By Lawrence M. Walsh, CEO and President, The 2112 Group
Cloud computing, like other services, is often based on predictable recurring revenues – usually on a monthly payment schedule. For the buyer, the amortized operational expense typically makes cloud computing more affordable since the cost is broken into smaller chunks. That same amortization, though, causes big headaches for solution providers selling cloud services, since it makes commissions smaller and harder to calculate.
The preliminary results of a study by the Channel Partners Cloud Convergence Council found that 55 percent of solution providers in the IT and telephony channels struggle with making cloud compensation worthwhile for their salespeople. The second biggest challenge is balancing cloud income and commission payments.
Both issues make sense, considering the financial structure of the cloud computing model. With hardware and software sales, salespeople earned commissions based on a percentage of the deal value and were paid when revenue was recognized (when payment was received). This is a relatively straightforward proposition for salespeople since all the money transactions happen at the same time. It doesn’t happen this way in the cloud model.
With cloud services, customers pay a fraction of the total cost of the service on a recurring basis. The total deal value may be $10,800, but the customer is only going to pay $300 a month over the course of a 36-month agreement. If this were a one-time sale, a salesperson working on a 5 percent commission would earn $540. In the cloud model, the salesperson’s cut could be as little as $15 per month.
The Cloud Convergence Council, a joint-venture of Channel Partners magazine and The 2112 Group, is continuing its study of cloud compensation and margin challenges. Its survey remains open for participants. The council invites solution providers to participate today by taking the survey.
The full survey results will be published in August.
Lawrence M. Walsh is CEO and president of The 2112 Group, a technology business advisory service that specializes in optimizing indirect channels and partner relationships, and principle blogger at Channelnomics. He’s also the executive director of the Channel Vanguard Council and moderator of the Channel Partners Cloud Convergence Council. He is the former publisher of Channel Insider and editor of VARBusiness Magazine. You can reach him at firstname.lastname@example.org.
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