Software as a Service (SaaS) and Data as a Service (DaaS) companies find themselves in need of various kinds of distribution partners to provide their product (or package of technology services) to a wide range of customers that cannot be reached directly. My work with these companies has brought back my earlier days of creating new distribution models and channels for emerging technologies. So here is a topline overview of distribution partnerships for our times.
Referrals: these partners create a “warm” introduction for your SaaS or DaaS offering and pass back the responsibility to your sales team to open, close and support the sales. Like an outside sales representative or a lead generation consultant, your referral partner is paid a commission (generally between 3% to 10%) for this referral, after the sale is closed, with a cap on the commission. The cap is either by duration (12 months of revenue, say) or by maximum dollar amount. Sometimes a small retainer is paid in addition to the back-end commission, structured as an advance against commissions, or not (as a non-recoupable advance or retainer fee).
Resellers and Value Added Resellers (VARs): these partners sell your product to their customer base, either on its own or in conjunction with their own products. Your product is not technically altered or integrated with the Reseller/VAR’s product, but may enhance the value of the Resellers’ solution to their customers. When your product is combined as a promotional value (special pricing when buying both products), the practice is called “bundling” and does not indicate any technology connection. VARs and Resellers provide the first line of support to their customers.
Payment happens in two ways. The Resellers/VARs buy your product at a 40-60% discount off your list price, and then price it to meet their market demands. Or, as there are no physical goods to keep in inventory with SaaS and DaaS products, you set a fixed price per installation, or a percentage split of revenue shared with the VARs (you would get between 40-60% of the revenue), and you would get paid at the time of installation (not when the VARs get paid).
White Label partners: These partners take your technology, eliminate your brand identity, label it with their own brand, and resell your product as their own, in conjunction with their other offerings, or on its own. Again, there is no technology alteration to your product. White Label partners pay more than VARs because they are removing your brand in these “white” or “private” label deals. This higher revenue to you is charged either in higher fixed price fees or higher revenue shares (when paid like VARs), or in an additional “labeling” flat fee set on top of the commission for each sale. All customer and technical support falls to these partners.
OEMs: These partners want to integrate your product with their product offerings to expand their solutions to their customers. (OEM stands for “Original Equipment Manufacturers” and goes back to hardware companies – -IBM and DEC — in the early 1960s). The integration requires some technology demand from your side. This technical integration may be as simple as providing “hooks” into the OEM partner’s offerings, or may require the building of new functionality of your product to work with the partners’ products. Customer and technical support is the OEM’s responsibility. You are responsible to the OEM (as your customer) to support the technology you have built for them.
Payments on OEM deals go beyond back-end commissions or revenue sharing. These deals include either consulting fees for the integration work if it is simple, or licensing fees if you have built a new functionality to make the products work together. The licensing to the new functionality may be exclusive to the OEM partner (for much higher fees), or exclusive in a single vertical market targeted by the OEM partner.
Or you may be paid consulting fees to create the new functionality as a “work for hire.” If the OEM wants exclusive rights to the new functionality, you will not be permitted to use it in your own company, as the OEM partner owns the intellectual property in a work-for-hire deal. In some cases, the OEM partner might agree to license the new functionality back to you for sale restricted to your own marketplace, if you sell into a non-competing market or vertical.
In any case, the OEM licensing fees to your core product are set and that license of your product to the OEM is non-exclusive. So the deal may include: your licensing fees of your core product, your licensing fees for the new functionality (or payment for developing it), plus whatever back end revenue share or fixed fee is placed on each combined product sold.
Of course you need a technology attorney well versed in these kinds of distribution contracts, often referred to as channel sales or indirect sales. But for your planning purposes and initial conversations with interested partners, this outline can guide you to a preliminary deal that can be finalized by your attorney.