Tuesday, May 5, 2015

Don't make the recurring revenue mistake that Microsoft, Symantec and HP are making

Every day lately it seems that partner programs that OS-Cubed and other small IT business vendors participate in are moving to partner program models that emphasize new sales over recurring revenue.  Recently HP, Symantec and Microsoft have all moved their programs over to this model. In an environment where you have one-time license sales this makes a tremendous amount of sense. In an environment with ongoing recurring revenue it's just stupid.

The big companies are reimbursing partners more for a new sale than ongoing ones, trickle off or eliminate the revenue sharing as a recurring revenue relationship ages, or de-level long-term partners who have high client loyalty over partners who have high initial sales.  I will posit here that they are applying the logic that you use for "new packaged license sales" to a recurring revenue model in an inappropriate and in the long term damaging way.  As software developers or entrepreneurs designing your new recurring revenue product - don't make the mistake that these big companies with their old-fashioned views are making.

These big vendors are pushing recurring revenue models as their preferred licensing method - that part of the formula they get. I certainly understand the desire to grow your market.  But understand that the major incentive that small resellers have for getting a recurring revenue stream is the same one you have for selling them - that is that it's constant, steady cash flow.  And cash flow is very important in a reseller environment.  It makes both the selling company and the client more stable and allows them to adjust license quantities and capabilities on-the-fly.  Because of this new model clients have the ability - at any point, on any given month, to "just say no" and switch to another vendor.  Keeping the customer happy, and satisfied at all times is what keeps those customers as customers. They can easily just change providers if they become dissatisfied, with almost zero capital investment on their part.

And who keeps them happy and satisfied? Their reseller in general - not the software vendor with their overseas based technical support, and their inadequate and out of date forum which they provide as a substitute for an actual curated and current wiki or knowledgebase. When your product screws up, the small reseller is the one that makes it so the customer never knows.  They deal with your tech support from India. They navigate your forums and separate the wheat from the chaff.  If a customer had to do that they'd fire you in a second.  Small business resellers are your face to the customer.  The end customer mostly doesn't care if the product they're using is one brand or another - it's the product that the small business IT provider told them was the best, and if that reseller changes their mind they will change in a heartbeat.

So why - in this scenario - would you not do everything you can to both reward the provider for their ongoing support and reselling of your product AND do everything you can to support the ones that do it best - small, personal companies who emphasize long term loyalty over new sales? 

I don't understand this logic, but several companies - Microsoft, Symantec and others have hopped on the bandwagon of "we will reward new sales, but your revenue for the ongoing revenue stream will decline" or worse yet  they take benefits away because despite having a large ongoing revenue stream you're not adding new customers at a breakneck pace. 

In recurring service sales ongoing revenue is everything.  You want to bring customers in and keep them there.  If someone does a new sale, the customer stays for a year and then leaves - you have lost!  Realistically you should be rewarding partners for the longevity of the relationship, not the new sales.  You should increase revenue sharing based on how long term the sale is, rather than punishing partners for not bringing in new clients at a ridiculous rate.  It takes a certain amount of time to make back the expenses of a new sale.  If on the other hand you bring in a new client and they stay for years - that's an overall win, as well as a potential to leverage that relationship for additional products and services in the future. And in the long term it's what will make your product and recurring revenue sale successful.

I am convinced that these short-sighted vendor partner moves are indicative of how successful these companies will be as long term revenue generators and ultimately as SaaS providers.  If you cut out small dealers, and emphasize new sales over overall volume and long term customer satisfaction your recurring revenue stream is destined to go from a flood to a trickle. It's quarterly tactical thinking, not long term strategic thinking. Because customers can easily choose a new provider now with zero capital investment in licensing.  And your vendor may be the one recommending it because you didn't have the vision to continue to reimburse them for recommending and supporting your product.  Recurring revenue sales are NOT the same as one time license sales. The sooner these big companies realize it the better.