Debunking myths about the SaaS partner channel

Debunking myths about the SaaS partner channel

Summary: Most people will tell you that SaaS business systems vendors need to work with channel partners because those deals have to be closed face-to-face, but the partners make less money from SaaS than they do from on-premise deals. Both assumptions are false.

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TOPICS: Software, Microsoft
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There are a couple of widely-held myths about the SaaS partner channel that I saw being debunked in the closing months of 2008. No, neither of them were the hoary old myth that SaaS vendors don't need partners because they can use the Web to sell direct — the dot-com bust proved that one wrong. Solution providers are still alive and well on the Internet, but to succeed they have to ignore some common preconceptions. Here are two statements I often hear from vendors and other experts when talking about SaaS:

  • SaaS vendors need channel partners because customers will only buy business solutions face-to-face
  • SaaS partners have to run lean operations because their margins are slimmer

Both of these assertions are just plain wrong — and I have to confess, that's not something I would have expected until I heard the evidence.

First up is the assertion that SaaS business solutions have to be sold face-to-face. I heard this point made very firmly by SAP last year talking about its experiences with its Business ByDesign offering. It had originally hoped this would be bought self-service via the Web, but later found it required at least a day's face-to-face requirements discovery. This led SAP to conclude that it would have to rely on partners with specialist vertical expertise or existing local trust relationships. It seemed a logical conclusion, knowing that another SaaS business suite vendor, NetSuite, operates a network of regional sales offices precisely so that it can be close to its customers.

But then in November I moderated a solution provider discussion at the SIIA OnDemand conference in San Jose, in which four solution providers who work with, respectively, Intacct, Intuit, NetSuite and Microsoft, spoke from their own extensive experience. There's a very good video of the complete session online now. The most surprising insight of this very informative panel discussion was that SaaS solution providers are getting smart at using the Web to sell, close and deliver solutions remotely — often without any face-to-face contact at all. What this tells us is that the trust factor that determines whether a customer is prepared to go ahead or not is more complex than simply a matter of direct personal relationships. Branding, web presence and competence (ie how effectively the vendor and the solution provider each conduct themselves via the Web) all play their part. I'm sure there are still plenty of cases where face-to-face meetings are needed, but they're not the only trust mechanism.

The second fallacy about margins stems from the calculation that solution providers miss out on two big chunks of upfront revenue when they switch to a SaaS model. They lose the technology implementation charges they'd have made when selling a conventional on-premise software package, and instead of getting the full perpetual licence fee as a lump sum, they have to make do with a monthly subscription payment. The conclusion reached is that they receive much less revenue and therefore margin in the first year of a SaaS deal than they would from a conventional on-premise solution.

What this calculation ignores is that a SaaS solution also includes the hosted infrastructure, and the customer now pays the provider to run that infrastructure — money that used to be spent on in-house resources and which therefore never reached the vendor or its solution partner. I was reminded of this when I heard that Microsoft's own sales force makes more money selling its Online Services than it does when selling server licences because the overall revenue is higher, even though the margins are lower. Actually, the margins don't need to be lower, that's just a by-product of the chosen price point and operating costs.

I hosted a webinar in September in which Herb Prooy, CEO of SaaS enabler SaaSplaza, talked through an example of solution provider margins when offering Microsoft Dynamics NAV as SaaS [disclosure: this was a paid engagement]. He showed that it's possible for a solution provider to make more money in the first year of providing a SaaS solution than from selling the same solution outright as a conventional on-premise implementation.

One element that helps is that Microsoft's service provider licence agreement (SPLA) is a baseline price to which the partner adds a margin of their choice, rather than being a list price from which the customer tries to win a discount. But the main factor is the lower cost of providing the infrastructure as a hosted solution compared to the customer's total cost of ownership for running the on-premise implementation. What the customer would have spent on running their own servers becomes potential margin for the solution provider. To see the figures for yourself, listen to the webcast. Prooy's margin calculations start at about 35 minutes in.

Of course, SaaS channel partners still have to run lean operations — but then, everyone does to stay competitive these days. The important takeaway from the findings I've outlined here is that the SaaS business model holds a lot of surprises, both for ISVs and for solution providers. And that some of them are pleasant ones.

Topics: Software, Microsoft

Phil Wainewright

About Phil Wainewright

Since 1998, Phil Wainewright has been a thought leader in cloud computing as a blogger, analyst and consultant.

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8 comments
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  • SaaS partnerships benefit both sides

    Building strong partnerships makes great sense for SaaS providers, and my firm has done extremely well in building relationships that benefit everyone involved (including the client). Sure some clients will come via Web-only sales channels, but as more and more SaaS offerings become available and the cloud computing space grows, many companies will still look to a trusted solution provider to help sort out the options. I think it's a mistake for any SaaS provider to choose one approach over the other. Both are valuable.

    On the flip side, the recurring revenue received from SaaS partnerships can help smooth out cash flow for solution provides, a bonus on the current economy. Those big lump sum payments are exciting, but all of the small dollars add up, too, and in the long run can contribute to a healthier balance sheet for any company.
    lareynolds
  • SaaS business solutions have to be sold face-to-face

    How a particular solution is sold (Saas or on premise) has to do a lot with many factors not just whether it is Saas or On-Premise. I refer to these two modes of selling as low touch selling (through website, over the phone etc.) Vs high touch selling (in person, face to face). Some of the factors which typically come in to play in deciding what is the optimal mode of selling (high touch or low touch) are:
    1. Size of investment on the part of buyer (enterprise Vs. for a business group or individuals) (Organizations are much more rigorous about evaluation and doing gap analysis if they are investing for a enterprise solution and high touch model might come into play in such situations)
    2. Mission criticality of the application/solution: What functions, activities are being supported through the offering (for example financial application Vs. application which allows you do to marketing surveys etc?.)
    3. Confidence in the solution/services provided by vendor (If you have already done business with a vendor, buying organization would be less hesitant to use low touch sales channel)
    For example, if a buyer organization wants to invest in web conferencing service, they are more likely to do such investment through low touch selling models of the vendors. Someone trying to invest in accounting solution might prefer to do it through face to face interactions.
    I agree that many a times price point at which Saas solutions/services are offered (as well as the functions which they offer) necessitates vendors to use low cost/low touch selling models, but I think Saas fundamentally does not mandate change in sales model (it enables and opens up multiple channels and possibilities for sales channel).
    BIVish
    • SaaS business solutions have to be sold face-to-face

      I have to agree with BIVish here that there are more factors other than just a SaaS delivery model which determines a need for a face to face discussion for a sale.

      However the fact of the matter is that SaaS solutions can be sold without a face to face interaction even in the initial sale.

      To say that there is no change in the sales model is a stretch. The biggest issue that comes to mind is the sales commission and compensation model.

      - Ranjit Nayak
      rnayak
  • RE: Debunking myths about the SaaS partner channel

    Phil, a good writeup, but there's an angle to consider when aiming to sell exclusively online. More here..

    http://ericgonzalez.wordpress.com/2009/01/05/the-bull-and-the-honeybee/
    write2eric
  • RE: Debunking myths about the SaaS partner channel

    Excellent article - I really think the channel concept is
    partially an issue of maturity in the given SaaS product.

    Certainly SaaS offerings can be sold entirely online - or at
    least without local face to face - but also consider that the
    channel can also value-add entirely online. The Salesforce
    AppExchange operates both as a channel to Salesforce and
    a value-add. How many vendors in that channel have
    regional offices? Not many.

    There are many opportunities for the channel to leverage a
    vertical focus through customization and integration. In
    the SMB space, there are certainly ways to package
    offerings for verticals that solve problems for their
    audience. What I don't see (enough) is these ideas
    considered upfront - when the platform could really
    embrace the channel from the start. It is something that
    should be considered in every marketing plan....
    michaeldunham
  • Enterprise roots and myths

    <p>Phil,</p>
    <p>Great post! Particularly regarding the face-to-face selling data. Having seen a lot of SaaS trials and tribulations with respect to both channels and sales models, my conclusion is that the misconceptions are often more a matter of <a href="http://chaotic-flow.com/2007/12/11/b2b-saas-flies-in-the-ointment-%e2%80%93-old-enterprise-habits-die-hard/">roots than reality</a>. My guess is that SAP's poor results were more determined by the company's expectations than the customer's needs. Indeed, all of the examples given have incredibly strong enterprise roots...with the exception of Microsoft, which while B2B at the core, has lot's of experience selling through channels and online with virtually no face-time.</p><br>
    <p>If I were to recast your 2 misconceptions into reality, I think I would try something like this...</p>
    <p><ul><li>SaaS companies need channel partners to provide more complete solutions than their product alone and to expand their reach (think affiliates,not VARs)</li></ul></p>
    <p><ul><li>SaaS channel partner margins are determined solely by their value added, which should be more about access to customers (affiliates) and getting the most out of the solution from a business standpoint (consulting) rather than tactical services for deploying it, customizing it, or figuring it out (technical services) Because, these things should be made stupid-simple and automated by the SaaS vendor in the first place.</li></ul></p>
    <p>by <a href="http://www.crunchbase.com/person/joel-york">Joel York</a></p>
    <p>at <a href="http://chaotic-flow.com">Chaotic Flow</a></p>
    york_joel
  • RE: Debunking myths about the SaaS partner channel

    Phil,
    When I brought one of the early SaaS accounting systems to market in 2001, we did our selling via the Internet. As a result of flexible meetings during which the customer "tasted" the SaaS experience we had higher closing ratios and shorter sales cycles than when selling turnkey systems on-site. And, not only were our profit margins were higher, but both our efficiencies and our customer's costs were also far lower, leading to our acquisition a few years later.
    davex44
  • RE: Debunking myths about the SaaS partner channel

    @kboasso - Excellent, Phil. Spot on.

    The other point we keep making -- particularly re alternate channels and partners -- is that SaaS vendors need to stop thinking like software companies. Good SaaS vendors shouldn't need technical expertise inside their customers' organizations; that's why the on-demand (r)evolution is giving IT people fits. To make the sale, SaaS companies (and their partners) need to demonstrate real line-of-business expertise.

    The best channel partners may not need to be all that technically inclined; instead, they'll act as consultants in their space, and the SaaS apps they offer will allow them to scale delivery of their core services. We see this happening with applications like Clario (www.clarioanalytics.com) -- developed by marketing analytics experts Decision Intelligence to offer their advertising / promotional services to a broader customer base -- and Janus Health (www.janushealth.com) - which was founded by health care industry executives to help MDs manage both patient care and their practices.

    Companies like these (and other SaaS vendors that "get it") will build partner relationships with vendors that add real business (as opposed to technical) value to the user relationship.

    kpb
    www.KeychainLogic.net
    KBoasso