Five best practices to get sales partnerships right

Most businesses look to partnerships as a way to scale-up fast and test new sales models. This is especially the case when they want to access new markets, leverage a skilled sales force or achieve synergies. However, when two strong parties start promising discussions, they often break up in spite of the obvious potential for collaboration. Worse, signed partnership agreements can quickly end up being abandoned or in tatters. One reason for such unexpected outcome is failure to recognize that parties have very different motivations: the party upstream is seeking market share acquisition, while the sales partner downstream is looking to maximize profit.

How can we reconcile these differences and is there a way for unlocking these opportunities? 

I think there is. So let’s look a bit deeper at this dynamic and how five best practices can help us produce better alignment and collaboration.

When two parties selling to each other along a vertical chain are dominant in their respective fields they have market power. Hence, they are able to push pricing above their marginal cost. This means that each tries to optimize price and sales volumes in a different way, which can lead to serious disagreement. The basic story is that the downstream party wants to extract the maximum possible profits immediately while the party upstream seeks to increase market share through lower end user pricing. Without proper alignment, the downstream party can end up aiming for an end user price that is significantly higher, and a sales quantity that is significantly lower than the optimum level for the principal.

Partnerships have a better chance of succeeding if parties levearge these five simple but effective practices to structure their discussions.

Let’s explore these one by one.

1.Making the downstream market as competitive as possible

The first best practice is for the upstream firm (the principal) to make the downstream market as competitive as possible. This way it reduces the risk of the downstream party pricing excessively high. This can be done by appointing multiple of resellers in each territory in such a way as to balance healthy competition and market opportunity. If the product or solution being sold is still relatively new, and the market size is still modest but growing, it is good practice to appoint multiple resellers progressively in a commensurate manner to the level of customer awareness.

It is also good practice to use a selective distribution model with criteria set high enough to have the right number of partners developing the market at any given time. 

Temporary exclusivity arrangements can motivate a key player to start early market development and achieve a first mover advantage. However, these arrangements are best kept to very short periods of time and are viewed as solutions of last resort because they give too much power to one party.

Another recommended solution is for the principal to have a direct route to market which offers the same product or solution at a recommended price -RRP. The goal here being to set standards for customer experience and pricing, but not to go after the market directly. It is often more expensive and time consuming for a principal to take on this task single handedly. Hence why partnerships are attractive.

2. Imposing sales quotas or quantity forcing

A second method for dealing with this marginalization challenge is quantity forcing or the establishment of sales quotas. The idea here is to impose a sales quota on a downstream sales partner so that they cannot reduce their output in an attempt to raise margins. The best partnership arrangements I have experienced so far have been those where the sales partner was able and willing to commit to quarterly or yearly numbers that I could rely on in my territory plan.

Quotas depend on the size of the opportunity, and the speed at which market is developed. This brings us yet again to the importance of discussing these issues early on and checking for alignment in expectations.

3.Using progressive volume rebates or pay offs

A third method that can easily be combined with the previous point is the use of volume and performance rebates. This is a softer but effective way to focus on quantity. Volume and performance rebates allow a principal to give incentives in a progressive manner commensurate to target achievement. Rebates can be linear or a combination of linear and more accelerated reward for the highest level of achievement.  

Performance rebates can also be more refined, aiming to drive more subtle customer experience goals. These include NPS, return rates, churn to name a few. They can also change and evolve periodically depending on customer feedback and needs.

Volume rebates also have the advantage of preventing sales partners from splitting their potential business between competitors. In this case they have to group their business with one principal to achieve the highest possible return on investment. This leads to specialization and long-term commitment.

4.Extracting investment commitment

The fourth method is to request an Investment commitment. This locks the partner in specific and approved market development activities and avoids free riding. It prevents any one partner from benefitting passively from the investment of others (including the principal).

This point is all the more important if the market potential is substantial and the number of sales partners reduced.

5.Taking control of the sales environment and customer experience with preconditions 

In more sophisticated settings, or when the product is new, the principal may require more control on the sales process and customer experience. 

By owning and investing in these essential tasks a principal can guarantee proper execution and better customer acquisition while ensuring that funding is used on the right kind of activities. 

For example, in the case of physical store partnerships, these elements are the main gears of the operating model: inventory, staffing, space and profit sharing. Inventory relates to who owns the stock and plans the assortment, staffing & space relates to who employees the staff and runs the space, and finally how the profit is shared proposes a combination of rent/ sales commission. Principals can agree to own inventory for example, or employ and train staff, or even handle the refitting of the store space.

For digital partnerships, fulfillment to end customers and control over experience alongside profit sharing determine the operating model. Fulfillment relates to how do we deliver to end consumers, merchandising & experience relates to who provides the content and trades on the website, and finally profit sharing relates to the mix of listing fees and commissions. Principals can own the design and update of the website content, and can also handle fulfillment and customer invoicing and data collection.

Similarly we can explore B2B models and break them down to identify the essential tasks. A simple way to think about this is to consider the partner as a lead generator or source of new leads. The partner may be trained to attract, engage and qualify the leads, then pass them on to the principal who will handle the proper sales process. This helps generate a funnel where the principal has good controls on the sales process and conversion process.

Once the principal is satisfied that the sales process and customer experience are of a certain standard, he can adjust the partner margin to take into consideration the investment made in this respect. Often, when the uncertainty on quality of execution is resolved it becomes easier to discuss and determine partner remuneration.

It is virtually impossible to model every kind of partnership negotiation, however I have found that over time these issues crop up regularly. They help build a simple but solid framework to achieve common ground and create alignment between strong, dominant players.