Archive for July, 2010

What should you pay a reseller?

One tactic that startups can use to reach a number of customers quickly is to depend on “sales” help from another company – loosely called a reseller.  In this post, I define different potential aspects of such relationships and suggest, based on my experience, what you can expect to pay for each aspect.

If you are selling to businesses (b2b) and have the price point to support it, your primary go-to-market plan has to include direct sales.  You can enhance your direct sales effort in a number of ways and what you pay a company to help you depends on what they do for you.  I tend to categorize what other companies can do to help our sales efforts as follows:

  • Refer – they introduce us to their customers who express a need for our product
  • Market – they actively seek customers who need our product
  • Sell – they take primary and ideally complete responsibility for getting the order
  • Support – they provide a significant amount of technical support to the customer
  • Stock – they buy and pay for, our products before they sell them

Based on this categorization, the table below summarizes what you should require of them and what you can expect to pay.

Partner responsibilities

Fees to pay

Refer They introduce us to their customers who express a need for our product. We benefit from the fact that they already have relationships with a number of customers.  You need to check how many.  You need to determine if your product is relevant to their customers i.e. if their customers are in your target market.  You also need to determine if their customers are likely to act on their recommendation to look at your product.

This is typically a low-risk, non-exclusive relationship.  If it doesn’t work, all you lose is the time you spent on developing this relationship.

5 – 10% of sales resulting from their referrals.  Nothing paid up front.
Market They invest in generating leads for your products.  This only makes sense if they have a lead generation asset that you don’t, such as a list of subscribers or customers.  Unlike the referral relationship a Marketing partner actually develops, pays for and executes lead generation programs.  A professional association might be an example of this kind of partner.  Before entering into this relationship make sure you understand at least the first marketing program they will execute.

This is also typically a low-risk, non-exclusive relationship.

5 – 10% of sales resulting from the leads they generate.  Some of these partners will ask for an up-front investment.  Laugh and ask them if they understood that you are a startup.
Sell They have professional sales people who sell your product.  You know how much knowledge it takes to sell your product – are they willing to invest in that training? Is that even feasible for your product at an early stage of development?  How much support are they going to need from you during the sales process?

In this relationship the sales leads could come from you or they could also be a referral source and/or a marketing partner.

This is typically a high-risk relationship, especially if you grant them some sort of exclusivity.  A sales partner will typically ask for exclusivity and you need to consider that carefully and tightly define the product (remember your products will evolve), type of customer, the geography, the industry sectors and the time period for exclusivity.

15-25% of their sales.
Support They have technical support people who are trained in your product and they are capable of resolving at least half the issues before asking for your assistance.  The more they can resolve the more they can be paid for support.You will hear terms like first-line and 2nd tier support.  I find those terms less useful than a metric for the % of calls they are able to resolve to the customer’s satisfaction.

Remember to require a log of all calls and do your own customer satisfaction survey.  There is a risk to your reputation that you must control.

25 – 50% of support fees, depending on the “% of calls resolved satisfactorily” metric.
Stock If a partner sees a lot of potential revenue from your product and particularly as a condition for gaining exclusive sales rights a partner may agree to pay up-front for your product.  If you have a physical product, you ship them your products and they stock them in their warehouse.  In the case of SaaS they pre-pay for a certain number of licenses.The cash inflow that results from this type of relationship is obviously very attractive to most startups.

This is typically the most complex and high-risk (beware of return rights) relationship and makes sense only if they are selling your product.  Properly negotiated and managed these relationships can be a huge win-win for both the startup and the reseller.

5 – 10% of sales.

July 25, 2010 at 2:52 pm Leave a comment

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