Building Indirect Sales Channels

December 9, 2010

A CEO recently asked me for my opinion on channel development best practices for his SaaS company. I asked if he wanted the short or long answer.

His inquiry related specifically to effective approaches for handling channel conflict, sales incentives and revenue sharing policies within indirect sales channels.

Here was my short answer: don’t spend too much time and energy on building a reseller channel.

After all, it generally doesn’t work for SaaS companies, especially in the early stages of a company’s development (sub $20 million in revenue).

There are two reasons for that:

  1. SaaS solutions don’t generally require an intermediary. They’re easy to find (they’re online), deploy (there’s nothing to deploy) and use. Granted, that’s obviously not the case with SaaS solutions that require a significant process change on the customer’s side, but I’ll address that later.
  2. SaaS license revenue stream in the first year (during which the reseller needs to make the most of its money) is a fraction of what perpetual license products receive. So the reseller has to either settle for a fraction of the revenue it expects from perpetual license vendors, or it needs to get a cut of subsequent year subscriptions (which would be a waste of your money).

The only way to engage an indirect channel in a SaaS delivery model is around the professional services that need to encompass your solution. In effect, the only indirect channel I’ve seen work for SaaS companies is the value-added service provider partner.

In that scenario, a partner delivers the business process re-engineering required to successfully implement your solution at a customer site. The service provider derives their revenue from the services billed directly to the customer, while deriving less revenue from the SaaS license margin you would provide on top of that.

Now, for the long answer…

Let’s start with the basics. There are numerous sales channels, each with its own characteristics and leverage. They include:

Online sales
This includes companies that market and sell their solution via the Web, which involves limited phone or physical interaction with customers. Typically, this channel is augmented by customer support to answer questions and on-board customers.

Direct sales
This involves sales people who engage with prospects to convert them into customers. There are several types of direct sales, including inside phone-based sales and field sales.

Affiliate sales
A channel in which partners drive online sales. Those partners are more of a marketing channel, as they don’t typically provide any sales support. Here’s a good write-up about it on Wikipedia.

Reseller sales
This is selling through partners who act mostly as a marketing channel. Generally, these partners don’t provide your customers with any additional value other than transacting the sale. They derive the majority of their revenue through the margin you provide when they sell your product.

Typically, resellers expect anywhere from 10 to 20 percent in margin and mostly cater to installed software providers and hardware providers. As a rule of thumb, they don’t have much to provide a SaaS provider. One example is Software House.

Value-added reseller
These are partners who provide services wrapped around your product to deliver a more complete solution to their customers. Unlike pure resellers, they derive the majority of their revenues through the delivery of services rather than the margin you provide them for reselling your product. Therefore, it’s imperative that you show them how to deliver those services.

In most cases, you will need to actually deliver the service yourself before teaching others how to do it. Good VARs will think of the customers as their own and provide you with the privilege of bringing your product to them. For example, Software Allies provides services around implementations.

System integrator
This channel involves partners who develop more complete solutions by integrating your product with others. While these partners are traditionally focused on installed software or hardware, a crop is emerging to support SaaS solution providers.

System integrators make the majority of their revenue through services and very little via product resale. A good example would be Blue Wolf.

Distributor and value-added distributor
These partners give you access to a pool of resellers or value-added resellers. The value of a distributor is leverage and their role is to extend your reach to numerous potential partners.

It is exceptionally difficult for SaaS companies to leverage distributors, especially in the United States. They tend to be much more suited for installed software and hardware vendors. Although, entering European or Asian countries can be effectively facilitated by value-added distributors.

This group typically includes companies with their own product to sell that are looking to expand their offering with your product. For example, announced its AppExchange OEM Edition back in 2006.

There are a few more categories of channel sales, but most are simply variations on the ones above. The point I’m trying to make is that channel sales come in a variety of flavors. You can’t generalize them and you absolutely must spend time figuring out the optimal channel for you to develop.

Now that I’ve described the various channels, I need to address some basic misconceptions about indirect sales channels.

Here are some of the most common:

Leverage: “We have to build indirect channels, otherwise we can’t scale.”

Maybe. Maybe not. It is true that indirect channels provide scale. The problem is that indirect channels typically don’t work for early stage or expansion stage software companies. Quite simply, those companies don’t possess the brand and scale to drive enough revenue through a partner’s business.

So you end up with a catch-22. The business can’t grow enough to get the channel partner’s attention, but can’t grow big enough without that channel. So what’s the answer? Plan your growth without that channel and look to build it once you’ve reached at least $20 million in revenue.

Complexity: “It’s easier and less expensive to sell through partners than direct sales.”

Wrong! Building indirect channels is exceptionally difficult to do, especially for early stage software companies. Imagine how hard it is to build your own dedicated sales team. Now imagine getting someone else’s sales team to sell your product just as well, while also selling 10 other vendor’s products. Build your own sales team first.

Reliance: “Our partners will sell our product.”

No they won’t. At best, they will market your product by introducing it to their existing customers. You’ll still need to sell the product yourself, working through the partner.

So for a period of time (typically a year), you must provide your own sales resources to sell to your partner’s customers. Once you close enough deals, the partner’s sales team will start to feel excited about your product and will begin the process of learning how to sell it.

Selfishness: “I should build a channel for my needs.”

Nope. You should only build an indirect channel if it suits your customer’s needs.

So what channel is best for your product?

Ask your customers. Start by asking what a complete solution means to them. What would they like to see delivered with your product to provide them with exactly what they need? What would they like to see from you relative to integration, deployment, implementation and training services?

Then ask them how they would like to see those services delivered. How would they like to buy your product? What service providers have they used (or wanted to use)? Their answers may point you to channels that you can leverage.

But they may also reveal that your customers prefer to buy and receive services directly from you. If that’s the case, don’t waste your time with an indirect channel. Until you decide on the right indirect channels, the engagement model you’ll use with the partners and the nature of the partnership, you don’t need to bother with incentives and channel conflicts.

Start with your current customers and then identify a handful of partners who are willing to take a chance on you. Approach it as a strategic experiment that requires CEO focus. And keep in mind that it takes two years to build an effective indirect channel. So if you’re not willing to take that two-year journey, don’t even start down the path.

Photo by: Luke Pamer

The Chief Executive Officer

Firas was previously a venture capitalist at Openview. He has returned to his operational roots and now works as The Chief Executive Officer of Everteam and is also the Founder of <a href="">nsquared advisory</a>. Previously, he helped launch a VC fund, start and grow a successful software company and also served time as an obscenely expensive consultant, where he helped multi-billion-dollar companies get their operations back on track.