New Ways To Fund Your Channel

A warning! Some of this discussion will be about accounting, but don’t give up immediately; I promise you’ll learn something to your advantage!

When I talk to Channel Marketing Managers across many vendors, they all complain about two things:

1) There’s never enough money to fund their partners

2) That budgets have been cut again.

In this article I’m going to provide a couple of ideas of where to go for new funding and how to use the funding you have more effectively.

It all comes down to rules. Let me explain the basic rules so you can understand where they apply and where they don’t. To begin, most companies, certainly the big ones, are publically traded and have to worry about what their financial reporting looks like as their numbers are used by stock markets to define the value of the company through its share price. Even private companies will want a good set of numbers to report.

The Basic Rule:

That’s pretty easy, right? Let’s take a more detailed look, taking into account a few shortcuts.

In this case I’ve added the idea that the revenue you care about is after any discounts and costs. Costs include: the cost of making your product, staffing, and marketing expenses. There will be lots of other things in there, but let’s not worry about them in this case, or the fact that this example company is very profitable.

Now I’ve introduced some real numbers into our fictitious company, let’s get to the exciting stuff- the ratio of costs to revenue. In this company we have a 10% marketing expense. You’ll see that if you start spending more marketing expense the company makes less profit and this is a bad thing. Public companies take this especially hard. When there is pressure to cut expenses; headcounts, marketing budgets, and travel get cut first. In the increasingly competitive technology market, prices fall and profit margins get squeezed. This explains why the marketing budget is always under attack and why many companies fund their investment in channel marketing, where partner marketing funds may be coming from.

But the word “may” is important. You need to know if that’s happening in your company and this is where the rules come in.

A few years ago companies had a lot of freedom to spend their budgets however they wanted. This can lead to some bad behaviours, the best known example of which may be the Enron scandal. This scandal included some very complex accounting that managed to make losses look like profits that led to a big tightening of US accounting standards. This is mentioned in legislation as the Sarbanes-Oxley Act (SOX). If you’re looking for more information on this, the documentary “The Smartest Guys in the Room” is well worth the watch.

Coming back from the accounting stuff, this led to some new rules, which for our industry and others similar, can be reduced down to the fact that only certain things can be paid out of the marketing expense and anything else must be regarded as a discount off the transaction.

This can be a good thing and a source of funding for your partners!

Taking into account the model above – If we leave everything alone, make more sales, and take money out of the discount line, the company continues to make the same profits and everyone is happy!

In my model I’ve increased sales by $100,000, but taken it back out in extra discount – this is called negative or contra revenue. All the legal accounting rules have been kept, but the approach depends on your company’s internal rules, and this is where you need to investigate.

Large corporations will have worked all this out and have a pretty strict set of rules on how marketing expenses and contra revenues can be used. In the end, this will include a set of negotiations, at the senior level, between the finance and sales functions. It may or may not be well understood and in my experience, making a friend in the finance department can be very fruitful to understand exactly how the rules work. In smaller companies I’ve often found that there have been a set of arbitrary accounting compliance rules put in place, maybe with the company auditors, but keep in mind these are just how the company chooses to manage its accounting and will differ from company to company.

The other trap is what these funds are called. You’ve heard phrases like MDF (Marketing Development Funds), or JMF (Joint Marketing Funds) or Co-Op (Co-operative funding) and they get tied up with percentages of joint spend and investment. In my experience this are all just words and local rules. Different companies use different terms to mean different things and they are often confusing. It’s important to remember what you call something does not define how it can be used.

I’ve often brought examples from one company to another to persuade a finance team to modify their approach and free up some much needed funding. Remember, these rules may have been put in place some time ago when margins were higher and marketing budgets more generous – now the world has moved on!

Remember to create ‘new’ money, you’ll have to sell more. But, you are generating funds directly in proportion to sales. If sales are up, then budgets grow. If sales are down, they shrink. Marketing expenses don’t work like that. Marketing expenses tend to be allocated as a fixed amount at the start of the year. If times are tough they get cut and very rarely go up.

Some other rules may apply to your individual company. Often, as you try to understand how or why your company does things in a particular way, you may receive the ‘stock’ answer from finance that it’s a set accounting law. However, often it’s an interpretation of said law.

It’s important that you understand separating fixed, and shrinking, marketing budgets from the ‘free money’ that can come from ‘contra revenue’. There may be more hurdles to overcome before you can optimise how you get investment funding out to your partners.

Discretionary Funding

I’m still amazed at how many companies give away most of their precious channel investment through contractual agreements (Example- All gold partners get 2% of revenue, or all silver partners get 1%.)

To me this is very wasteful. When the industry was richer and margins were higher, vendors tended to get more and more generous with large amounts of money paid out to partners every month or quarter. Trouble is, as margins fell and money got tighter keeping these big contractual payments tied up huge amounts of funding. Since partners are often entitled to it, this can be very inefficient in driving the investment activities you want.

Much of my time is spent advising companies how to improve their partner programs. My major rule is to take back control of the partner funds, they’re not the partners’ money. These funds belong to the vendor. The vendor should be controlling and directing the spend. If you follow the same path, expect a fight when you move to take away funding from what are often your biggest partners.

If you analyse the funds available under these fixed rules you will find a lot of partners with not very much. Remember, one percent of a small number is very small! You need to sweep up all fragments into a single controllable pot and ensure it’s used in the most effective way with the most effective partners. It should be noted that taking away small fragments from smaller partners is less painful.

Back to the rules…

Your friends in finance may fight you on this saying that funds ‘earned’ by a partner must stay ‘attached’ to that partner. This is driven by legal accounting rules, but I disagree. If you dig into this you will find this is an internal rule put in place before anyone can remember, without legal compliance, about how the company has learned to behave. That one can be a hard battle, but shows precedents from other peer companies. This is your best weapon for change.

The last rule is when you can spend the money, particularly with contra revenue. Accounting departments like to keep revenues in the same accounting period as the sales, so they may insist that any spend takes place within the same period. This can be a pain, leaving a short window to get money out there and used. Again, examples and precedents are useful tools to take into battle to loosen these constraints. In this case you are making your finance team’s life more complex, so don’t expect them to be thrilled!

I hope I’ve shown you that when you are despairing of having enough funds to drive your partners in the direction you want, there may be ways of doing things differently in your own organisation. It may take some work and some outside examples, but it’s worth a go.

Oh, and if you thought the world had learned a lesson from the Enron Scandal – look up the film “The Big Short” from 2015 and see what you think!

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