SaaS Pricing Models for the Channel
A particular focus of a recent Channel Mechanics webinar “How to Take your SaaS Solutions to Market via the Channel”, was to look at the types of pricing models used by vendors selling through the channel. Channel Mechanics CEO Kenneth Fox spoke with special guests Nehul Goradia, Co-Founder, Enabler ONE and John McArdle VP Sales, Channel Mechanics, to discuss the pricing models successful SaaS vendors are utilizing in the channel.
Based on the webinar, here are some of the most frequently asked questions around SaaS pricing for the Channel.
1. How do Vendors decide what margins to give Channel Partners?
There is a general perception amongst partners that SaaS vendors do not give attractive margins on subscriptions (at least not compared to the traditional “on-prem” margins that were typically on offer). They believe that the SaaS vendor, especially those selling subscriptions directly, are not keen to shell out a bigger chunk of margins to partners.
Indeed, that may be true for certain players – perhaps for commoditized offerings. But when we get into very domain-specific, large enterprise-based offerings, where the partner plays a significant role in the sale of the SaaS solution, that changes. In fact, margins can vary from five points to 40 points. But what causes this range in points? The margin offered depends on a number of factors:
There’s an expectation today by vendors that partners make money (revenue and margin) on providing value-add services around the SaaS solution. They expect the partner to provide not just advisory, consulting, deployment or configuration services, but managed services to build a practice around their SaaS offerings. The same is even true for “on-prem” products. Whereas with these, the partner typically gets a higher margin and the services wrap may have a shorter lifespan. SaaS solutions offer partners the opportunity to build business engagements with end customers over a longer time period. Therefore the “returns” must be measured typically over a 2.5 – 3 year period.
2. How long do typical SaaS contracts run for?
During the webinar, we surveyed attendees to understand the typical duration of the SaaS contract they asked customers to sign-up to. Almost one-third (29%) of respondents said the majority of their customers sign-up for 1-year agreements. However, more interestingly, 53% aim for a 3-year contract term. This is crucial for partners reselling vendor SaaS solutions – because margins are typically lower than for on-prem, it can take up to 3 years to achieve the same returns. It is good practice as a SaaS vendor to engage with partners that have a solid track record in winning multi-year contracts with their end customers.
53% of webinar attendees opted for a 3 year contract term
However, there can be some interesting dynamics when it comes to customer demands for SaaS contracts. Small & Medium businesses (SMBs) are attracted to a pure SaaS model where they can pay monthly by credit card, or even quarterly. They typically love the flexibility of being able to pay monthly, or what we refer to as ‘pay-as-you-go’ and ‘pay-as-you-grow’ models.
Larger enterprises and corporations typically buy for at least 1-year or even multi-year. It is worth noting however, an interesting trend, particularly in Europe, where in addition to the pandemic turmoil, Brexit has had a massive impact. The currency and exchange rates between different countries have created a dynamic where customers are looking to buy for one, two, and three years and pay up front. Even though they have the flexibility to pay monthly or quarterly, they’re buying in the old style, to protect themselves from currency deviations. It has nothing to do with the flexibility of SaaS payment options; it’s just the economic conditions. People want visibility and predictability of their costs, and currency still has a big impact on the buying model.
Some of the more lucrative longer-term SaaS contracts are handled by global consulting firms and global system integrators (GSIs). For SaaS vendors, whilst they may have to offer higher end margins to do business with these partner types, this can be incredibly fruitful. These companies are looking to sign three, five, seven, possibly even 10 year frame agreements with their end customers. This gives you, the SaaS vendor, tremendous revenue visibility and runway. But remember, minimize future financial risk. If you sign up to a five year or 10 year agreement, you must think about forward pricing. Don’t lock yourself into your current year pricing levels for the next 5-10 years; make sure you include mutually agreeable price increments into the overall contract with these partners.
3. What are the Challenges for the Channel regarding SaaS Pricing?
When we look at the challenges channel partners are seeing with SaaS pricing, much of it comes down to complexity. There can be many elements to the pricing model, along with additional fees. For example, do you charge per user, per transaction, per module, per API, for storage, for onboarding services etc. This can make it difficult even for partners to construct quotes for end customers. The expectation or perception of SaaS is to simplify things, not complicate things, especially for buyers. A mantra of “Easy-to-try, Easy-to-buy, Easy-to-deploy”, works well.
So in order to make it easy for the Channel, make sure your Pricing Model:
- Is simple for partner sales teams to understand
- Is supported by easy to use tools that generate formal quotes for partners to share with prospects
- Handles different configuration options for expansion that partners may want to offer to their prospects
- Clearly spells out all fees and cost elements. In particular, the variable elements that grow with scale in plain, easy to understand language for the partner and customer
SaaS solutions are disrupting both the way business customers consume technology and the workings of the Channel. As such, pricing models are still evolving. However, there is a general perception that SaaS pricing is complex, especially for Enterprise solutions. As a vendor, you want to ensure that the partner experience for reselling your SaaS offerings is as easy as possible, while being financially lucrative. To be successful, ensure your pricing model is well structured and easy to understand. Support it with tools the channel can use to generate quotes. Take time to fully train channel sales teams on how your pricing model and quote tools work. And finally, review your partner ecosystem to identify those with a proven track record in securing multi-year contracts with their end customers – and work with them to scale your revenues faster.