Today less than 23% of all B2B SaaS is sold through the channel. This is a massive shift from traditional software, where the majority goes to market through partners. Why? Because software sales channels have evolved to match the shifts in how software is developed and used.
Creating packaged software applications used to be hard. Pre-Internet it used to require hundreds of thousands of $ of investments in hardware and software tools to bring a software product to market. Software development lifecycles were defined and often long.
Software applications were sold as a product to be installed and managed by the customer, with high up-front acquisition costs and smaller annual support contracts (hello Oracle SQL databases!). Software ISVs focused on acquiring new customers, while those customers often turned to third parties offering customization (systems integrators).
In some cases, software companies relied on third parties to also sell (or “resell”) their software and offer complementary services (these were “value-added resellers”).
But the internet changed everything
Cloud platform providers started hosting applications, initially in a single-tenant architecture (at application service providers or “ASPs”). Software vendors sold directly to the ASPs to host their applications and end-users contracted with the ASPs for the applications and their hosting abilities.
Soon the market evolved to take advantage of multi-tenant architectures. Software ISVs re-wrote their applications or were replaced by new ISVs, such as Software.com, who took advantage of this shift. And so SaaS (“software-as-a-service”) was born.
Cloud providers started to create and host environments where software ISVs could develop and host their applications, leading to a boom in companies who could create and release software at a mere fraction of the cost before.
SaaS ISVs shifted their focus from acquiring new customers at any cost to understanding and controlling their Cost of Customer Acquisition (CAC) and keeping customers happy (thereby reducing “churn”).
A brave new world calls for a new way to sell software
They moved from using expensive direct, field sales resources to instead using lower-cost inside sales, with more of the sales cycle being driven by Marketing (with a shift to “growth” teams). Where possible ISVs would take a deal direct since they wanted direct control over the customer relationship. SaaS margins can be thin, and they want to maximize revenue per customer.
Meanwhile, the channel evolved, given these new realities. Managed Service Providers (“MSPs”) started to emerge. They were often third parties evolving from offering “break-fix” services to a series of fixed price-per-employee services to manage customers’ computing environments. ISVs started selling solutions to MSPs to help them manage their businesses, as well as packaging their solutions to be offered by MSPs on behalf of their customers.
Software vendors made it easier to buy their solutions directly, typically with monthly subscription plans. Purchasing often became de-centralized within companies, leading to “shadow I.T.”. And because the applications themselves were easier to use, end-users either installed or managed the applications themselves, or relied on the ISVs’ Professional Services teams to provide canned implementation services. In a few cases, enterprise application vendors, such as Salesforce.com, developed strong networks of systems integrators who would come in after the sale to service the customer.
SaaS allows partners to offer more value
As these SaaS applications were being deployed, companies started to realize that they could use these applications to re-engineer their business processes. But to do so required inter-operability. Thus the age of APIs was born.
The traditional reseller channel, who had been recommending and reselling software, started to look for other ways to add value. Some evolved, such as Microsoft and Oracle partners, as their traditional ISV partners moved to the Internet. Others emerged or evolved to create business-focused services companies, such as marketing agencies focused on implementing and leveraging core SaaS applications.
Software ISVs were forced to open their platforms, and customers started to select applications based on how extensible they were. This led to SaaS ISVs investing in ecosystems of third party applications and connectors that their customers could use (and that they could profit from). We started to see ISVs measure “stickiness” in terms of how many 3rd party applications were connected to a customer’s deployment of their solution.
While early SaaS applications were departmental in nature, (focusing on sales with CRM, etc), today SaaS applications are being used across the enterprise. According to the Blissfully 2020 SaaS Trends Report, the average mid-market company now uses 137 SaaS apps.
The explosion of SaaS business solutions also led to new types of intermediaries who wanted to be compensated for either providing leads or referring business. These were not your traditional VARs or MSPs. In the early days of the Internet, this was simply monetizing link sharing but has since evolved into SaaS ISVs Sales and Marketing teams proving affiliate or referral link programs to allow third parties to recommend their solutions for fees.
Many SaaS companies soon found that revenues from these (unmanaged) partners were unpredictable, and they became discouraged. In many cases, they reduced their investments in their partner programs. After years of trying as an industry, approximately only 23% of SaaS sales go through partners, compared to almost 76% for B2B software in general.
SaaS companies. Where do we go from here?
What SaaS companies are realizing is that their existing partner programs are a “one-size-fits-all” approach. They don't take into account the different roles that a third party can play in recommending, selling, implementing, and managing solutions. The market needs to strike a balance between the needs of the SaaS company (to reduce CAC and churn), the partner (to retain and service their customers), and the end-user (who have problems to be solved).
What is needed is a move back to working with partners who have customer intimacy. When a third-party (such as a marketing agency) tells their client that in order to solve their business problems they will implement a SaaS vendor’s solution on their behalf, then chances are the client isn’t going to argue because they trust that their service company has selected the right solution. SaaS companies need to make it easy for these partners to acquire their solution on the customer’s behalf and reward them for doing so.
Once that happens we can get back to a place where the majority of the revenues will flow through trusted third parties, reducing operating costs and strengthening customer relationships.