A great deal has been written about employee churn and customer churn. Channel partner churn not so much. In this article we take a deep dive on channel partner churn and discuss typical churn levels for channel-centric organizations.
What is channel partner churn?
In the HR arena the concept of ‘employee churn’ – also known as ‘attrition’ or ‘turnover’ - is well understood and is well accepted. It’s the number of staff leaving the organization over a given period, as a percentage of the headcount. So for example a company that has 1000 employees, of whom 50 leave during the year, has annual employee churn of 5%.
Likewise, most B2C organizations also measure customer churn. This is the number of customers who stop buying over a given period, as a percentage of total customers. Clearly the lower the level of customer churn the better for any type of company. Employee churn is different because it can be argued that a certain level of underlying employee churn is a positive feature, as low performing staff are weeded out and as new blood is introduced.
Organizations selling through channel partners can experience channel partner churn. This is the number of channel partners who move away and resell with other vendors over a given period, as a percentage of total channel partners. What level of channel partner churn is to be expected? Is zero channel partner churn a sensible objective? Here we address these issues.
The churn landscape
It’s useful to context channel partner churn against industry data for employee and customer churn. Employee and customer churn data is readily available and much discussed online. Partner churn data is not.
According to Statistia customer churn for telecom and wireless providers in the US is around 20% per year. It’s 25% for cable TV and internet providers. Focusing on B2B rather than B2C, churn rates reduce. Recurly Research reports that the average churn rate for B2B subscription services is 6%. On that basis a B2B cloud application vendor with say 100 business customers might expect to lose 6 customers per year.
According to Betterteam an employee churn rate of 10% is considered ideal. Not too low and not too high.
There is no public data for channel partner churn rates.
Typical partner churn rates
As a general rule, looking at partner churn in the technology industry, it’s clear that natural churn is higher in markets where deal size and barriers to entry are low, and where partner counts are correspondingly higher. For example, partner churn is likely to be higher in the printer market, where deal sizes are smaller and where there are many partners competing for sales. Partner churn is likely to be much lower in the ERP software market, where deal sizes are higher and where there are fewer partners with deep skills competing for sales.
Based on our experience with technology clients we estimate that typical channel partner churn in low complexity markets is between 10% and 20% per year. Typical channel partner churn in high complexity markets is less than 5% per year.
Putting this into numbers, it means that a low complexity channel with say 2,000 partners worldwide, will expect to see between 200 and 400 of those partners become inactive each year. A high complexity channel with say 200 partners worldwide, will expect to see less than 10 of those partners become inactive each year. A big difference.
Most vendors in low complexity markets need to constantly recruit partners in order to retain a stable channel with coverage in all required geographies. For high complexity markets partner recruitment is more likely to be strategic, about channel expansion.
Ideal partner churn rates
Most channel-focused technology vendors rely on a small proportion of their channel partners to drive a large proportion of their sales. The churn rate in this ‘committed’ group is low. The churn rate in the ‘long tail’ of other partners is higher.
For most vendors the ideal churn rate in the ‘committed’ group is zero. A committed partner is more likely to suffer from reduced growth than to move wholesale to a competitive vendor.
The ideal churn rate in the ‘long tail’ is above zero. This is for the same reason that ideal employee churn is around 10%. It shows that the poor performers are being weeded out and are being replaced with new blood.
In our experience, looking across a range of clients, we see that most vendors experience approximately twice the level of channel partner churn in their ‘long tail’ than is ideal. Smart vendors precision target channel partners that are capable and they take steps to retain them. Smart vendors accept churn in the channel partner group that lack capability to grow.
Cost of acquisition and lifetime value
This is a concept that is well-accepted in B2C but that is only just starting to enter the channel vocabulary. We will see more of it in the coming years.
In B2C, for example in a company selling cable subscriptions, a provider will work out what it costs to acquire a customer, and how much revenue a customer typically generates per year. This allows the provider to work out how long a customer must be retained in order for that customer to be profitable for the provider.
We are beginning to see this with channel organizations, particularly those with low or mixed low/high routes to market. The vendor can calculate the cost to engage, onboard and enable a partner. They can also estimate the likely revenue generated by a partner in year one, year two and onwards. This allows the vendor to calculate the ‘breakeven point’ in terms of churn, how long a partner must be committed to the vendor in order to be worth investing in.
This type of thinking is leading to focus on ‘partner journey’ concepts, where joint investments are mapped out with the partner to deliver revenue up to and beyond the breakeven point.
Where to start
Assessing ‘normal’ churn is a key element of effective to-partner marketing. When assessing what level of churn is ‘normal’ in your market, you need to start by establishing the complexity of your market. This is best done by assessing the level of ‘mutual interest’ that is required to justify partnering in your market.
Higher channel complexity and commitment for example, as we see in the ERP software market, will mean lower partner churn. In this type of higher complexity market, partners and vendors need higher levels of ‘mutual interest’ to justify commitment. The partner must invest more in skills with the vendor, and the vendor must invest more in developing the relationship.
bChannels offers a proven approach to assessment of mutual interest. We take into account the size of the market, the comparative strength of your value proposition to partners and the level of partner interest to engage with you. This creates a mutual interest map showing which categories of partner to target.
A bChannels mutual interest project is an excellent way to assess if churn rates in your channel are normal for the market you operate in.
Key points from this article
Although well-accepted in employee and customer applications the concept of churn is not well developed for channel partner organizations. Sometimes churn is good.
Channel partner churn has to be understood in the context of the market type. Churn rates are higher in lower complexity and lower mutual interest markets.
Most channel vendors rely on a small proportion of their partners to generate significant sales revenue, and churn in this group is nearly always a negative.
Churn in the ‘long tail’ is desirable. However, most vendors experience twice as much churn in this group than is ideal. Targeting capable partners is important.
Increasingly vendors are looking at the cost of acquisition of a channel partner versus their potential lifetime value.
Read more about the precision targeting of partners based on their growth capability in our White Paper Finding Partner Revenue Growth Hotspots.