By Steve Walter, VP, Global Partners, Aspen Technology, Inc.
A software veteran shares his playbook for identifying and regulating channel partner discounting, which resulted in more than $8 million in annual savings at his former global software company.
I previously worked for a software company that developed a significant partner ecosystem to expand its geographic reach and accelerate revenue worldwide. The reseller channel contributed more than 30 percent of overall bookings through the hard work of several hundred channel partners. Like many software companies, the company originally did not have the infrastructure or systems to understand the impact that unmanaged or ad-hoc discount requests were having on the business. The result was that unmanaged extra discounting by channel partners — combined with a corporate shift to a subscription-based licensing model — placed extreme pressure on both the company and its channel partner’s profitability.
The goal of the channel discounting project was to reduce the number of unmanaged extra discount requests that were submitted by partners throughout the fiscal quarter. At the time, there were several regions globally that developed extra discounting behaviors which didn’t meet company guidelines (e.g., requests that exceeded three percentage points). In fact, several geographic regions consistently generated extra discount rates in the range of 15 to 20 percent. These discount requests were considered “extra” because they exceeded the standardized tiered discount rates and deal registration incentives available to partners by the company (e.g., Silver, Gold, etc.).
These percentage points may not sound extreme, but during a four-quarter period the company was granting more than $15 million in extra discount requests to channel partners. The consistent quarter-over-quarter trends presented an opportunity for the company to address the usage of the discounting tool. More importantly, it helped us provide additional sales training to the internal and partner teams to improve value sales skills and to better address customer objections.
UNCONTROLLED DISCOUNTING: A SURE BET FOR LOWER AVERAGE SELLING PRICE (ASP)
To obtain an outside perspective on the impact of discounting, I reviewed several case studies in the Harvard Business Review and found a very interesting report by Vantage Partners, a management consulting firm affiliated with the Harvard Negotiation Project. The sales study on the impact of pricing exceptions included operational data from 80 companies on the Fortune 500 list, including Microsoft, Cisco, and Oracle. The research revealed most companies did not track extra discount requests. In fact, many companies that did address discounting executed the review process in an unmanaged or ad-hoc manner. Interestingly, the study found over 30 percent of companies that frequently granted unmanaged discounts reported a decline in their average sales price after only three months. Once a price exception was provided to a customer, it had the potential to impact the average selling price (ASP) for all customers. This is because customers by nature are conditioned to continue to ask for the extra discount in the future. For example, when a customer demanded an incremental discount due to their long-standing relationship, providing the discount conditioned the customer to ask for the same or a larger discount the following year.
The research also indicated as companies continue to provide discounts, customers become less satisfied because they feel they should have negotiated for a higher discount. More than 50 percent of all companies with ad-hoc or unmanaged discounting experienced a decrease in ASP within 12 months, and another 20 percent will see a decline in one to two years. As you can see, an unmanaged approach to extra discounting places strong financial pressure on a software vendor and its sales teams to continue supporting the request.
DIAGNOSING DISCOUNTING PROBLEMS
While the impact of discounting on any software company seems straightforward, this case was especially complex because the company was transitioning from a perpetual license model to a subscription-based business. The economics for a subscription program will place profit pressure on resellers, because subscription- based pricing is often lower than a traditional and more expensive perpetual license purchase with annual SMS fees (software maintenance services).
Through our own data analytics, we knew the transactional order flow generated by the partner channel was consistent on a historical quarter-by-quarter and geographic basis. This meant channel partners, the sales region, and their customers requested most of the extra discounts during the last few days of a fiscal quarter. Until we established a policy and automated the workflow approval process, the company required several layers of management approval by email to maintain the internal sales and compliance policy.
There were several other factors driving the discounting problems, including:
At the same time, the company was implementing a new corporate initiative focused on operational excellence. Through this initiative, we recognized our internal control processes and discount workflow approvals needed to be enhanced. In addition, channel partners told us they were losing precious selling time when they needed to close a deal because the approval process was slow and inefficient. The problem was compounded by our own manual efforts in order for operations to facilitate the discount requests and execute the approvals, all under very tight deadlines. Ultimately, the company wanted to standardize the extra discount request process and simplify the resellers’ time and cost of doing business with us.
IMPLEMENTING DISCOUNTING POLICIES & PROCEDURES
As the company placed more focus on the discounting issue, I worked closely with the senior management team in certain geographies to test a few theories. For example, after evaluating the extra discounting process, the reasoning provided by channel partners and customers was not supportable. The sales reps were not equipped to manage through the sales objections by declining a request. On top of this, we tracked the number of discounts that were provided in a fiscal quarter and the negative impact it was having on quota achievement. We then implemented a six-month pilot that required additional sales management inspection and approval by the company’s first-line sales directors. We also provided the territory sales reps with additional value training to help them better manage customer objections. This provided a basis for a solution.
As part of the validation process, the company’s field sales team was responsible for providing a detailed “justification” for the partner’s extra discount request. If a summary was not provided, the discount request was rejected. As the competitor discount requests became more prevalent, the company required identification of the competitor, description of the solution, copy of the channel partner’s price quote, and rationale for the proposed discount request. This information provided the management team with a better understanding of the request.
The heightened sense of company and partner awareness and the resulting impact on quota achievement — and ultimately revenue growth — made the extra discount policy a priority for all sales regions worldwide. The new workflow process required the following at the time of the initial order placement, and all channel transactions were subject to end-of-quarter audit:
When we implemented these requirements, we leveraged many forms of communication to inform our sales team and channel partners about the policy change. This included training materials stored in a sales portal, prerecorded Brainshark presentations describing the policy and workflow process, FAQs, formal policy documents, live presentations, and one-to-one conference calls with the sales region. It was important the internal sales teams and partner ecosystems were effectively trained to make the change a success.
It was critical to provide more training to our internal sales team and partner sales reps on how to sell on value. The goal was to strengthen the ecosystem’s ability to address customer and partner objections. The company provided additional training on best-in-class strategies to the partner sales reps. This included obtaining a multiyear commitment or seeking more wallet share from the customer in concession of an extra discount request. Another tactic was to make sure the partner sales reps did not provide free training or free services with a discounted deal. It was important for the sales rep to have a discussion with the customer about the companywide costs of moving to a competitive solution. The entanglement cost of software for mature customers (those with a license footprint of 10+ seats) is very high and the technological platform shifts are very expensive. The associated costs of retraining a labor force, changing design workflows, and/or converting literally thousands of historic electronic designs into a new fi le format meant it was not economical for a customer to move to a competitor just because a 10 percent extra discount was rejected.
In cases where a region or country did not migrate to Salesforce for transaction processing, a manual approval and verification process was implemented that paralleled the system controls built via the automated extra discount process.
THE RESULTS: $8 MILLION SAVINGS PLUS BETTER INTERNAL COMMUNICATION
These policies took approximately six months to implement due to the worldwide impact of the program, additional sales training and communication, and the light development that was required to adjust the transaction processing system.
The new approach to managing extra discounting in the channel required a highly collaborative effort within the company and partner ecosystem. The project had executive sponsorship from the CFO, COO, and EVP of sales. In addition, we built strong alignment with geographical sales leadership, territory field sales, solution segments, legal, compliance, finance, channel operations, IT, and systems development. The extra discount policy touched all aspects of the organization and each function played a critical role to ensure our success. In addition, the sales enablement and training teams were instrumental in providing best practices to the company’s field sales team and the partner sales reps.
I attribute our success to several characteristics described in Vantage’s The Value of Pricing Discipline report. The report lists several commonalities of companies best in class at managing pricing exceptions, including “a clearly understood process for determining when and why pricing exceptions are granted; salespeople who are able to define and defend the value of their product to customers (and well-supported by their organization in doing so); a system to track exceptions and adjustments as they are made; and metrics and incentives that are structured to enable salespeople to walk away from ‘bad deals.’”
When the company announced the new strategy to control discounting, the initial reaction by our internal and partner sales teams was the extra discount policy would freeze the transaction flow and result in the loss of valued install base customers. This did not occur. The program was launched mid-quarter to minimize any potential disruption to the company’s channel business. During the first quarter we experienced a 70 percent reduction in orders that required an extra discount request. On average, the company decreased extra discount requests by $1.5 to $2.5 million in “saved” revenue. This equated to approximately $8 million over a four-quarter period.
STEVE WALTER is the VP of Global Partners at Aspen Technology, an asset optimization software company with 30 worldwide offices across six continents. His B2B channel and sales management expertise stems from 20+ years of leadership roles at software companies like PTC, Autodesk, Cerylion, and IBM. Walter has a master’s in finance from Boston College’s Carroll Graduate School of Management