Channel compensation terms and margins seems to be a difficult topic for many software vendors (ISVs). My work takes me to many different places around the globe with the opportunity to talk to channel partners and software vendors.
In a recent ISV seminar where I was talking about channel compensation models, I got a question from the audience how long an ISV should keep paying its channel partners for a deal that has been closed.
Traditional Channel Compensation
Let’s first review how we have done it in the traditional software license model sales with maintenance.
The typical margin for the channel partner ranges from 10 percent (referral) to 50 percent. In most cases, the channel partner manages the customer relationship and invoices the customer for the software. The ISV invoices the channel partner for software based on the agreed margin. Typically the payment terms between the channel partner and ISV has been set in a way where ISV gets paid when end user organization has paid the channel partner. I also know cases where this has led to problems where ISV requires payment before the channel partner has been paid. This is not a good situation and the channel partner becomes “the bank” for the transaction. The annual maintenance and a share of that is paid on annual basis and typically based on either same percentage or a bit smaller if the maintenance has been divided into support, upgrades and maintenance. The idea here is that the channel partner gets one big payment when the software has been sold and then annually a piece of the annual maintenance fee. The typical maintenance fee that the ISV charges ranges between 18-25 percent
SaaS Channel Compensation
The question that I got from the audience recently when running an ISV seminar was whether the ISV should pay the channel partner same margin for the entire lifetime of the contract that it has with the end user customer? I have a strong opinion about this, especially as I am an entrepreneur and live the life of a channel partner for some solutions.
The channel partner is investing to push the ISV solution in its local markets. This means that there are investments in sales and marketing, support and many other things that are needed to become successful. The channel partner accumulates investments to acquire customers so why wouldn’t the ISV let its channel partner the recoup its investments over time? The only way to do this is to have a secured cash flow to match the Customer Acquisition Costs (CAC) that the channel partner has accrued with time.
The counter argument from the audience to pay channel partners over the lifetime of the contract was the need to push the channel partner to focus more on new customer acquisition (hunter role). My opinion about this is that each channel partner sets their own strategy in respect to the sales model and it is therefore not the role of the ISV to define whether the channel partner takes a hunter or farmer role.
And finally, it is very important that the channel partner keeps its interest in the end user customer and their use of the solution to avoid a churn that is one of the most dangerous things for the ISV.