Indirect Sales: The Holy Grail of SaaS

Glen Canyon National Recreation Area, Utah; photo by the author

Indirect sales, where a third party bears the cost and does the work of customer acquisition (and frequently professional services and customer success/support, too), can be the holy grail of SaaS, because it allows you to “sell while you’re sleeping” — to grow revenue disproportionate to expenses to an even greater extent than usual:

Lost revenue (discounts to third party) + cost of partner team < cost of demand generation + sales + professional services + customer success/support

In the formula above, the customer acquisition cost (CAC) is the cost of a partner team for indirect sales, versus the cost of demand generation and sales for direct sales. The former is a fraction of the latter. The cost of revenue (or COGS) from indirect sales is the discounts to the third party, versus the cost of professional services and customer success/support for direct sales. Because the CAC is so much lower, you can offer discounts to the third party in excess of your direct sales COGS and still generate the same net margin (or more) over a five-year period. That’s a pretty good deal.

Perhaps more important, indirect sales is a compelling way to expand your addressable market. The right third parties will be able to attract and service customers that your business can’t. Three examples are entering new geographies; going down- or up-market from your sweet spot; and offering complementary products and services that fill out a “complete solution” for a certain segment of the market.

When I was at Atypon we had three indirect sales partnerships, all of which contributed significantly to our top and bottom lines.

The first was with a professional services firm in Japan. The firm had existing relationships and infrastructure to secure and support Japanese customers—including government connections and of course local time zone and language support. It would have cost us millions of dollars to enter the market independently, and I doubt we would have found success.

The second and third partnerships were with companies that catered to smaller businesses and bundled our software with sales and marketing consultancy and other ancillary services. These smaller businesses never would have bought from us directly because we didn’t offer the additional services that represented a complete solution.

Each of these ticked every box for a winning partnership:

• End customers received the services they needed to be successful, with fantastic support at a reasonable price.
• Atypon’s partners formed stickier customer relationships and generated revenue from reselling our software.
• Atypon generated revenue from market segments that would otherwise be unreachable or cost-prohibitive to service.

Of course, achieving success with indirect sales is easier said than done. I’ve made my fair share of mistakes, and have seen many others. Here are five considerations for building a successful indirect sales channel. If in reading through these points you think you’d struggle with more of them than not, you may want to stick to direct sales for now.

• Get direct sales humming first. Think about all of the time and energy that goes into supporting your internal sales team. Your partners will only receive a fraction of that enablement. If your internal sales isn’t firing on all cylinders, prioritize addressing that problem before introducing a new one with an outside sales team.
• A certain product maturity is required. The above can be repeated for implementations and support. The more feature-complete and well-documented is your product, the more likely indirect sales and support is to be successful. If implementations and support are a heavy lift, the economics may not be favorable because your internal teams will end up having to do a lot of the work.
• Know what’s in it for the partner. Not understanding how your partner will make money reselling your software is a red flag. There may be ancillary benefits to the partner, but a relationship in which they’re selling your software at an economic loss is unlikely to be a strong one. And if the partnership goes south, you may be on the hook to support your mutual customers — regardless of what your contract says.
• The market needs to be big enough. You want to partner with companies that are long on you and the market. That means the market needs to be big enough to support the partner investing in building a sales and support operation for your software. What constitutes “big enough” will depend on the circumstances. Avoid toe-dippers.
• Minimize channel conflict. Sometimes, channel conflict is a non-issue—for example, Atypon granted the Japanese firm country exclusivity. More often, there’s some gray area in which two or more sales teams may target the same prospects. Define territories as clearly as possible and meet regularly to manage possible conflict.

I confess to being skeptical of indirect sales the first time I encountered the model, probably because I hadn’t considered the above factors and learned how to do it right. More than a decade later, thinking about how to make indirect sales work is one of the things I enjoy most. I hope this post helps you to reach the same point.