SaaS Rewards Should Reflect The Risks

IT customers traditionally assumed a lot of risk when purchasing packaged software because they were making big, up-front license payments. But Software-as-a-Service shifts much of that risk back to vendors because customers are paying subscription fees they can cancel at any time, noted Joel York, an Internet software executive and blogger, in a posting at CloudAve.com.

Solution providers find themselves taking on much of this risk, according to York. That's because solution providers make most or all of the investment in customer acquisition and on-boarding. But they receive only a portion of the recurring revenue or subscription fees.

For that reason, York argued, SaaS vendor payments to channel partners should be tied to the lifetime value of a deal, not just the customer's monthly or quarterly payments.

"A flat payment schedule does not match the value-added or costs incurred by the SaaS channel partner over time," York wrote.

Solution providers should receive a bigger payment up front to reflect the disproportionate amount of risk they are taking on. A channel partner, for example, could get 75 percent of the initial payment and take 35 percent of the ongoing recurring revenue. The actual amount hinges on the value provided by the partner, ranging from simply providing a sales lead to fully servicing the customer.

"The percentage margin or revenue share still reflects the value that the SaaS channel partner brings to the table," York wrote.

PUBLISHED AUG. 12, 2013