Article

How to set margins for software resellers

by Harald Horgen
President, The York Group

Setting the right margins or discounts for partners is one of the biggest issues for software companies.  Pay them too much, and you are leaving money on the table but pay them too little, and they don't have the incentive or budget to invest in marketing and selling your solution.

There are three key considerations:

  1. Margin or discount?  Do you give them a margin on the actual sales price, or a discount from the list price?
  2. Discounts for on-premise licenses: This is what partners are most familiar with, and they will view margins on SaaS solutions from that perspective
  3. Discounts for SaaS solutions

Margins or discounts?

Most partners are going to prefer getting a margin on the actual sales price because that means that you are sharing any discounts to the end user with them.  This can be an option if there is a small number of large, complex transactions that all end up being negotiated.

The biggest challenges with margin-sharing are:

  1. You get involved in negotiating almost every transaction, because partners will rarely sell at list price
  2. Controlling the end-user discount, to avoid partners selling the solution too cheaply.  It will be important to provide the partner with a pre-approved discount, such as 10 percent, that they can offer without your approval, but anything more than that will have to be approved by you.  This will effectively reduce the list price by 10 percent, because most partners will give away the discount to every customer that asks.
  3. In large, complex transactions there will likely be a large services component, which is where many partners make their real money.  This means that the price of your solution can become a barrier to selling their services, and some partners will be tempted to negotiate your price down as much as possible.

In general, using a list price with a discount is the best option.  You will always know what you get from each transaction, and it is up to the partner how they price it to the end user.  Do they want to maximize their margin from the solution, or do they want to discount it in order to win a large project?

On-premises solutions

For on-premise software, the traditional partner discount off list price for enterprise solutions 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 ongoing, 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:

  • Twenty percent to cover sales and marketing costs
  • Twenty percent to cover overhead (office, customer support, billing, collections, etc.) and profit margin

This explains why a 30 percent margin often isn't effective for those who invest in sales and marketing. Unless there is a significant services component that generates additional gross margin, 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:

  • Ten-to-20 percent for resellers that rely on you to do the marketing
  • Forty percent or more for resellers who are self-sufficient

Cloud-based solutions

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About Harald Horgen

Harald Horgen is an acknowledged expert in the field of helping software companies expand into new markets, and with 25 years of global experience he has learned what it takes to build successful business models. 

As the President and founder of The York Group, an international business development organization with offices and partners in 25 countries, Harald speaks from experience.  The lessons learned from hundreds of client engagements involving most technology platforms (mainframes, client/server, open source and SaaS) have been analyzed and documented, resulting in an extensive set of best practices. 

Focused exclusively on enterprise software vendors since 1993, he works with clients to extend or transform their business models in three primary areas:

  1. SaaS business model transformation – from overall strategy to adapting current roles and functions (e.g., sales organization and compensation, customer support, marketing, etc.) to work more effectively in an IP subscription-based model;
  2. Big data, data analytics and IoT – helping clients develop a comprehensive view of the data in their world, providing them with the knowledge and understanding they need to monetize the data they are collecting while maintaining compliance;
  3. Channel programs – from creating the right channel program using a comprehensive, fully-document methodology to actually recruiting partners worldwide through a network of partners in almost 30 countries.

Clients range from emerging firms to established players such as Microsoft, HP, CA, Symantec, Schneider Electric, Ericsson, ABB, Lufthansa, Sage, Schlumberger and GE Healthcare.

More about Harald Horgen