I know this sounds strange coming from AppBind, a partner billing platform that manages commission payments, but there is a dirty secret in the service channel for software and SaaS. If you’re going to market through agencies, consultants, SIs and GSIs, solution partners, implementation partners, MSPs, VARs, or even accountants who set up software for their clients, the first question is always what is the right commission structure.
So what is this dirty secret?
No one cares about commissions. But conversely, if you don’t offer commissions, no one will care.
They will never prioritize you over their clients. They make their money from clients, not from you.
The reason is that commissions are not incentives. They are per Herzberg’s Two-Factor theory, a Hygiene Factor. The lack of commissions is a disincentive. It shows you are both fundamentally unserious about your partner program, and you don’t understand the shear cost to a potential partner to invest time with you.
After all, these companies sell time and labor. Every minute talking to you is a loss. They view their time as investing in their relationship with you.
Therefore, when you talk about the commissions program on your partner page, you talk about investing back in companies who invest in you. Never talk about paying to buy customers.
In many cases, solution partners refuse to take commissions from software vendor if they think they are a conflict of interest with their duty to their client.
What do solution partners look for?
We’ve surveyed and interviewed hundreds of solution partners. What solution partners care about, in descending order of priority are:
- Does the product work and solve a problem my client has?
- Can I trust the company?
- Does the software company provide support to me at the same level I provide support to my client?
- How do I build a services package around you that I can sell my client?
- Can I build technical expertise fast enough to serve my clients with this product?
- Will the software company help me find new clients, either through promotions in their marketing or by referring their customers to me?
- Does the software company offer commissions?
Ok, thank you, but seriously what commissions should I offer?
Commissions are necessary as we mentioned. The commission model has to match the partner model, and the partner model is really what is their engagement with the client.
There are 4 main types of commissions.
Affiliates are brand or media partners who create demand generation and lead generation for your company. Most want to be paid as fast as possible, with a bounty for sign up or conversion. Some want to build a recurring revenue basis with you as a passive income stream, but frankly that is not a good deal for you.
While it’s attractive from a financing point of view because you are paying the affiliate only when the customer pays you, it’s bad for you because it permanently drags the value of the customer account and also leaks data about the customer’s activity to someone only tangential to the deal.
But more to the point, only the most long-term thinking affiliates care about passive income. Most affiliates care only about immediate results because they are dependable and controllable. A recurring bounty means they must depend on you to keep growing their cash stream.
I recommend sticking with cash bounties. They generate the most excitement up front because bigger bounties are awarded immediately. If you have a freemium product, you can even accelerate excitement by offering a two-tiered bounty for sign up and then another one for paid conversion.
Generally you should offer between 1 to 3 months of contract value of the account to an affiliate for paid conversion, and 1 week to 1 month for sign up to free.
Referral partners are service partners who make introductions to qualified opportunities. They may get involved in a co-selling arrangement with you to help the client through the sale, or to help you fit your offering to the client’s needs.
Truthfully, referral partners should be only those who don’t want to manage the client’s use of your software product. They are only making a recommendation to the client for something peripheral to their core service offering.
And remember solution partners don’t care about commissions. They sell their trusted expertise to the client. Most companies will not take you up on the referral commissions because it’s beneath them, which is one of the reasons why referral partner programs have very low activation rates.
However, in reality, most service partners who refer are actually managing the implementation and operations of the software product. They only use referrals because they can’t manage the risk of procurement themselves for two reasons:
- They are terrified of getting in the middle of the client’s billing.
- The client has process needs to manage the procurement themselves, like compliance, procurement rules, or a high degree of personal choice (e.g. choosing a CRM they are comfortable with).
Referral programs have a confusing problem where they mix disengaged partners who are making recommendations because you’re peripheral to their offering; and those who are highly engaged managing the technology for clients but are afraid of managing procurement.
On one hand, you have what is really an affiliate. They are generating a qualified lead and letting you take the client over. They should be paid on a bounty basis.
On the other hand, you have a partner managing services who is taking on a huge amount of the customer success burden. They would prefer a longer term commission structure.
Since he most engaged solution partners do manage the software, most referral programs are biased towards longer term commissions to reward the ongoing commitment, typically between as 15% and 30% of the recurring revenue, with 20-25% being the most common.
However, what you’ll find is that clients and solution partners part ways often before the client churns from your software product. You end up paying solution partners for clients they are no longer supporting. Then, most companies change their referral commissions to have term limits, typically 12 months.
Then you’ll discover many solution partners keep supporting the clients past 12 months and get mad they lost their commissions even though they are doing all the work.
Ugh. This is why you should drop the idea of a long-term referral partner, and only use up-front bounties for affiliates or recurring commissions for managed services.
Implementation partners, managed service partners, and systems integrators
The best solution partners are actively involved with the client from pre-sales, through sales and implementation, and thereafter in an ongoing operational role. They are standing in as customer success for your team. Typically, their role is to not just bring your software to the client, but build an entire system out to solve the bigger problem for the client–what Geoffrey Moore calls in Crossing the Chasm, the whole product solution.
Before subscriptions, most SIs would be like plumbers. For an industrial plumber building the pipes at a factory, it would be normal quote the client to build the plumbing system out, including the pipes, valves, pumps and also their own labor plus a multi-year maintenance contract.
No plumber would ever make their client go to the hardware store to buy their own pipes. The plumber would buy all their equipment and do the work. The client would just have to do one procurement: the plumber.
SIs are really digital plumbers, building entire systems out of digital pipes like your software.
Solution partners are all like this. They just want to get the job done for the client without burdening them any more than they need to. And they are all looking for ways to build service revenue around your technology; the easiest way is managed services.
Commissioning is actually much easier to think about for managed services. As long as your partner is servicing the client, they should earn a commission. And because they are deeply involved with the client, they are offloading more work from your company. You can pay 25-50% recurring commissions (typically 25-35%) easily and still be profitable.
This structure is robust whether the solution partner only does implementations for a short engagement with the client or does managed services in a multi-year arrangement.
As long as the partner is working for the client, they share in the revenue with your commissions. When the client and solution partner end their engagement, you stop paying commissions.
The only difficulty is that you have to know when their engagement ends. And you want to know without getting involved in any disputes!
That’s why you need to use a partner billing platform like AppBind that lets your customers and partners attach and detach clients and partners on their own.
Final word: Never discount!
If subscription software was sold like physical products, you’d sell it at a discount to the partner who’d mark it up and sell it to the client. However, that no longer works because of laws around data ownership and privacy.
Because solution partners are very unlikely to take on the data liability and things like SOC2 compliance, the client must have a direct relationship with the software vendor.
Which means you have a legal and tax obligation to show the client their invoices for your software product. And then they’ll see the partner’s wholesale price. That always generates a giant conflict!
Keep your commercial relationship with the partner off the client’s bill. This is a big no no.