The key to establishing a “fair margin” for your resellers is to pay them for what they do – and don’t pay them for what they don’t do.
For on-premise software, the traditional partner discount off list price is 40 percent. If you are paying your salespeople upwards of a 10 percent commission – the reseller margin might seem high.
Realize that just like you, resellers need to make a profit. Most on-going, successful software companies build a budget that produces a pre-tax profit of 15-to-20 percent. A reseller’s profit margin may not be that high…but they need to make money to survive.
The 40 percent partner discount breaks down as follows:
- 20 percent to cover sales and marketing costs
- 20 percent to cover overhead (support, billing/collections etc) and profit margin
This explains why a 30 percent margin isn’t effective for those who invest in sales and marketing. It doesn’t give the reseller enough to cover their costs.
The reality is, most resellers don’t invest in sales and marketing – they want you to do the lead generation for them. In which case you shouldn’t be paying them 40 percent.
You may want to consider having two tiers of pricing:
- 10-to-20 percent for resellers that rely on you to do the marketing
- 40 percent or more for resellers who are self-sufficient.
What happens to discounts for Cloud solutions?
With payments coming in the form of subscriptions, is there enough margin to keep everyone happy? Vendors usually look at the equation from their own perspective and decide they can’t afford 40 percent. They go to their partners with an offer of 20-to-25 percent and sometimes less for renewals.
For the partners it comes down to simple math. If they have been selling software with a list price of $100K and 20 percent maintenance – they get $48,000 when they close the deal.
Now, looking at the same transaction, but on a subscription basis, the typical conversion pricing leads to an annual payment of $53,000, with maintenance included. If the partner is lucky enough to get a 40 percent margin from you, and they can collect the first year up-front, they get $21,000. This is why, given the choice, partners will almost always push the on-premises version. Even if they were to get a 40 percent margin on renewals, it would take them almost three years before they collect the same amount they would for selling an on-premise plus maintenance for three years.
Many vendors recognize this is a challenge and are offering an aggressive discount structure to attract partners. NetSuite, for example, has a program called SP100 that gives partners a choice if they bring in a contract for two years or longer:
- 100 percent of the first year subscription, and 10 percent of all renewals; or
- 50 percent of the first year subscription and 30 percent on all renewals
For most companies, this is not a viable option – they cannot give away the first year’s revenues. However, it does highlight how important margins are to partners. Our recommendation is to offer partners the same percentage discount for on-premise and subscriptions. However, over time partner margins are likely to decline, for the following reasons:
- Even a 40 percent discount will be hard to sustain because of the costs you incur to host and maintain your Cloud solution, which erodes your margin more than on-premise software.
- Many of the big vendors are driving down partner margins, pushing their channels to generate more services to offset the lower discounts.
- As more partners build up their recurring revenue stream, and have a guaranteed cash flow that covers all or most of their operating expenses, they will become less reliant on product margins.