So, your team has found the perfect, looks-great-on-paper strategic partner for your next business venture. Before rushing in, ask yourself: Remember Kraft and Starbucks?
That collaboration appeared to make a lot of sense too at first, back in 1998. Kraft, a major food manufacturer, had all the resources to distribute Starbucks packaged coffee to grocery stores across the country. Then, in 2010, Starbucks wanted to expand into the single-serve, K-cup coffee business, but the contract with Kraft prevented Starbucks from doing so.
So Starbucks sought to get out of the contract – eventually paying Kraft $2.75 billion.
And so it goes for many seemingly perfect business partnerships. Each year, millions of corporate alliances are forged with carefully selected partners that possess the expertise, talent and brand appeal to bring a project to life. But do they first meet certain metrics that provide the insights into the value they derive?
Evidently, many businesses fail to evaluate such measures beforehand: Half to 80% of all business partnerships fail in the first few years, according to the Harvard Business Review.
So, ask yourself: Is this worth a billion dollars?
Before Jumping, Consider These 5 Partnership Metrics
According to Forrester, partnerships are becoming “the surest path to customer success and achieving higher and more profitable revenue growth.” Indeed, partners account for 23% of overall company revenue, on average, its research shows.
In a space so promising and crowding so fast, securing the right long-term partner can present a lot of pressure. Don’t pay the price of a rush job. First perform these carefully chosen performance measures; they can help you project the long-term promise of the collaboration.
- The “yours, mine, ours” revenue effect. Let’s start with the top line, in two parts. First, analyze the revenue composition of your partner’s products on their own; then of those products combined with your own (the multiplying effect). You’ll need the following measures: your partner’s historical and seasonal sales data; typical sales cycles (how long it takes for customers to purchase and repeat); risks of cannibalism from the combined products; and test-market analyses. Factor in external influences such as inflation and interest rates. Microsoft is a great example of the multiplying effect: More than 95% of Microsoft’s 2021 commercial revenue came from its network of partners – 300,000 in all.
- Map out pipeline possibilities. This measure helps you estimate the potential of the types of deals your prospective partner would bring in. You’ll need to request data from the partner’s CRM software, company sales team reports, market trend records and feedback (customer and vendor). Vet the sales team and analytics to ensure the outlook is reliable and to measure the pipeline performance against competitors. Next, apply your criteria to these data to single out pursuable leads (for example, it generates at least $5,000 a month) and categorize the results by product, size and industry. Then, using historical data, track the probabilities of closing the deal across stages of the sales cycle, for reference.
- Know customer lifetime value (CLTV) expectancy. A partnership can boost the amount of money each of your customers spend by expanding the services you offer. Take the long-running Nike and Apple collaboration on fitness apps: Apple is reported to have a potential CLTV of $2,400 over 30 months among iPhone users. You’d measure your partnership CLTV just as you would your own: the customer’s average transaction value times the lifespan with the business. However, because you’re forecasting, you should combine your prospect’s historical CLTV data with predicted CLTV via machine learning. This exercise has the added benefit of distinguishing customer segments that present more value.
- Find the fortune in new frontiers. If your company has saturated your primary market, a partner can present an inroad into new territories, either geographically or through service channels. You can calculate a partner’s saturation rate by dividing the number of customers it serves by the total market size. Then multiply the result by 100 to create a percentage – and gauge growth opportunities. If counting customers is challenging, you can measure based on sales. Don’t underestimate the value of the partners’ own partners, either: Forrester estimates that organizations with mature partner programs can generate 40% of their revenue from indirect partner channels.
- Put a price on customer heads. Ideally, your partnership would reduce how much it costs to land new customers due to combined marketing and sales efforts. You can quantify your prospect’s customer acquisition cost by dividing its full-year sales and market budget by the number of new customers it acquired. Cross-reference the results across channels to spot the wins. The complementary possibilities of your services and products, including how customers buy them, matter much here. Kohl’s partnership with Sephora, for example, is expected to generate $2 billion in revenue for the beauty chain by 2025, while affordably bringing in new Kohl’s customers who shop the entire store.
Measure Twice, Partner Once
Above all, when courting a prospective partner don’t ignore red flags no matter how rosy the deal looks on paper. Run the above metrics with diligence; hire a third-party to do so if necessary. Your due diligence will determine if the seemingly perfect collaboration generate billions in revenue, or costs billions in expenses.
When you enter a partnership, you’re entering it for your employees, vendors and customers. Craft the good deal.