With the buzz building for the upcoming SalesLogix Cloud Edition, one topic not being discussed so far is the impact on the SalesLogix Business Partner community. By shifting it’s business model from On-Premise software to the SaaS (subscription) model, Sage has the opportunity to energize hundreds of Business Partners who are currently at a competitive disadvantage relative to a handful of of their peers. Whether they, Sage or their partners, know it or not.
Sage, as most every vendor we’ve worked with over the past 16 years, has a tiered channel program. This means that Business Partners, commonly referred to generically as VARs (value added resellers) receive different levels of support and financial benefits from Sage, including the price they pay Sage for software that is resold to client (hence the “r for reseller” in VAR). For those in the tech industry this is not news, and in fact is standard practice. So what?
Let’s take a look at the benefits provided to VARs by vendors in the same category as SalesLogix – Mid-Market Business Management solutions. This comprises CRM, ERP and other database type of apps. Typical benefits include:
Margins. Top VARs typically have a 100% advantage on Cost of Goods Sold (COGS). Their purchase price is 1/2 that of VARs on the lowest tier level.
Leads. Top VARs typically get all leads in their territories.
MDF / Co-op Funds. Usually 2%-5% of VAR purchases from vendor. The top few usually get a higher MDF percentage.
Marketing Event Sponsorships. Vendor funding of specific marketing events. Lower level tiers rarely get financial support from vendors.
Other. Too numerous to mention. Use your imagination.
Again, we have to ask, so what?
Obviously, the handful of VARs on the top tier have a huge competitive advantage over those on the lower tiers. Imagine being able to sell your product at your competitors COGS, and earn a healthy profit doing so. And then throw in lead generation and the other benefits listed above. Pretty cool, huh? The big get bigger, the small get smaller and those in the middle tread water. There are exceptions, of course. Lots of them. The exceptional company will always be able to find a way to win. Again, this is not unique to Sage, it’s just the way the industry is structured.
How SalesLogix Cloud Might Level the Playing Field.
Disclaimer: The information regarding SalesLogix Cloud that follows is not yet finalized and is subject to change. This is just my interpretation based on information already shared with the SalesLogix Business Partner channel.
SaaS, Subscription Model, Cloud, or whatever the term, the revenue and delivery models for for SalesLogix Cloud is a radical change for both Sage and their Business Partners. There will naturally be some push back from some partners – it will force everyone to tweak their business models, and change can be scary. Software installation related revenue will go away (this is not really a “value added” service anyway) and revenue recognition will be spread out over time. The channel needs to take a collective step back, a collective deep breath, and look at the big picture. Ready? Ok, so the pay-off is:
Competitive Advantage Against Salesforce.com and Microsoft Live CRM. Based on the numbers I’ve seen, it will be more attractive from a financial standpoint to sell SalesLogix Cloud. With greater margins relative to our competitors we will have more to invest in our business, marketing, etc. A healthier business means a stronger competitive position.
Level Playing Field Among SalesLogix Business Partners. I’m not sure if this was intentional, or if Sage is even aware, but so far I’ve not seen or heard of a tiered margin structure for SalesLogix Cloud. For partners currently on the low tiers, they will more than double their software related revenue over a three year period. Virtually all partners will see an increase in software related revenue in the first three years of the client relationship. Now get this – while software M&S (near and dear to BP’s) goes away under the SaaS model, the ongoing subscription margin in year 3 and beyond is roughly 3 times that of M&S commissions. Furthermore, with client purchasing subscriptions direct from Sage, the opportunity for partners to discount may be reduced. All of this adds up to a much more level playing field among SalesLogix BP’s.
So far, it looks like SalesLogix Cloud might level the playing field for partners. Is this what Sage intended? Will it energize the Business Partner Community?
Maybe.
But I think nearly all SaaS margin comparisons make a very fatal mistake. They assume that the margin the SaaS vendor pays will remain constant.
It won’t.
When the market is new and companies buy like crazy to adopt a new technology the SaaS vendors will pay out almost whatever is needed in margin to keep new customers flowing and win market share.
Need proof? Fast forward to 2010 where on-premise software is considered a saturated (stagnant) market and what happens? The on-premise publishers have to monkey with tier to keep earnings constant or growing. It comes out of the VAR pocket and into the publisher. Zero sum gain for the customer. Definitely not zero sum for the VAR.
The same tier gymnastics is going to happen with SaaS — only the market’s so new at the moment that nobody cares (or thinks about it).
The only relevant goal for VARS looking to form long term businesses that someone would want to buy (know anyone looking to buy ERP businesses today?) is that they MUST build their OWN recurring revenue (special sauce).
Anyone building a business based solely on the courtesy of a software publisher (on-premise or SaaS or whatever the next big thing is) to continue to pay them a margin is foolish.