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Building Indirect Sales Channels

A CEO recently asked me for my ideas on our sales process and building indirect channels. He asked for my opinions on the best practices in channel development for his SaaS company, specifically strategies to dealing with channel conflict, revenue sharing policies and sales incentives.

Let me start with the answer... My guidance would be not to spend too much time and energy on building a reseller channel. The reseller channel generally does not operate for SaaS companies, especially at the early stages (sub-$20M in revenue). This is driven by two things:

1. SaaS solutions commonly don't require an intermediary. They are simple to discover (online), easy to implement (nothing to deploy), and simple to use. This is certainly not the case with SaaS solutions that require a significant process adjustment on the customer's side, more on that below.
2. SaaS license revenue stream in the first year (where the reseller needs to make the bulk of his money) is a tiny proportion of what perpetual license products receive. So the reseller needs to settle for a fraction of the revenue he expects from his perpetual license vendors, or he must receive a cut of subsequent year subscriptions (which would mean a waste of your money).

The only way to interact with an indirect channel in an SaaS delivery model is around the professional services that need to embody your answer. In essence, the only indirect channel I witnessed function for SaaS companies is the value-added service provider partner. This is where a partner delivers the business process re-engineering needed to successfully put into action your solution at a customer site. In this case, the service provider derives his revenue from the services billed immediately to the customer... while deriving much less revenue from the SaaS license margin you would produce in addition to that.

Here's the long answer...
 
Let's start with the basics...  There are many sales channels, each with its own characteristics and leverage:

• Online sales: Marketing and promoting your solution via the net which includes restricted phone or physical communication with customers. Generally, this channel is augmented by customer support, whose role is focused on replying to questions and on-boarding customers.
• Direct sales: Your personal sales people engaging with prospects to transform them into customers. Several types of direct sales exist, such as inside phone based sales, and field sales.
• Affiliate sales: Affiliates are partners who drive your online sales. They are more of a marketing channel, because they usually do not offer any sales support.
• Reseller sales: Selling through partners who work mainly as a marketing channel. Typically, these partners do not supply your customers with any extra value other than transacting the sale.   These partners derive the majority of their money by means of the margin you provide them when they sell your product. Typically, they anticipate anywhere from 10-20% in margin. These partners primarily cater to installed software and hardware providers. They don't have much to give an SaaS provider. Example: Software House.
• Value-added reseller: These people are partners who supply services wrapped around your product to supply a more full solution to their customers. These resellers derive the majority of their revenues by means of the delivery of services, instead of the margin you give them for reselling your product. Therefore, it is crucial you show them how they can do so. Most likely you will need to actually deliver the service yourself just before educating others how to do it.  Good VARs will consider the customers as their own, and they are providing you with the opportunity to bring your product to them. For instance: Software Allies supplies services around Salesforce.com implementations.
• System integrator: These are partners who create more total solutions by integrating your product with others. While these partners are traditionally focused on installed software and/or hardware, a few of them are rising to facilitate SaaS solution providers.  These partners produce the majority of their revenue through services and little through product resale.
• Distributor and Value-added Distributor: These partners offer you access to a pool of resellers or value-added resellers. The value of a distributor is leverage ... their role is to extend your reach to many potential partners. It is exceptionally difficult for SaaS companies to leverage distributors, specifically in the United States. Distributors have a tendency to be significantly more suited for installed software and hardware vendors.  Though, entering European or Asian countries can be successfully facilitated by value-added distributors.
• OEM: These partners are ordinarily companies that have their own product to sell and they are seeking to broaden their offering with your product. For instance, Salesforce.com introduced its AppExhange OEM Edition back in 2006.

There are a couple of more categories of channel sales, but they are merely variations on the above.  What I am trying to say is that channel sales come in all varieties of flavors. You are not able to generalize sales channels and you ought to spend the time to determine the optimal channel you should generate.

Let us now look at some basic misconceptions about indirect channels:

1. Leverage: "We have to build indirect channels, otherwise we can't scale."  Maybe. Maybe not. Indirect channels definitely do provide scale. The dilemma is that indirect channels typically don't do the job for early stage or expansion stage software companies. Early stage software companies basically do not have the brand and scale to generate enough revenue through a partner's business. You will end up with a catch-22... can't grow enough to get the attention of the channel partner ... can't grow big enough without the channel.  Answer? Plan your development without the channel and seek to build your channel when you're at least $20M in revenue.
2. Complexity: It is simpler and less pricey to sell by way of partners than direct sales. Wrong!  Building indirect channels is extremely difficult to do, specifically for early stage software companies.  Imagine how hard it is to develop your own dedicated sales team. Now consider getting another sales team to sell your product, while also promoting 10 other vendor's products. You need to start building a sales team first.
3. Partners will sell your product: No they won't. At best, they might market your product by introducing it to their current customers. You will still be required to sell the product yourself, working through the partner. Therefore, for an extended period of time (typically a year), you must provide your own sales resources to sell to your partner's customers. Once you start to close a good amount of deals, the partner's sales team will begin to feel enthusiastic about your product and will start the course of action of finding out how to sell it.
4. I should build a channel for my needs: Nope... You should only create an indirect channel if it caters to your customer's needs.

So what channel is best for your product? ASK YOUR CUSTOMERS. Begin by asking them what a COMPLETE solution means to them. What would they like to see delivered with your product to give them what they need? What would they like to see as it relates to integration, deployment, implementation and training services?  Then ask them how they want to see those services delivered. Ask them how they would like to acquire your product and what service providers they utilized (or they would have wanted to use). These solutions may point you to possible channels you can leverage.  If they said they liked buying directly from you, and getting service directly by you, don't construct an indirect channel.

Until you come to a decision on the suitable indirect channels, the engagement model with the partners, and the dynamics of the partnership, you do not need to bother yourself with incentives and channel conflicts. Begin with your customers and then establish a handful of partners who are inclined to take a chance on you. Approach it as a strategic experiment that requires CEO focus. Be sure to keep in mind that it requires two years to create an efficient indirect channel. It is better not to go in that direction if you're not prepared to embark on the two year journey.

Firas Raouf is a Venture Partner at OpenView.