Back in November, I wrote an article called How Partner Ecosystems Ate the Channel.
My central theme was that Ecosystems include the channel, but encompass more than the limited route-to-market, transactional, post-integration attributes that define IT channels’ 4+ decade career in the B2B technology market.
Today, I’d like to propose that although the channel’s role in B2B SaaS is currently less significant than it was historically, particularly in the increasingly bygone days that proceeded subscription-based technology sales, the channel is about to witness a renaissance as aggregated, cross-vendor solutions emerge in the B2B SaaS space.
Let’s start by laying out some key foundational premises.
The Partner Ecosystem includes the channel, but encompasses much more. Partner Ecosystems perform five distinct value functions that align to the SaaS customer lifecycle: Innovate, Influence, Sell/Transact, Value Realize, and Retain. The traditional pre-SaaS channel value kicks in on the back three-fifths of the lifecycle and is typically more independent in nature. The non-channel part of the ecosystem – typically technology partnerships – adds value through co-innovation (e.g. integrations) and can provide influence in terms of both co-selling, and cooperative customer retention.
Traditional Channel economics are incompatible with the monolithic SaaS go to market model. The channel business model within a vendor go to market program is a function of services multipliers applied to license sales. On-premise software economics – with high, up-front license fees and substantial IT plumbing requirements – were decimated by cloud computing which eliminated the multiplier on both fronts. First, cloud computing lowered the up-front license fees by as much as 2-3x because customers paid for at most one year’s worth of license fees, typically one third of traditional on-premise license fees. On top of that, the SaaS model reduced the plumbing costs required to implement and integrate a piece of enterprise software. The net effect was a reduction in channel services dollars per transaction by as much as 5-10x when comparing a vendor’s on-premise vs. SaaS services contracts.
For example, consider a typical license sale of on-premise software of $30,000. In this model it was not uncommon for a channel partner to realize a 3x services multiplier. As a result, the economics for the channel were good, and channel partners could justify building a marketing and sales machine to sell or co-sell the license software and drive sizable projects. However, with B2B SaaS the ACV is typically one third that of on-premise and a services multiplier of 1x is considered rich. A similar transaction that generated $90k in channel services in the on-premise model now results in something closer to $10k for B2B SaaS – the channel value proposition is very weak.
Channels currently play a smaller role in the value equation for B2B SaaS than in the days of on-premise. According to Forrester research, something north of 60% of technology, in general, is sold indirectly. However, less than 30% of SaaS is sold indirectly. The reasons for this are many but include the lowered need for IT plumbing-related professional services, the burgeoning technology partner co-sale motion, the lack of an economic value proposition due to the demise of the services multiplier, and the direct nature of the subscription procurement that makes indirect selling not only unnatural, but can also complicate the vendor-customer relationship.
B2B SaaS vendors are increasingly recognizing that they need to pursue GoToEcosystem strategies with other technology partners. These partnerships – that include co-innovation, co-marketing, co-selling and co-retaining with other B2B SaaS vendors – are required to meet customer requirements, create profitable and efficient growth levers, and build sustainable, competitive business models. This realization has made technology partnerships a more important partner ecosystem segment for most B2B SaaS companies. However we believe it has also created the foundation for a channel renaissance associated with aggregated, multi-vendor solutions.
The Channel Renaissance in B2B SaaS
Although a single B2B SaaS company often struggles to justify an indirect channel play, once that company begins to partner with other SaaS companies to form end-to-end solutions the channel opportunity changes.
As an example, let’s consider Procore, a B2B SaaS company focused on the construction industry. Procore currently supports hundreds of technology partner integrations and created end-to-end solutions that include many of these integrated technology partners offerings. Early on, Procore’s business did not justify a channel program. But now that the technology partner solution ecosystem has matured, an economic value proposition has emerged for channel partners who can:
- Market, sell and support the original B2B SaaS vendor.
- Market, sell and support the end-to-end solutions the original SaaS vendor has built with other SaaS companies.
- Sell sufficient licenses along with professional and managed services to create a viable business model for becoming a channel partner for the original B2B SaaS vendor.
As shown in the following diagram, a bundled SaaS offering creates an opportunity for channel partners to sell software licenses as well as professional and managed services for both the original SaaS solution together with the SaaS solutions of its technology partners.
Note that the new economic driver is the channel’s ability to represent multiple SaaS products and create bespoke business processes, templates, advanced integrations, change management, training and support across more than one vendor. In this new model, the channel multiplier is reborn – which is evidenced in how companies like Hubspot, Salesforce, and Microsoft publish 5-10x multiples for their ecosystem partners on top of their own license sales.
Partners leaders, as you build out your technology partner programs, think about how a downstream channel can act as a monetization engine to drive the ROI on your emerging end-to-end solutions. Find out which of your technology partners already have a channel or agency program that you can leverage. Begin to plan when it makes sense to transform consultants, who are already influencing and driving customer value together with your customer success and professional services teams, so they can become channel partners in their own right.
The renaissance of the channel within B2B SaaS is happening and companies that GoToEcosystem together, win together.