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

Let me start off with the reply… My guidance would be not to invest too much time and energy on creating a reseller channel. The reseller channel normally does not do the job for SaaS companies, specifically at the early stages (sub-$20M in revenue). This is driven by two things:

1. SaaS solutions generally don’t require an intermediary. They are straightforward to discover (online), easy to implement (nothing to deploy), and easy to use. This is certainly not the case with SaaS solutions that require a vital process adjustment on the customer’s side, more on that below.
2. SaaS license revenue stream in the first year ( when the reseller should make the most of his money) is a portion of what perpetual license products receive. So the reseller needs to settle for a portion of the money he expects from his perpetual license vendors, or he must receive a cut of subsequent year subscriptions (which would become a waste of your money).

The only way to engage an indirect channel in an SaaS delivery model is around the professional services that must encompass your resolution. In effect, 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 necessary to effectively implement your solution at a customer site. In that case, the service provider produces his revenue from the services billed immediately to the customer… while producing much less revenue from the SaaS license margin you would provide in addition to that.

Now 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 internet which includes restricted phone or physical interaction with customers. Generally, this channel is augmented by customer support, whose function is centered on replying to questions and on-boarding customers.
• Direct sales: Your own sales people interacting with prospects to convert them into customers. Several types of direct sales exist, including inside phone based sales, and field sales.
• Affiliate sales: These are partners who push your online sales. They represent more of a marketing channel, for they normally do not supply any sales support.
• Reseller sales: Selling through partners who work mostly as a marketing channel. Typically, these partners do not provide your customers with any added value other than the sales transaction.   These partners derive the vast majority of their money through the margin you provide them when they sell your product. Typically, they expect anywhere from 10-20% in margin. These partners primarily give favor to installed software providers and hardware providers. They don’t have a lot to offer an SaaS provider. Example: Software House.
• Value-added reseller: These people are partners who provide services wrapped around your product to provide a more total solution to their customers. These resellers create the majority of their revenues through the delivery of services, rather than the margin you provide 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 teaching others how to do it.  Good VARs will think of the customers as their own, and they are offering you the privilege to bring your product to them. For instance: Software Allies delivers services around Salesforce.com implementations.
• System integrator: These are partners who create more total solutions by integrating your product with others. Though these partners are traditionally focused on installed software and/or hardware, a few of them are emerging to assist SaaS solution providers.  These partners manufacture the vast majority of their revenue through services and little through product resale.
• Distributor and Value-added Distributor: These distributors grant you entry to a pool of resellers or value-added resellers. Leverage is the main benefit behind a distributor … their role is to lengthen your reach to many probable partners. It is particularly challenging for SaaS companies to leverage distributors, especially in the United States. Distributors have a tendency to be a lot more suited for installed software and hardware vendors.  Although, entering European or Asian countries can be successfully facilitated by value-added distributors.
• OEM: These partners are typically companies that have their own product to sell and they are looking to expand their offering with your product. For instance, Salesforce.com announced its AppExhange OEM Edition back in 2006.

There are a handful of more categories of channel sales, but they are simply variations on the above.  What I am trying to say is that channel sales come in all kinds of flavors. You are not able to generalize sales channels and you need to commit the time to figure out the optimal channel you should develop.

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

1. Leverage: “We have to build indirect channels, otherwise we can’t scale.”  Maybe. Maybe not. It is true that indirect channels provide scale. The trouble is that indirect channels ordinarily don’t work for early stage or expansion stage software companies. Early stage software companies basically do not have the brand and scale to push enough revenue through a partner’s business. You will end up in a catch-22… can’t grow enough to get the channel partner’s attention … can’t grow big enough without the channel.  Answer? Plan your development without the channel and look to develop your channel when you’re at least $20M in revenue.
2. Complexity: It is much easier and less expensive to sell via 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 assemble your own committed sales team. Now envision getting someone else’s sales team to sell your product just as well, 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 will market your product by introducing it to their existing customers. You will still need to sell the product yourself, working through the partner. Therefore, for an extended period of time (typically a year), you should supply your own sales resources to sell to your partner’s customers. Once you close enough deals, the partner’s sales team will begin to feel excited about your product and will start the process of learning how to sell it.
4. I should develop a channel for my needs: Nope… You should only construct an indirect channel if it suits your customer’s needs.

What channel works best for your product? ASK YOUR CUSTOMERS. Start by asking them what they think a COMPLETE solution entails. What would they desire to see delivered with your product to give them what they need? What would they like to see when it comes to integration, deployment, implementation and training services?  Then ask them how they would like to see those services delivered. Ask them the methods in which they would desire to buy your product and what service providers they used (or they would have wished to use). These solutions may direct you to possible channels you can leverage.  If they said they liked buying directly from you, and getting service directly by you, don’t create an indirect channel.

Until you make a decision on the appropriate indirect channels, the type of engagement model with the partners, and the nature of the partnership, you do not need to become bothered with incentives and channel conflicts. Begin with your customers and then establish 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 requires two years to construct an efficient indirect channel. You are better off not to follow that path if you’re not ready to embark on the two year journey.

Firas Raouf is a Venture Partner at OpenView.