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Vendors have never been blind to the benefits of selling their products through the channel – but they’ve never been blind to the costs, either. Historically, their relationship with resellers has required a substantial investment of time and money on both sides to be worthwhile, and it can sometimes seem like this investment isn’t worth the eventual return. For channel businesses, the learning curve of a new application (particularly in a complex area such as accountancy software) can be too steep to make selling it viable.
For these reasons and more, six years ago we dropped our channel strategy and invested internally in marketing and sales to bring our products and services directly to the end-user.
However, the channel dynamics have changed and we’ve decided to re-enter the market – and not without cause. The rise of plug-and-play applications such as ours has dramatically reduced the learning curve for resellers (who can more easily achieve high levels of self-sufficiency, and higher returns), and thereby the costs for vendors. In fact, we have found that working with resellers and accounting practices alike has added a great deal to our product offering and our mutual end user experience alike.
And we’re far from the only company looking to return to the channel. In a time where perpetual software licenses are becoming anachronisms and monthly subscription services rule the day, businesses have no option but to change their revenue models. Orienting it towards resellers and their value-added services is simply good business sense: vendors benefit from the access to the channel’s larger customer base – and the channel needs more modern and cost-effective products to remain competitive for their customers and prospects.
The right revenue mix
Naturally, there’s more to making a success of re-entering the channel – or indeed, entering it for the first time – than simply employing the services of a few resellers. The revenue model must be finely balanced in the interest of both VAR and vendor alike, without ever neglecting the customer.
The channel should adopt a pragmatic, long-term approach to vendors. Five years with this business model has taught us that recurring revenue streams are about cumulative income over time, not the one-off sales associated with perpetual licenses: the need to acquire new customers should be balanced with the need to keep existing customers on board for years to come. Because of this emphasis on customer retention, this software-as-a-service (SaaS) revenue model is much more conducive to high company valuations than the older perpetual license model.
Changing markets, changing models
A short-term approach simply doesn’t work for this revenue model: when a new sale generates only one 12th of the revenue associated with a perpetual license/annual maintenance sale in the first year, a reseller naturally has to think ahead. The lower costs both incentivise the customer (who gets access to what they need, for as long as they need it, for a lower short-term cost), and the reseller (who will, provided they can keep their customers, continue generating revenue indefinitely). Nonetheless, pressures are being applied at the lower end of the market, as competition with the channel heats up.
In the world of financial software, players such as Xero are finding their revenue threatened by other software vendors encroaching on their market and are being forced to discount their prices to remain competitive. This means that revenue per unit sale declines for everyone. Simultaneously, accounting practices are slowly replacing traditional accounting revenue streams with automated outsource financial management services based on these new applications.
In this competitive environment, resellers have started developing deeper collaborations with customers – upselling applications and services and reducing their need to acquire new business. It’s a necessary change, to be sure, but these efforts are being thwarted by bigger players, accounting practices, and new SaaS accounting applications, focused on replacing the old accounting software with the new SaaS applications. Evolving and working with vendors represents the best way forward for the channel, but it will not be easy.
If they don’t change, financial software resellers face a stark reality: declining revenue per sale, accounting practices muscling in on their territory – and existing customers moving towards SaaS models and away from them. If they do survive, it will likely be in vestigial form as they are assimilated into larger resellers.
This dilemma is not specific to the area of financial software: it will play out in macro across the entire channel. Services income is no longer optional, but necessary for resellers and vendors alike. The latter will need to provide applications that have few meaningful competitors, high sales and retention rates, significant additional service income, and lower financial barriers to entry. What’s more, they know this, and are building channel programmes to factor it in.
Our business is one such vendor, and our criteria for partners is simple: know the opportunity of this revenue model, understand the obsolescence of the old model, and actively work to add more applications that provide more value to more customers (new and old). After all, resellers today can’t afford to do otherwise and expect to survive, let alone prosper.