Channel compensation terms and margins in SaaS business

Channel compensation terms and plansChannel 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.

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  1. Jeff Dalby on December 19, 2014 at 11:59 am

    I saw this article on LinkedIn and thought I’d comment. I agree with you 100%. SaaS companies should be compensating partners over the life of the account. Here at IAM Cloud we do this by providing a fixed percentage of the initial sale, and then a slightly variable percentage for each subsequent year. As long as a partner maintains a reasonable amount of revenue each year, the percentage is the same as the initial sale. And frankly, we don’t care if it is X amount of new revenue, or if the partner keeps Y amount of customers happy so they stay on our platform. The only scenario that doesn’t work is when it costs the SaaS provider more to maintain the relationship with the partner than the amount of revenue received.

    I think there is a bigger story as to why a SaaS provider should do this. We have the opportunity to help the more traditional SIs and VARs transition to a recurring revenue model vs. a strictly transactional one. As more services move to the cloud, hardware, license, and professional services revenue drops. For many in this industry the only way to survive is to become a Cloud Services Provider/Managed Services Provider.

    Any SaaS vendor that wants to ensure their channel partners continue to exist should understand that we are moving towards a more community based economy. It can’t be about “Hey please can I get mindshare of your account reps so you’ll sell my stuff” and instead has to be, “Let us help you grow your business so mutually we can do better in this changing industry.” The more a SaaS provider does to help their channel be successful in a cloud economy, the better off both organizations will be.

    People will find that the Golden Rule is going to be the only way to do business in the SaaS world.

  2. DrSalonen on December 28, 2014 at 10:09 pm

    Thanks Jeff for sharing your feedback and comments. I just run 3 seminars for channel partners in this topic and it is obvious to me that every single VAR/SI is looking for new ways to grow their business and every one of them has to find a way to identify what is the best scenario for them. I really liked the approach that I am also educating ISVs is to change the attitude to helping the channel to grow the business.

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