Why doesn’t anyone care about us?

This is an open letter to the reseller community that just cannot figure out why vendors do not write software to support them.

Hypothesis: We, as VARs/ISPs/MSPs/GSIs deploy, manage, maintain and recommend vendor software. It stands to reason that we reduce vendors cost of support, provide free marketing, provide free installation (doesn’t cost vendor anything) and as such the vendor should be writing software to enable us to reduce our costs of the said support, deployment and ongoing migration/maintenance.

Sound reasoning. And if it weren’t a fantasy, no software vendor would ever have a sales force, R&D department or even technical support. Who do you think those folks are working for? What do you think they do all day long? What do you think pays their salary? Here is how the world actually works:

Reality: Indirect sales channel is more expensive to market, support and sell through than direct sales to the end customer. The indirect sales channel has no buying power, no volume, no expertise and generally no loyalty to the product in the same way that an end customer would when it comes to signing multi-year renewal contracts. To top it all off, the indirect sales channel demands free software, free support, free internal use licensing, free trials for their prospects, free sales assistance and most importantly – huge margins that make most indirect sales an unprofitable venture in the long term.

So if that is the reality, why would any company want to have a reseller program to begin with? Because it is all about marketing and getting the product out, even at a loss if it establishes the product within its target segment. Ever notice how low-end commodity software comes with a margin of just a few points? Ever notice how ridiculously overpriced and specialized software comes at an incredibly high profit sharing margin, at times close to 20–40%? Why do you think that is?

Commodity software: Commodity software like antivirus for example comes with a very low discount rate and a margin for the reseller. Why? Because the reseller is given the same level of discount (though usually less) than the retail channel that commits to a much larger volume.

Specialty software: Specialty software like complex accounting and ERP systems, government, custom scientific solutions and others come with a huge profit margin for the reseller because reseller adds an actual value beyond that of getting the sale. They deploy, customize, manage and work with the client day to day or  month to month to keep the software evolving with the requirements of the business.

So, if the software or hardware vendors make most money out of their direct sales, why do they have partnership agreements, APIs, integration frameworks and software development kits?

The key to software and hardware profits is volume. The easiest way to gain volume is to become a preferential vendor or an underlying engine of a third party software or hardware solution that has a massive direct sales force. Again, think antivirus. The dominant SMB VAR solution in the antivirus game is Trend Micro. Reseller friendly, solid product. Surely they are the largest company out there? Surely its dominance in the SMB channel would make them difficult to beat, who in their right mind would install McAfee? Yet, McAfee is larger than Trend Micro (5.8 billion vs. 5.6 billion) because as absent as McAfee happens to be from the VAR space they sell as an engine – to a little company called America Online.

Software and hardware companies look for profitable partnerships. Profitable partnerships happen in large volumes because they mean less time and headcount spent on training, support, sales, feedback and conflict resolution.

That is short sighted, you might say. If you were in charge, you would do all you could to explain these naive software companies that the future is the VAR and they need to integrate with one another if they are to get your business.

This is a statistically unproven myth. If it were a realistic argument there would be hundreds and hundreds of companies out there trying to create mashups of all the APIs and administrative controls to allow the VARs to centrally command and control their entire enterprise.

Yet there are none. Why?

Volume. VARs expect everything for free. Enterprise pays through their ears for solutions like MOM, SMS because they have to manage thousands of seats. A lot more people integrate their software with MOM and SMS than with companies like Autotask, Connectwise. Don’t believe me? They don’t integrate with MOM or System Center because they want to make their products friendly with Microsoft, they do so because they want to sell thousands and thousands of seats at a time – and those companies tend to use MOM.

The most flawed misunderstanding of the VAR community: “Software and hardware companies fail in the SMB space because they are overpriced or provide dumbed down solutions.”

Wrong on both counts.

The key reason software companies fail in their entry to the SMB market is because they underestimate the need for bandwidth for dealing with the SMB market. A thousand run of brochures can cost a company $18,000 to produce, qualify and mail. If they get 1–2% qualified leads they are lucky. By comparison, an enterprise CIO can be flown to Hawaii in first class and 5 star accomodations for $15,000. If you were to put your money, where would you invest?

Dumbed down solutions called “SMB” or “SmallBiz” editions lead to higher sales and higher satisfaction than the enterprise at the lower price. Truth of the matter is, the end customer is buying a feature set that addresses a particular problem and is making a purchasing decision based on budget (if they have one) or on the potential productivity savings to be gained from that solution. So when dealing with VARs a software vendor trying to enter the space can either offer a turnkey version that is easier to deploy and manage but does not have all the features or the flexibilities of the enterprise version, or they can offer the incredibly complex and expensive enterprise version that requires 3 servers and two sales engineeres to set it up. Would you like to guess which one sells better?

Finally, why doesn’t anyone care about us (VARs)?

This is also a flawed, emotional argument made by external parties with no insight into what the companies are doing on the inside. All non-manufacturing companies are first and foremost service companies, we all strive to provide the best possible service to our customers. However, assuming limited budgets and hard release timelines, the primary goal of a software company is timely release and responsiveness to the market demands. People purchase software to address a problem, even for commodity solutions like antivirus.

So, I ask you to put yourself in the antivirus software makers shoes. You have six months to design, develop and deliver your new antivirus program. Your competitors are working on integrating an antispam piece and you are behind. What do you do? Sit down and focus on the API and management consoles to reduce the operating costs of your reseller base that accounts for little if any profitable prortion of your sales, or do you try to beat the other antivirus maker to market in quality or efficiency of your software? If the answer to that isn’t self-evident, take the money factor out of the equation completely. If you were no longer the leading piece of software in the market, and you did not provide the most features that the end customer needed, don’t you think the VARs would dump you for the competitive solution?

Therein lies the problem in the VAR-Vendor relationship. VARs lack loyalty, sales volume and expertise to support the complex or even the most basic solutions on their own (doubt that? how much time did you as a VAR spend to train your first employee? How much productivity did that cost you?) and the software vendors cannot make a profit without huge sales numbers because the commodity software has a lot of competitors.

How do we fix this?

Well, as a VAR you might want to try being more loyal to your software vendor. But let’s face it, thats not going to happen because that will put you in the red and when it comes to your house or vendors house…

How can we as vendors address this? I am going to let you in on a little secret over at Own Web Now. Even though we don’t make most our profits or our revenues from the VAR space, I consider it the most critical piece of our companys future. Rewind through the post to find out the reason why software companies write software: To address end customer problems and make them more efficient and profitable. Now, how do we make the most important and most relevant product for the end user? By working closely with their trusted advisor.

Long term view. In the long term, our VAR partners will give us feedback, feature suggestions, be our front line of support, our support lead, our go-to direct managers and our R of R&D. Most of the features you see in the OWN products today are directly driven by the partner feedback that they get from their customer base. In return, the development at OWN is completely open. As our partner, you have access to our internal and external bug and feature request sheet. Each partner sees the Development tab in our software and can see what we are working on. If there is something missing, our partners tell us about it. In effect, our VARs become our partners with the vested interest in the future of the product development and become more loyal to the solution because it evolves with their needs. In turn, OWN gets the feature set that actually makes the difference in the end users business.

It is a means of artificially creating loyalty through the joint development and distribution effort by the partners and OWN. It no longer stands just as a VAR-Vendor relationship, where one side  is trying to screw the other for the extra revenue basis point. It changes the economics of the relationship as well, because it eliminates support and research headcount and assigns it to development.

However, this is not something you can expect from your software vendors because it is incredibly painful to reorg the business to support such a change in the business model. As a software vendor, you really have no other choice though. As the VARs mature and start offering services, management and monitoring plans, complex support agreements – they too face the same economies of scale that a software  vendor does. Anything that becomes incredibly expensive to support or sell will fail for the VAR. In order for VAR to survive it will have to sacrifice some flexibility in order to provide a predictable cost and a predictable point in time. The key to marginalizing (or commoditizing) any service is having a predictable cost without unpredictable surprises, such as trying to move from one commodity solution to another. 

So…

I hope this post gives you some insight into the business models from someone who is both a software publisher and a VAR. It is not an easy relationship by any means, but companies that trust one another and have the best interest of each other and the joint end user they serve will indeed be the only ones that remain in business. The companies that accept their partners as material foot soldiers will get a more profitable distribution approach while gaining the research and insight into the end user that is very expensive to reach. The companies that show loyalty to their vendors will receive preferential treatment and input into the direction.

There is only one important factor: money. (struck through for people with incompatible RSS readers) Customer service, satisfaction and solutions that adequately address the problems those customer have.