SaaS Channel compensation is one of the hardest things that software vendors are facing today. If you have a nice traditional software business model with good software maintenance revenue and mature channel, you are reluctant to change or touch it. Let’s dive into some of the difficulties that software vendors are experiencing.
I am currently running educational sessions in SaaS channel development where my audience is given the task to present the business case of a channel partner for a given software vendor. We are using Business Model Canvas to model the business. The task that I am giving to my students is to represent the software vendor leadership team that is trying to recruit a channel partner to become a reseller. The way this is done is to present a Business Model Canvas to the channel partner management team. If the software vendor management team can’t convince the channel partner of the benefits, then the business model is broken. I have done this exercise with many software vendors and it is one of the most powerful ways to get the software vendor to think about the partner, not about themselves.
I have bad news for you. There are no exact rules what kind of compensation models a software vendor should have for its channel, but what is known is how to calculate whether a business can be profitable for the channel partner using different compensation models. Why is this? The biggest issue that software vendors have is that many of the processes and tasks that the channel partner has taken care of in the past, have now moved back to the software vendor. One of them is the monitoring the cloud infrastructure, provisioning the solution, upgrading the software etc. In the end of the day, it is all about roles and responsibilities that the software vendor and the channel partner have to agree on. The more the software vendor moves responsibilities towards the channel partner, the more margin the channel partner expects to get and this is very typical in the traditional software channel model. The software vendor delivered the CD or download to the channel partner, but in the new SaaS world, the instance is provisioned by the software vendor and the channel partner becomes the “middle man” between the end user customer and the software vendor. Let’s review some of the industry “standard” commission models and some implications around them:
If you look at the percentages, the one that is missing is the typical 10% which is really more of an opportunistic percentage that anybody will give out regardless of business model. If you call a software vendor and tell them that you have a lead, they will pay you at least 5%, but 10% is not uncommon.
When you add an additional 10% (now the total is 20%) it adds more interest to the channel partner. The software vendor can not expect any active sales with this percentage and can’t really ask the channel partner to do any serious account management. This is mainly lead generation activity and typically there are other products that the channel partner is reselling as well.
If we add an additional 10 % (now the total is 30%), this is still too small to be able to build an organization and requires the channel partner to have many different products that they are reselling. Larger reseller with deep pockets to build and maintain an organization, 30% is doable.
When the percentage is 40% or more, the software vendor can expect investments from the channel partner and reporting responsibilities on pipeline to the software vendor channel account manager. This type of percentage is also doable for smaller channel partners that want to build a business around the solution and build a dedicated team.
The biggest surprise that most software vendors are facing when we discuss about the roles and responsibilities is the amount of additional work that the software vendor has to take on. In a pure SaaS channel scenario, the border of responsibilities are blurred and the end user customer ends up in many cases in direct relationship with the software vendor. This has been a big no-no in the past for channel partners as they have wanted to “own the client”. However, the reality is that the cloud is changing the roles and channel partners have to make changes in their models as well. This is a behavioral change that is taking place and can be compared with the changes that are taking place how software sales people are compensated. Nobody wants to change the way things were in the past, but the market and competition is forcing the change and the ones that keep doing the same thing as before, will eventually be on the loosing side. We have already seen this in many organizations.
Before talking about channel margins, the software vendor has to decide what kind of role they expect the channel partner to play and then define how much they can afford to give a way of the margin. Some software vendors have even decided that a channel is not an option in their new business model and this is of course an option if the company has the resources to build its business with its own direct sales and internet marketing methods.