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What happens to channel incentive spending when the economy changes? 360insights' exclusive report on the latest channel trends in Q1 2019 gave us some insight into this. One of the questions we asked in Channel Pulse was what senior channel professionals were planning for 2019. The majority told us nothing would change. Normally there wouldn’t be much to read into this response, but we reached out during a prime budget period with an economy showing signs of weakening.
US Economy Softens as Channel Leaders Plan 2019 Budgets
In January 2018, President Trump imposed tariffs and quotas on billions of dollars in imports of solar panels and washing machines. Trump’s actions were taken despite warnings that these actions could lead to retaliation from trading partners which, in turn, could significantly impact the US economy.
By February, China began to mobilize investigations into US imports, and by April, China was imposing 176% duties on sorghum. Simultaneously, the NY and Atlanta Fed projected US GDP growth slowing. Shortly after, the stock market began a rapid decline that lasted through year-end. During all of this, most senior channel professionals were planning their budgets for 2019.
Channel Incentive Spending Approaches for a Softening Economy
With this context as a backdrop, it’s easy to see how a question about spending takes on new meaning. It has been a little less than a decade since the last economic downturn, making this a good time to revisit what happens when incentive budgets and revenue begin to slow.
When the economy last took a major hit in 2008, three scenarios played out regarding channel incentive spending:
Indecisiveness – These companies were reluctant to rock the channel’s boat, and hope trouble will be short lived.
Financially Driven – CEOs and CFOs in these companies batten down the hatches by cutting spending across the board in response to headwinds. Channel leaders look closely at incentives and cut anything questionable to meet new budget demands.
Growth Driven – These companies generally spend ahead of growth. When the economy turns soft, they get aggressive with incentives. Their logic is simple, every revenue dollar will be harder to get, so they must spend more to grow.
Indecisive companies quickly learn that “hope” is not a strategy. As revenue misses pile up heads roll, and more decisive leaders are put in place. Financially driven companies tend to ride out the storm with unimpressive, but manageable results. Growth companies run into cash trouble as investment dollars become harder to secure and revenue growth slows.
What's The Right Answer?
There is an approach that lies between the financial and growth strategies. It involves taking risks on questionable channel incentive spending and taking away entitlements. At the same time, it means increasing spending on programs with proven ROI.
Entitlements are age old problems in most channels. It’s hard to build relationships when you’re taking things away from channel partners. When times get tough, these decisions don’t become easier, but tolerance for risk grows. Programs channel leaders feel either don’t have great ROI, or are simply an entitlement, are the first to be eliminated.
Changing the Channel Incentive Spending Mix
At the same time, these channel leaders will increase spending on programs with proven ROI. They essentially shift money away from questionable programs and towards more proven methods. This softens the blow to channel partners on entitlements, while at the same time, optimizes the incentive mix.
When sales and marketing leaders say their channel incentive spending will be the same in 2019 some of them are communicating this last approach. This was reflected in the Channel Pulse report, where channel leaders indicated spending would stay the same in 2019. However, they indicated that they will spend more on consumer rebates, volume incentives and MDF and CO-OP. It’s no coincidence that these are also three of the top four ROI producers.
Why Do Channel Leaders Choose This Particular Mix of Incentives?
Considering, MDF & CO-OP are used to drive market demand, volume incentives are being more frequently tied to transformation KPIs, and consumer rebates address increased price competition the mix makes sense given uncertain economic indicators. When you think about it, it’s the ideal mix to address perceived new market pressures.
So, when 60% of respondents in the Channel Pulse report said their channel incentive spending will remain the same in 2019, maybe they are changing the mix in anticipation of new market pressures. My question is – do channel leaders have the right channel data they need to get this mix right? What do you think?