InsightaaS: It's pretty well known by many of our readers that my focus extends to both cloud and channels - and that I find discussions involving cloud channels especially interesting! Today's featured post looks squarely at a key issue in cloud channels: the compensation model needed to engage the channel in selling SaaS applications. In it, consultant Joel York does a good job of explaining why cloud's ability to transfer risk from buyers to sellers (a key point in the seminal cloud sales book Consumption Economics) puts an unreasonable amount of strain on the channel, one that can't be properly addressed by applying standard discount/commission levels to recurring revenue in the same way that these rates are applied to one-time product transactions. He then provides a graphic with three different payment models; the models themselves aren't of great value, but they do demonstrate that there are a range of approaches than can and should be considered.
I've worked with both vendors and channel members on this, and there isn't a single, easy solution to how to engage the channel in the cloud. There is, however, a clear need to do so: the channel, better than product vendors and even the buyers themselves, understand how best to deploy and manage technology in small and mid-sized companies, and there is a clear and compelling need for this expertise as cloud adoption increases across and within SMBs. York's post doesn't define "the" path forward, but it does add to a very important discussion.
I recently had the pleasure of speaking at the Retail Solution Provider Association annual thought leadership summit on the challenges faced by channel partners and vendors in the transition from purchased software and hardware to a recurring revenue service model. Not unexpectedly, one of the hottest topics on the agenda was SaaS channel compensation. In particular, how can SaaS vendors expect their more modest channel partners to absorb the up-front costs of customer acquisition and on-boarding when the SaaS vendors have trouble doing it themselves?
A Game of Risk
The SaaS subscription model shifts risk from the customer to the vendor. SaaS vendors promote low-risk free trials, entry-level subscription plans, and bundled on-boarding, whereas enterprise software vendors expect big up-front license payments and professional services fees. In fact, it is common practice in enterprise software to promote and sell a product before it is completely built or even started. Not so in SaaS. The risks don’t go away though, they just get shifted away from the customer back to the vendor. The SaaS vendor must make big up-front investments in R&D, customer acquisition and on-boarding just like the enterprise software vendor, but it often takes well over a year to recover these costs. If the product fails to live up to expectations; the SaaS vendor is left holding the bag, not the customer.
Between a Rock and a Hard Place
Enter the channel. Acting as a risk buffer is a long-standing value added service of the channel. Some channels exist almost solely to absorb risk, like wholesalers and investment bankers. Enterprise SaaS and software channel partners invest in sales, service and support capacity in advance, absorbing the risk of fluctuating demand. Sitting as it does between the customer and the vendor, the channel can absorb risk from either direction. Too much risk and the channel partner lands between the proverbial rock and hard place. Goodbye channel.
The problem arises when SaaS vendors try to apply licensed software math to SaaS channel compensation...