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  • Writer's pictureRichard Israel

Best practices for channel revenue share

Updated: Mar 5, 2021

Clarify your goals: With any channel revenue share strategy you should first consider your goals. What behaviors are you incentivizing through your channel? Lead generation, qualified referrals, bringing sales across the finish line? If you are building or running an affiliate, agency or solution provider type program determining how much you pay out should be based on these two factors.

A) The value the partner brings to your channel. A partner who brings you unqualified leads vs one who closes deals requires different resources and costs that impact your channel economics. Those channel economics should serve as your guide posts as you consider the second factor.

B) Aligning the value of your partner to your LTV:CAC ratio. Going with a 3:1 benchmark (industry standard) means your payout + costs (sales & marketing) should average out at around 33% of each dollar of lifetime revenue coming in.

Balance your rev-share: Industry average rev-share is estimated at between 17-20% across all channels. Depending on your cost of sales and marketing, you should stay within the 15-25% range on your rev-share payouts to ensure a blanced approach that is economically maintainable. Let's take a quick look at how you can get there.


LTV:CAC calculation: Take your MRR and multiply by life expectancy in months to calculate your LTV. Add in your cost of sales and marketing (estimate at least 10%) and your rev-share costs (let us use 20%) and add it up – it comes to 30% - which is your CAC (cost of acquisition). Then divide your LTV ($3,600) by your total CAC ($1,080) and you will have your LTV:CAC computation. Therefore maintaining a rev-share in the 15%-25% range you should be able to consistently balance rev-share with profitibility.

Incentivizing for short term growth: I’m often asked “how can I offer higher sales incentives to get my partners to sell?” I recommed incentivizing for short term growth through growth bonus incentives rather than higher rev-share.

For example, you can offer a bonus for the first year on new business. Or you can offer a bonus on sequential revenue growth quarter over. In other words, incentivize for the right behaviors that drive revenue growth – but stay within the parameters of a balanced LTV:CAC ratio.

Here is an example using the above LTV:CAC calculation: You could offer a 40% total payout in year one by combining a 20% rev-share plus one-time bonus of 20% for new accounts. The beauty of this structure is it incentivizes the behaviors you want to drive channel revenue acceleration - without rewarding mediocrity!


Caution! don’t overpay on your base rev-share: There are many downsides to overpaying on rev-share, LTV:CAC ratios notwithstanding. Paying out 40%, 50% or higher is fraught with problems - here are three I've seen up close and personally.

1) Creates partner mistrust: Any partner who understands how rev-share works knows you are not making money at rev-share that high. They will be suspicious of that offer and it will generate skepticism which will further diminish channel brand and equity.

2) Weakens partner recruitment: If you try and use this as a partner recruitment tool – most experienced partners will run in the opposite direction because they know it is a gimmick (think used car sales!) and lacks credibility in the marketplace.

3) It is unsustainable: If you do offer your partners large rev-share payouts you will at some point have to reduce those payouts because it is unsustainable! This is not a complicated formula as it becomes unsustainable when your partner economics are less profitable than your direct business! Further, your partner community will be irreparably harmed and the changes you are forced to make for the sake of sound partner economics will cripple your ability to maintain let alone accelerate channel revenues.

 

* Happy to discuss exceptions to the rule if you are interested. There are several including companies that sell exclusively through the indirect channel where the LTV:CAC ratios will be different.

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