I recently had the opportunity to speak at a conference on how vendors and partners are dealing with transitioning from purchased software/hardware sales to recurring revenue. One of the hottest topics was SaaS comps or compensation, especially when it comes to smaller channels that can’t afford customer acquisition costs upfront.

SaaS changes the customer-vendor relationship because it moves potential risk to the vendor (not the consumer). This can be hard on salespeople and channel partners who are trying to sell products that they know may not turn a profit.

A Game of Risk

The SaaS comps model shifts risk from the customer to the vendor. With enterprise software, big up-front license payments and professional services fees are expected before a product is even started or completed.

But SaaS vendors promote low-risk free trials and entry-level subscriptions that allow customers to test out their products for little commitment in order to reduce risks on both sides of this business transaction. However, these new investments don’t go away.

The vendor must make a high initial investment in R&D, marketing, customer acquisition, and training which can take over a year to recover from, when it comes time for renewal.

Between a Rock and a Hard Place

It is not just the customer that takes on risk, but channel partners as well. If they take too much of a chance with demand and cannot provide service to their customers, then there will be no need for them in this industry.

When SaaS vendors try to apply traditional software licensing math in the comps structure of their channel partners, they are met with problems. Traditionally, enterprise channel partners net a portion of the license fee from 10% up to 70%. With this margin-based model applied in situations where they are expected to invest 100% into customer acquisition and on-boarding with only earning a fraction of the recurring revenue, it puts them at risk as well as puts pressure onto both parties: rock and a hard place.

The New SaaS Channel Math

I argued in my post on SaaS comps that vendors should pay their reps a) based on the lifetime value of the deal and b) entirely up-front, because it is unreasonable to ask for reps to take any investment risk. The same idea applies with channel partners but there are caveats that require proportional payments. When it comes down to this issue I recommend paying your partner either a) proportionally or b) disproportionately, not all at once.

This will help better evaluate how much the SaaS channel partner brings in and what their costs are over time.

The lifetime value of SaaS comps is calculated by multiplying the percentage margin with the revenue per deal.

SaaS companies have an infinite number of payment schedules for any given lifetime value. They can be tailored to the specific needs of your SaaS comps model and even down to a single partner’s requirements.

There are a number of different payment schedules that can be tailored to the specific needs of your SaaS comps model. This offers an infinite amount of options.

Match SaaS Channel Comp to SaaS Channel Value Add

The SaaS market has a wide range of pay structures for salespeople, from simple referrals to ones that provide the customer with everything. It is important when thinking about incentives for your company and representatives alike to know what you are trying to achieve in terms of lifetime value.

No Magic Bullet

When you link SaaS comps to lifetime value, it can break the direct link between customer revenue and vendor profit. Click To Tweet

This allows for incentives that better match what each side offers – but is not a cure-all solution. The lifetime value of deals will always be limited by recurring revenue streams which leads back into all the usual Sause challenges like automation and economies-of-scale.