Co-op or MDF? As a category, they are referred to as promotional allowances. Regardless of the structure, promotional allowances are the #1 most utilized channel program among vendors today—and the most favored among partners—according to a recent proprietary survey. As for program structure, the trend is moving away from co-op to MDF as observed by our clients and prospects.
Why? Is this a good thing? Before we answer that question, let’s do a level-set on the working definition of each:
Co-op Programs are “accrual based” and as such are awarded to channel partners based on sales history—generally as a percentage of prior sales.
MDF Programs are more forward looking, and as such allocations are discretionary because Partners are awarded funds based on anticipated future behavior.
So, with that behind us, let’s go back to the original questions: Is moving from a Co-op to MDF funding model a good thing?
Once again the answer is: “It depends”.
My perspective is that most people are actually making the shift for the wrong reasons.
Proponents of the shift to the MDF model say they are doing so because their channel partners feel that Co-op is “an entitlement”. Further, the vendor often feels that they are not getting proper ROI from the program expenses. I say: if those are the motivations for change, then simply switching from a co-op funding model to an MDF funding model isn’t going to solve your problem. This is true for several reasons:
- If you are going to issue MDF funds, and tell your channel what those funds are in advance, then they are still going to perceive it as “an entitlement”—regardless of the funding model.
- If you make the shift but DON’T tell the partner’s their balance in advance because you believe the funds may be truly distributed on a discretionary basis, then you are in danger of violating the Robinson-Patman act. The act basically states that all competing resellers must have the same access to funds on a proportionately equal basis. So violating a federal law may not be a big deal to you, but maybe your “powers that be” have a different opinion.
- If you don’t feel that you are getting appropriate ROI from your program, then simply changing the funding model isn’t going to change that either—you need to revamp your program with a new set of guidelines that makes it accountable for reimbursing for mutually beneficial activities. Simply changing the funding model isn’t going to result in improved ROI from your program.
Therefore, “lack of ROI” and “avoiding Partner entitlement” are not reason enough to make the switch in funding models. Addressing those challenges will require other modifications to the program —and most of those can be made to the co-op funding model with similar outcome.
Another perceived advantage to MDF is that the overall budget can be more flexible, compared to a co-op program where allocations are somewhat locked in a fixed percentage of sales. While on the surface budget flexibility appears to be a huge benefit, in reality if your partners are used to getting funded at a level of “$X”, should that allocation be reduced drastically (because the “powers that be” lowered the overall budget) it would likely result in a negative reaction from your partner community. So this may not be as big an advantage as your finance people would like to believe.
Still another argument for switching to an MDF model comes from another trend: the fact that today most of the vendor’s reimbursement dollars are funding “business development” activities, versus “lead generation” activities. Specifically, partners and vendors alike are using the majority of their allocations to fund near-sales activities and partner enablement activities such as customer events, product champions, demo/seed units, training and more. Many of these activities may require more scrutiny before funds can be released—a perceived benefit to an MDF program. However, we are a proponent of “clear guidelines” for all activities—and if those exist, approving such activities for reimbursement wouldn’t necessarily require such scrutiny.
My POV on the appropriate funding models?
An argument FOR a co-op model is that funding allocations are predictable for the partners. As a result, a partner can plan future activities with a degree of confidence that the program costs will get reimbursed. If your guidelines are appropriately designed, you should be confident that the funding will be directed to mutually beneficial activities.
Conversely, a big advantage to the MDF model is that in highly dynamic markets or when supporting early lifecycle products, MDF allocations may be the best way to help achieve future goals because past sales behavior is not the best measure of what should happen in the future.
Another approach that should be considered—especially among larger vendors with a large product portfolio—is a hybrid model offering BOTH co-op and MDF funding. This model would direct co-op funding to traditional marketing and lead generation activities that are classified financially as “marketing expense” line items. This would encourage partners to forward plan for sales and marketing activities supporting mature products. Conversely, the MDF funds would be directed to contra revenue activities that focus on business development or to support early lifecycle products to create traction at that point in time when it’s needed the most.
Net/Net: there is no one solution—supporting my belief that quality channel marketing is an art form.