Realities of reseller agreements
Think a reseller agreement is going to be the crux of your explosive sales growth? You might have the greatest intentions and your reseller might also have the greatest intentions. Many companies have been wildly successful riding on the wave of a larger company (Microsoft resellers, Apple resellers, every company on earth who puts Google Ads on their website), but first you have to ask yourself, is selling my product integral to this reseller, or is it just a plug-in that their clients can choose as a fringe benefit to buying your reseller’s main product?
One client of mine is building a nice piece of software which merges point-of-sale (POS) software (swiping credit cards in stores) with online purchases, so that all the company’s inventory is accurate at all times, without having to manually sync the two. They have been working on this software for, honestly, about two years, but the good news is that their prior software had been a pretty solid revenue producer for them, so they have a solid cash flow footing to maintain the business as-is until they launch this new product. My client’s goal is, when finished, to resell his product via the seemingly hundreds of cloud-based point-of-sale companies popping up.
Well, let’s talk about that for a second. The first question is whether my client’s product is really so compelling that clients of the reseller are going to NEED to also purchase his product? Seemingly, if they have an actual retail store with a hardware-based POS system, it would seem like a pretty compelling compliment. I asked my client what type of revenue-share agreement he had with the reseller, and for the moment, the answer was none. “It’s such a compelling compliment that it’s going to help their salespeople sell more product. I’m OK with that logic, in certain cases, but I asked him to let me break something down for him.
I asked him about the price-point for his product and that of his reseller, and they were pretty similar, a couple thousand dollar setup and a recurring monthly fee per terminal. My client mentioned that he knows for a fact that the reseller’s salespeople are primarily commission-based, so we took a stab at their compensation – 20%. So let’s say they make 20% of the setup, and let’s say they get a kicker on the monthly fee, perhaps the reseller pays them three months of the monthly fee. To make a long story short, we calculated roughly that they earned about $800-$1000 per sale.
Now, let’s say my client’s product really is so compelling that it’s helping the salesperson sell more product. That’s great. If I were their salesperson, I’d tout the ability for a potential client to use my client’s sync system, and I’d tout all the possibilities that were available when the client signed up for the reseller’s POS system. Hopefully, I’d get a sale and I’d get my commission. But I know salespeople, and guess what they’re going to do after that? Go where the money is, and onto the next sale with their company. If I were their salesperson, I’d leave it up to the new customer to integrate with my client’s sync system if they wanted it later on, but after the sale and earning my commission check, there’s very little incentive for me to follow-through with reselling my client’s software. As a matter of fact, pushing this add-on RIGHT AFTER making the sale is even potentially dangerous that I say something the new client doesn’t like, and I blow the entire sale when he backs out.
The first lesson here for my client was that you have to offer the reseller’s salesperson an incentive to continue trying to sell the add-on, and it has to be compelling. It has to be as compelling, or even more compelling, than hanging up the phone and trying for another new sale. From a time perspective, the salesperson wants the add-on to be a quick upgrade that adds to their commission check, and it has to be proportional to the time value of money they’d receive if they just moved on without trying to sell the add-on. In my client’s case, he has to negotiate a commission package with these POS firms that is enticing to BOTH the company and their salespeople. Obviously, the reseller wants their salespeople to sell their product first, so the add-on has to be quick, complimentary, and fiscally advantageous to push. The commission package also has to be enticing enough for the salesperson to remain on top of the client POST-sale of the core product to sell the add-on.
The second lesson here is that if you’re going to RELY on resellers to sell your product, you really have to look hard and fast at what your product offers the reseller. The less in commission you’re willing to offer, the much more your product is going to have to be very core to the entire sale. In my client’s case, we came to the conclusion that he had probably overshot the bow in how much he thought his product was “necessary” for the sale to go through. The end result was this – He offered the reseller two options: Give us the contact for new sales, and we will sell them in-house for a compelling commission, or offer an even higher commission comparable to the reseller’s commission to their salespeople. The reseller chose the latter, and the sales are now actually coming in.