ask them to diagnose whether their economic model is actually partner-friendly?

Larry Walsh 9:55

That's again, it it's it's something that we don't spend enough time on. Um, and I'll tell you, I'll walk you through the methodology that we use. We developed the methodology we call Rocker. And Rocker is a means of defining the partner mission. We Channelomics, we believe that if for channels to work, partners have to have something to do. So that there is something, there's a clear expectation of the vendor and how the partner interacts with them and interacts ultimately with the customer. So I won't bore you with all the details of Rocker because there's six questions we ask through it. The first two are the most important. And it they trip up the vendors every time. Because we say, what is it that a partner can do that you can't do, and what is it that a partner can do that you don't want to do? But there's a catch to those questions is that you cannot answer, you cannot answer generate sales and revenue.

Maciej 10:52

Okay.

Larry Walsh 10:53

That is obvious. That's what everyone wants, and that's a baseline. But if you can say, yes, we need them to perform you know, tier one services or level one services, we need them to perform to consume our technology and deliver services at scale to our customers or to our mutual customers. If we need them, because we need them for staging and support, we need them for design and implementation, you know, things like that. These, you know, it because it's really about driving the customer experience. And if we want to create customers and you know, we need to focus in on the customer experience. If the customer has a solid experience, then they will be, they will, they will remain a customer, which is what everyone wants. Um, you know, one of the things that that is that we miss on this, because everybody thinks that that customers are price sensitive, yes, but they want value. They don't necessarily want, they don't necessarily equate value to paying less. They equate value to what they get more of. And there are you know 67% of customers, and in some categories, it's as high as 87% of customers will pay more for a better experience. So, how do you deliver a better experience at scale? You do that through partners. And so that's why we ask those two questions.

What Really Drives Partner Behaviour

Maciej 12:21

Perfect. And when I think about you know partner motivation, and a lot of vendors are doing that still through those, you know, types of incentives that we have seen for many, many years. Think about rebates, spaffs, or MDF. In this in today's reality, are all of these still valid? Do they still work from what you see, or do they need to be maybe redesigned, or maybe some of them need to be retired?

Larry Walsh 12:55

We get quite we get asked this question a lot, and and it's very specific when it gets asked. Like, does this incentive work? Does this benefit work? And our answer is always the same. Sure, maybe okay. And you know, because it's not one thing, it's it's a uh God, anybody who's ever heard me talk or had the misfortune of having a drink with me at a bar will know that I I really do. I just I despise the word ecosystem. And it's not because I don't believe in ecosystem or the ecosystem effect, it's because we've bastardized the word. And if you think about what an ecosystem is, is an ecosystem is a collection of different different organizations working together in concert.

Maciej 13:49

Okay, that's right.

Larry Walsh 13:50

Incentives are the same thing. You have different resources, different incentives that come together within a program that create the lift effect that helps partners be successful. That's you know, so it's not one thing, it is it is a collection of things working in concert that drive partner behavior. Now, if you look at this from an impact perspective, where do incentives, profitability incentives, typically fall in terms of the in terms of the ranking order for partners? Usually third or fourth on the list when they're evaluating their vendors or they're saying what what influences their behavior. Number one is the relationship with their account manager or with their field salespeople, you know, because they're the ones that are in constant contact with each other. If they have a good relationship there, then that typically creates a thriving relationship that benefits both organizations. Number two on the list consistently is ease of doing business. The easier it is, the less friction there is in the go-to-market, the more likely the partner is to engage. And in fact, our research shows that vendors that are easier to do business with typically have three X of partner performance than those that are more difficult to work with. And those that are more difficult to have more friction within their programs, you know, they tend to pay 30 to 40 percent more in incentives to get the same outcomes. Wow. So there's so when we talk about this in terms of incentives, which work, yeah, can we reorganize them? Can we re re-engineer what incentives look like? Sure we can. I always recommend that when you do so, go through some rigorous testing to make sure that the incentive is having or is at least working the way you want it to work. Because if it's not, if you can't demonstrate how it works and what the outcome is going to be, then there's two things that could happen. One, it will be a question about whether or not it's worth the expense. The second thing is if it can't be managed, then you run the risk of leakage, which then gets you in more trouble. Um, but I yeah, can we, you know, come back to your original question? Can we reimagine incentives? Sure we can. But last week I was speaking at a channel scaler event in California, and this came, you know, I it wasn't me, it was one of the panelists with you know, uh, one of the channel chief uh channel scaler customers who said it if you need a decoder ring to decipher how a program works, you're doing it wrong. And I really I love that line because that speaks that speaks directly to that friction issue that I was talking about.

Offence Versus Defence In Programmes

Maciej 16:30

Thank you. And yes, that ease of doing business, simplifying partner programs as a whole, not just how incentives work for for the partner to understand it very quickly, it is it is so important. And that's some of the conversations that I'm that I'm having with customers and prospects every day. But to get this to simplify the complex is hard, right?

Larry Walsh 16:57

Oh, yeah. Oh, well, it it is, and I'll give you an example. Um we were working with a company, one of our clients, and we we talked about this. You know, they they wanted, they weren't getting the level of partner engagement that they were expecting. Um, they were actually seeing sales decline, and so they brought us in, we looked over their program, we analyzed their partner data, we talked with the partners, and we came back and we told them your program was designed to play defense. Your program was all about not paying partners. And what I mean by that is that in order for a partner to realize an incentive, whether it's a front-end or a back-end incentive, they had to jump through hoops to get there. It was very difficult. Whereas we said, you know, if we remove these barriers and let your program run a little bit wider open, yes, you're gonna run the risk of a little bit of leakage and bad behavior, but you're going to gain because you're gonna move faster and the partners are gonna have greater clarity and they're gonna see greater recognition faster, which will then stimulate them to do more. And so I think that's you know, when we talk about our posture and working with partners, that's the other thing we have to look at is like, are we playing offense or are we playing defense? And which one is gonna be more advantageous for us?

How Top Vendors Balance Value

Maciej 18:22

Excellent. And when you look at the vendors who are you know getting the channel economics right today, what what actually differentiates them from the others? Is it on the program structure? Is it on how they select their partners, how they measure things? What are your observations?

The Hidden Complexity Of Channels

Larry Walsh 18:44

Well, first of all, I I I want to dispense with the notion of this partner selection. Yeah, it's nice to go after. I mean, whenever we hear the vendors talk about, you know, let's go after these partners. Well, what does that actually mean? Well, they're going after big partners because they perceive bigger partners are the ones who will drive the most benefit. And really, we need to have a better idea of which partners, regardless of their size, align better with our go-to-market mission and our customers. Um, but what are they doing best? The ones that get it right, well, they have a balance in the economic equation. So when you look at the way we look at it, is there is a there is a cost of doing business associated with a vendor. So a vendor may have a stack of front and back end incentives, and they'll call you know the output of that to the partner, well, that's your profitability. Plus. Okay, well, plus means that there's something else that comes after. Again, come back to my two questions about what can partners do. And so if the partner's benefit does not come, you know, have some level of balance with the vendor's benefit, then it's not going to be it's not going to be equitable. It's not going to be advantageous to the partner. If a partner had to survive purely on the front-end and back-end incentives or front and back end compensation, they're probably making 15, 20 points. Well, 15, 20 points on a on a product sale that's already been greatly discounted isn't a lot of money. And they have to cover their full operating load out of that. So they absolutely need to have things that they're selling on top of it in order to make it work. And so that's where we talk about creating that balance.

Maciej 20:36

When you think back those nearly 21 years, what's the one thing that you you wish you knew before you started your career in channel?

Larry Walsh 20:47

Well, uh, I wish I knew there was a channel. Uh and I think that that's the and like as much as we all live in it, we're immersed in it, the average person doesn't know what a channel is or what partnerships are or why they how they work. I I think it became visible to people during the pandemic when they they showed up to their local stores and all of a sudden there weren't things on the shelves that they thought about. And you know, you don't buy, you know, you don't buy paper towels and canned goods and toilet paper from the manufacturers. You buy them through intermediaries like the retail stores. And when I came into the channel, I really didn't fully understand or appreciate what the channel was or how it operated. And and I remember, you know, even when they they first explained it to me, I started whiteboarding, okay, well, this is how it works. And they said, yeah, no, no, no, that's not how it works. You know, that's just too simple. And uh it is, it's it's deceivingly complex, you know, because it looks simple, sounds simple, it's not easy. And there's a there's an absolute need for it. Whenever I hear somebody say cut out the middle man, I I kind of twitch a little bit. I was like, you know, there are places for that. We you know, channel nomics, we have a um you know a model that describes the Goldilocks zone for for having channels. And that's where the complexity is too too great for the customer, but not too great for a partner to master. And you know, and there are there are there are products out there that that definitely don't require a Partners to to uh to sell or to support, but there are many more out there that do. And I think that whenever I hear somebody say cut out the middleman, it's it's doing a disservice to the customer.

AI Tools Versus Human Relationships

Maciej 22:43

Right. And Larry, on the previous episode, I hosted Pablo Hanono. And as it is on this podcast, every guest leaves a question for the next guest while answering the question from the previous one. And Pablo left a question for you, and it goes like this. As AI takes over more of the day-to-day tasks in partner programs, do you think partners will still want that personal touch from a real partner manager, or will digital tools and chatbots be enough to keep those relationships strong?

Larry Walsh 23:19

Well, Paulo, he's he's usually asking me what book I just read. So this is a this is a a welcome change. Look, it's a good question. I I there's channel nomics, our research shows that the two greatest drivers of partner behavior and partner performance. Number one is the relationship with their account manager, whatever we may call that, a channel account manager, a partner, you know, business manager, whatever it is. Uh, the second one is easy to do in business. You know, how simple or how difficult a program is or the relationship is. Uh incentives is typically third or fourth on the list. So I I hope that we are we stay true to what we say about AI. AI is going to free us from drivework and enable us to spend more time with people, as people. Uh as a friend of mine, Liz Cope, uh says, you know, you know, automate - de humanize. But I also fear that the the people who are paying for AI have a different set of expectations. And so they are going to I I think there's going to be a lot of pressure to use automation to replace a lot of the human interaction. And I don't think that that's going to be healthy for anyone. I think they're going to I think we're going to see a lot of, they won't call it experimentation. They'll call it innovation. And when it fails, it'll revert back to experimentation. Oh, we experimented with this, it didn't go well, so we're going to go back to the old way. That's kind of how I think this is going to play out. Uh, that's that it's it's not gonna I and I don't think you know entrusting AI to do the work, that personalized work of humans is not a is not a good good use of it. But I think the the company, I think the vendors are gonna have to experience before they actually believe it.

Maciej 25:17

Got it. Thank you very much for answering this question, and I'll let Pablo know that you were the one answering it, and it did not include the last title that was on your read list.

Larry Walsh 25:29

If you want, I mean it's it's my reading list is extensive.

Maciej 25:34

Give us give us the last one you read. Why not?

Larry Walsh 25:36

The book I read over the weekend was uh The History of Money by uh David by David McWilliams, good Irishman. Um and absolutely I highly recommend it. It's a great book on money being a catalyst for innovation and development of humans and society. It's absolutely a very good read.

Hyperscalers Marketplaces And The Future

Maciej 25:58

Excellent. Thank you for the recommendation. Yeah. And Larry, just as Pablo left a question for you, would you mind asking a question of our next guest, please?

Larry Walsh 26:09

Yeah, I mean, like I'll give you the question I frequently get is you know, what's the role of partners in a channel increasingly dominated by hyperscalers? Uh, and it's not just hyperscalers. You know, I I tend to we tend to look at the hyperscalers because of the attachment of their cloud platforms as a reason for treating them differently, but it really is about marketplaces and automated sales. And we know that the customers are the research we've done here at Channel Nomics, we've seen it is that the customers are increasingly gravitating towards marketplaces and digital sales platforms as a uh not just for convenience, they just have a an inherent mistrust of you know salespeople and traditional sales processes. Uh, and we're also seeing enterprises overcommit to the hyperscalers to create basically bank accounts that they can use to spend on other things. So, what will be the role of partners in a in a channel that will be dominated by hyperscalers in the next few years?

Maciej 27:16

Excellent. Thank you, Larry. I appreciate you coming on the show. Thank you so much for this great conversation. Wishing you the best. I know you travel quite a lot. Stay safe out there.

Larry Walsh 27:29

Thanks so much. Great to be with you.

Maciej 27:35

Thank you for tuning in to this episode of Channel Voices. I hope you enjoyed today's conversation and gained valuable insights. Don't forget to subscribe, rate, and leave a review on your favorite podcast platform. Every bit helps us grow and reach more future channel leaders like you. Thanks again, and we'll catch you in the next episode.