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Navigating
the SaaStransition
software insights
Capturing valuethrough dealescalation
Channel strategyalignment
Interviews with
industry leaders
from InsightVenture Partnersand RightNowTechnologies
Spring 2014 Issue 1
PerspectivesonthesoftwareindustrybySimon-Kucher&Partners
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Simon-Kucher & Partners Software Insights | Spring 2014 2
Contents3
4
5
8
10
14
17
19
20
WHATS HOT
EDITORS LETTER
TRANSITION TOSaaS
Wolfgang Mitschkes article on drivers of
successful perpetual-to-SaaS transitions will
draw on case studies from multiple companies
who have made it to the other side.
INTERVIEW WITH SUSAN CARSTENSEN,
RightNow
An in-depth interview with Susan Carstensen, the
former CFO & COO of RightNow Technologies,
which successfully navigated that journey.
DEAL ESCALATIONPROCESS
Deepak Sharmas article on deal escalation
will highlight how to establish structures that
reinforce value selling.
VALUE-BASEDCHANNEL STRATEGY
David Turnquists article will explore how
to extend this concept to your firms
indirect channels by constructing
value-based partner programs.
INTERVIEW WITH HILARY GOSHER,
Insight Venture Partners
Hilary Gosher, a Partner at Insight Venture
Partners, reveals in the interview how
successful software companies put all these
concepts together to scale their business.
SIMON-KUCHER NEWS
ABOUT SIMON-KUCHER
Editor-in-Chief
JOSHUA BLOOM
Graphics
ANKE SCHUMANN
HANNAH CHOI
GENEVIEVE SOLOMON
Please send inquiries and comments to:
8
14
10
17
5
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Simon-Kucher & Partners Software Insights | Spring 2014 3
Feb Mar 2014Jan
-0.7%
5.1%
4.1 5.3 6
8.9
EnterpriseSoftware:
Infrastructure
EnterpriseSoftware:
Application
Security SaaS
31.4
23.4
13.313.6
Revenue MultipleEBITDA Multiple
Dow JonesUS Software Index
Dow JonesIndustrial Average
Endofyear2013
Strong start to the new year Attractive SaaS multiples
more likely to have...
defined renewal pricing
clauses in contracts optimized their
price metrics confidence in their sales
reps to enforce pricing guidelines
more likely to useROI/EVAtools inMarketing Collateral
more likely to have a definedpackagingstrategy
more deals through Deal desks
100%
150%
25%
50%
are
are
are
send
*Those who have driven revenue growth through pricing
Source: Simon-Kucher Software study 2013-14
Managingthet
ransitionto
SaaS/Cloudoffering
s
Successful pricers*...
2
Post-acquisitionpackaging & pricingharmonization
$60B
Software M&A activity*
$200B
*2014 software M&A report - Baird
Source: CAP IQ Source: CAP IQ
2008-
2009
2010-2014
1
Top Strategic Questions
we have been asked about
Whats
whats
HOT
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Simon-Kucher & Partners Software Insights | Spring 2014 4
W
elcome to the first issue of the Software Insights
Newsletter! At Simon-Kucher & Partners, wehave spent the last 28 years helping companies trans-
form their marketing and sales practices to realize the
value of innovative products. Nowhere is the pace of
change as fast as the software industry, and in this is-
sue we will explore how companies are dealing with
increasing pressure on existing business practices.
As computing resource costs
have rapidly declined, pres-
sure is coming from all sides:
customers who require more
flexible business models,
competitive entrants who can
more quickly gain a foothold,
and investors who demand
greater capital efficiency.
Inside this issue you will find perspectives from soft-
ware industry leaders and institutional investors, as
well as contributions from our Software Competency
Center experts who will distill our experience gained
from working with 100+ software companies.
Our goal in this newsletter is to capture the pulse of the
industry at a specific point in time through interviews
and news, while also providing deeper exploration into
the lasting content that has proven to be most relevant
across multiple engagements.
Capturing the value of your productsin a shifting landscape
editors letter
years of combined software
marketingexperience
software industry projects
in the last 2 years alone
Deepak Sharma
Director
Adam Echter
DirectorWolfgang Johann
Mitschke
Director
Joshua Bloom
PartnerMadhavan
Ramanujam
Partner
200+
50+
Matt Johnson
Managing Partner
Silicon Valley office
Joshua Bloom is a Partner in the Silicon Valley office of Simon-Kucher & Partners.
He leads the software industry practice in North America.
Joshua Bloom can be reached [email protected]
Please reach out if you have feedback
on these topics or if there are spe-cific areas you would like to
see us cover in future issues.
Happy reading!
G obal Softwarmpetency
Center
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Software as a Service (SaaS) long ago established its
credentials as the future of software delivery. Still, we at
Simon-Kucher continue to receive requests to support
clients migrating from perpetual license models to sub-
scription models. The good news about being late to
the game is that companies just now embarking on the
journey to SaaS can learn from their predecessors. We
recently reached out to companies who have made the
transition in order to understand the common success
drivers and pitfalls.
The key learnings:
1. Revolutionary commitment:
Partial SaaS migrations do not unleash full SaaS
benefits
2. Simplicity in communication and pricing:
Concise packaging, pricing and contract terms
drive adoption
3. Pull then Push:
Use of carrots and a targeted price positioning
first, then sticks, motivate customer migration
4. Delivery extends to the entire organization:
Sales channels and customer support teams
need to be redesigned
Revolutionary commitment
The reason many traditional ISVs (Independent Soft-
ware Vendors) want to migrate to SaaS pricing and
delivery models is obvious: A quick look at trading mul-
tiples reveals that public markets bestow much higher
valuation multiples on pure SaaS business models.
[See Whats Hot page for latest figures]
So what is holding back a stampede towards switch-
ing to SaaS? Over the years, we have seen a de-
cline in concerns over SaaS security and control. It
seems that we are entering a period when the major
concerns are financial and developmental risks
borne by ISVs. In the short-term, companies moving
to SaaS typically experience a revenue flattening or
decline, as up-front revenue streams are re-distributed
over longer time horizons. Many companies have de-
scribed this hurdle as kicking an organizational drug
habit. Fostering a culture of transparency and over-
communicating operational & financial KPIs to the in-
vestor community is the only way to navigate this pe-
riod. Opaqueness is the enemy of favorable analyst
coverage.
The developmental risk is also one that can only be
overcome with a full commitment to a revolutionary
agenda. A successful SaaS strategy requires a multi-
tenancy product, for which development efforts go be-
yond normal product upgrades. Multiple companies
have failed in their attempts to reap the marketing ben-
efits of a SaaS offering without first building out a true
low cost architecture. The benefits of the single, multi-tenant architecture go beyond the IT stack savings that
can be passed on to the customer and extend into
the R&D and technical support challenges that have
historically eaten away at earnings. As long as you are
still supporting on-premise models, the cost benefits
of supporting a common solution will not be realized.
Many companieshave described this
hurdle as kicking anorganizational drug habit.
SaaS Transition:Learnings from the other side
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The developmental risk is also one that can only be
overcome with a full commitment to a revolutionary
agenda. A successful SaaS strategy requires a multi-
tenancy product, for which development efforts go be-
yond normal product upgrades. Multiple companies
have failed in their attempts to reap the marketing ben-efits of a SaaS offering without first building out a true
low cost architecture. The benefits of the single, multi-
tenant architecture go beyond the IT stack savings that
can be passed on to the customer and extend into
the R&D and technical support challenges that have
historically eaten away at earnings. As long as you are
still supporting on premise models, the cost benefits
of supporting a common solution will not be realized.
Simplicity in communication
Due to a more mass market focus and sales approach,
the SaaS pricing model tends to be simple and helps
the customer self-select. This includes multiple as-
pects:
1. Packaging: Large price lists, customization and
complex implementations run counter to the ethos of
SaaS. In our recent case study interviews, we found the
transition process often involved a significant level of
offering simplification and re-packaging. Only compa-
nies that already had a simple ap-
proach in place for their on premise
software, like a 3-tier good/better/
best bundling structure, did not
change their packaging. All others
significantly simplified their pack-
aging, involving radical cutting of
line items on the price list.
2. Price metric/unit: The ten-
dency in SaaS is to move awayfrom large enterprise-wide license
agreements and to have a more land-and-expand fo-
cus. This translates into user-based pricing models at
a division level, and also a higher prevalence of usage-
based price metrics that tie pricing to value delivered
[Figure 1].
3. Payment and contract terms: Most SaaS com-
panies will offer an array of both contract lengths and
billing frequencies. Beware of offering deep discounts
on multi-year deals, as many companies find this leaves
money on the table and drives down the reference val-
ue at renewal.
Pull then Push: How to migrate
the existing base
To unleash the full SaaS transition
potential, most companies need to
migrate all of their customers to the
new SaaS product while minimizing
customer churn.
To compare pricing of perpetual li-
cense models with SaaS models,
a quick rule of thumb is to apply
break-even calculations using license and mainte-
nance costs from a customer perspective. Typical
break-even ranges are between 3 and 5 years. A
long break-even encourages customers to migrate to
SaaS models; a short break-even encourages custom-
ers to stay with the perpetual model.
Large price lists,customizationand complex
implementationsrun counter to the
ethos of SaaS.
Figure 1: User-based pricing metrics in subscription-based revenues.
Source: Simon-Kucher Software Pricing Study 2013
0%
10%
20%
30%
40%
50%
60%
70%
More than
Companies with (> or
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factors to consider in how long a sales team should
participate in customer revenue is to understand the
upsell sales cycle. If it is realistic that they can go back
for an upsell within 2 years, they should maintain the
primary customer relationship.
The Professional Services team also needs to navigate
major upheaval, as implementation technical support
takes a back-seat to business process consulting.
Conclusion
Migrating fully to a SaaS model is an attractive option
for many ISVs,with higher valuationsfrom the Street
and more efficient product development and sales ef-
forts. Those who want to go down this path need more
than a product roadmap. To succeed, they need to re-
visit their packaging & pricing strategies, their financial
targets, and their sales & support capabilities and do
so in a transparent manner.
In addition to the price positioning, future SaaS com-
panies need to develop incentives for customers. A
churn-minimizing strategy is to start with positive
incentives, i.e. carrots. Such incentives can be cred-
its against migration professional services costs, sub-
scription discounts or special features only available inthe SaaS version.
At some point in the transition process, the last cus-
tomers need to be pushed a bit more vigorously. Such
stick incentives include maintenance price increases
and, finally, discontinuation of incremental perpetual li-
censes and support for the perpetual version.
Delivery extends to the entire organization
A successful transition to SaaS not only requires a new
licensing model, but also additional organizational
efforts [Figure 2].
Subscription businesses rely much more heavily onfield,
inside and internet sales, while external partner sales
become less relevant. This closer control of the sales
process also involves hiring more personnel to meet
that challenge.
With many companies we have worked with, one of
the trickiest hurdles is the incentive structure for
sales teams and channel partners. Most companies
want to maximize the renewal anchor and link commis-
sions to the first 1-2 years of subscription revenue to
account for the deferred income stream. One of the key
Importance of Sales Channel
Revenue share in % of total revenue
0%
10%
20%
30%
40%
50%
Field sales Inside sales Internet sales Channel partners
Companies with
more than
less than
25% subscription revenue
Figure 2: Sales approach of subscription vs. non subscription compan
Source: Simon-Kucher Software Pricing Study 2013
Wolfgang Mitschke is a Director based in Bonn, Germany and has also spent time in
Simon-Kuchers Silicon Valley Office. He has a decade of experience in both Software
Product Management and marketing consulting.
E-Mail:[email protected]
One of the trickiest hurdles isthe incentive structure of salesteams and channel partners
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Susan Cartensen spent over 12 years as the CFO, COO, and SVP of Customer Experience at RightNow,
a SaaS CRM pioneer that was acquired by Oracle for $1.5B in 2011.
Simon-Kucher: What were the biggest company
transitions you steered in your time at RightNow?
S.C.:Over my 8 years as CFO, we really went all the
way from our start-up phase to becoming a public com-
pany. Through that process we raised multiple rounds
of funding and implemented the financial reporting,
systems, and controls of a public company. From a
business operations perspective we transitioned our
commercial model from being a mixed model to pure
SaaS. Originally we sold every combination of per-
petual and subscription licenses, as well as cloud and
on premise deployments. Transitioning to a pure SaaS
offering took a lot of time thought and energy. We had
to tackle everything from how you position when a
customer is up for renewal to how to migrate our exist-
ing base of perpetual license customers.
Simon-Kucher: What types of metrics did you track to
see if you were on course with your transition from a
mixed model to a SaaS model?
S.C.:For us, it was pretty black and white that we just
quit selling perpetual licenses. That immediately took
20% from our top line and turned us from profitable to
making a loss and we told the investment community
that would take a 2 year period to gain back our previ-
ous profit levels. We communicated a very clear time
frame and the expected financials.
Simon-Kucher: What was the rationale for switching
over new sales all at once to a SaaS model?
S.C.:We felt maintaining both would just be prolonging
the pain. In a SaaS business the revenue and recurring
revenue growth rate is what is important, so we ripped
the Band-Aid off and wanted to re-set the baseline of
expectations. Also, it is really hard to manage a sales
force with a mixed model; its hard to do foundational
tasks like setting quotas and easily understood sales
compensation plans.
Simon-Kucher: How did you set expectations with
your sales teams?
S.C.: Clearer incentive structures helped. Our sales
force and client success managers were also given
specific targets, responsibilities and times for getting
the conversions done.
Simon-Kucher: In terms of the SaaS offering, what
was the typical contract structure?
S.C.:After some experimenting, we settled on one year
ARR targets, which focused the company on makingsure that the customer is fully deployed and using the
service. It wasnt helpful to sell multiple years, as it can
degrade the unit pricing. If you maintain the upfront unit
pricing it pays you back over the lifetime value of the
customer because you have a higher base.
interview
Susan Carstensenwith
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Simon-Kucher: How did you provide budgetary
certainty for customers with a standard one-year
contract?
S.C.:There was definitely customer fear that if they re-
ally liked the product and were on a one year contract
that we would significantly increase the price. In what
we thought was fairly innovative at the time, we set up a
cloud services agreement with a 6-year pricing prom-
ise. They could terminate after the first year, but at the
3rd year renewal, we could increase price by 9% (an
implied annual increase of 3%).
Simon-Kucher: What are some of the biggest
packaging and pricing challenges you faced with
new offerings?
S.C.:From the buyer perspective, its all about having
a simple pricing structure. We narrowed down our pric-
ing to incorporate two metrics: seats and sessions. The
packaging challenge was difficult, as we
struggled with how to incorporate new
developments. With a cool new
feature, there is a temptation to
create a separate SKU, as op-
posed to incorporating it into
an existing package. Ultimate-
ly, we were more effective when
we maintained the integrity of our
offering structure and increased
the overall pricing rather than setting
up too many SKUs.
Simon-Kucher: Finally, in your latest role as a Board
Member on multiple software companies, have you
seen the SaaS landscape changing at all?
S.C.: One trend that has surprised me is that there
has been a proliferation of SaaS business metrics,
even for public companies. Everyone defines churn in
a unique fashion and I would expect investors to start
putting more pressure on companies to come up with
common definitions.
From the buyer
perspective, itsall about having
a simple pricing
structure
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Many software companies will spend a great deal of
effort optimizing and tinkering with product list prices
before turning to the more difficult internal task of opti-
mizing sales practices. Not only may this distract fromthe real challenges of value capture, but all of that work
may also be for naught if unchecked discounting can
reverse any list price modifications.
This hits the software world especially hard, where
variable costs are nearly zero in an on premise world
and negligible in a hosted environment. Never lose a
deal on price is a refrain we have heard at multiple
companies, in which a wild west culture has eroded
the companys price position in the market, left inexpe-rienced sales people adrift, and sometimes even an-
gered customers with inconsistency.
If your discounting patterns look like these, you may be
suffering from an ineffective deal escalation process:
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%0 100 200 300 400 500 600 700 800 900 1,000 1,100 1,200 1,300
%D
iscount
Deal Size in $ (Thousands)
Some of the smallest dealsreceived the highest levelsof discounts!
Broken escalation process: No correlation between discounts and size of deals
Establishing adeal escalationprocessthat reinforcesvalue-based selling
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In our experience, companies with robust deal escala-
tions processes have put in place many of these guid-
ing principles to ensure value capture and a smooth
quoting processes:
Standardized deal checklist:step-by-step guide
to evaluate pricing of each deal and ensure
organizational alignment
Product lifecycle guidelines:Flexibility based on
degree of innovation across the product portfolio
Approval volume and frequency targets:Clear
expectations for managers and executives
Neutral representation:Inclusion of Product,
Finance, and Pricing teams at higher levels of
the approval process
Standardized deal checklist
The checklist serves as a framework for sales reps
to systematically think about deal preparation and then
quickly bring others up to speed with a consistent set
of information.
0%
5%
10%
15%
20%
25%
30%
0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%
PercentageofallDeals
Average Discount per Deal
Account
Executive
Sales
Director
VP Area
Sales
SVP
Country Sales
Global Head of
Sales
Sales Director and VP Area
Sales discount to their
maximum authority level!
Broken escalation process: Discount authority limits well exploited
Before focusing on the deal specifics, take a step back
to examine the customer relationship and under-
stand customer lifetime value. How do we expect
the relationship to evolve and what is the expected
purchase behavior in the future? How well have they
kept past commitments? This is also a natural place to
begin negotiations with customers.
Next, evaluate the deal context. What has their pric-
ing been historically in relation to other customers?
What concessions were necessary to close previous
deals? How close is the requested pricing to similar
deals for other customers in the segment (a key VSOE
issue)? How reliable is our competitive intelligence?
Do product capability comparisons against competi-
tors really hold up under a microscope? Consider con-
tamination effects. What other business with this cus-
tomer could be affected by aggressive concessions?
Unchecked discountingcan reverse any list pricemodifications.
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How likely is it that this pricing trickles down to other
customers?
Instead of focusing solely on your own concessionsstrategy, take a step back to ensure the negotiation
has taken into account non-price elements. Is there a
way to expand the scope to include an up-sell or cross-
sell? Is there terms & conditions flexibility on public
references or joint white papers? Are there payment or
implementation approaches that will be optimized for
the vendor?
Finally, in the big picture, are you appropriatelylearn-
ing from a large number of deal data points?
Sample deal escalation checklist
Customer lifetime
value Evaluate relationship
Deal context
Deal strategy
Track & learn
Past:Historical pricing
Present:Competitive prices
Future:Price contamination
Up-sell / Cross-sell
Terms & Conditions
Monitor pricing changes
& win-loss data
Produc
ttype
List PriceTarget Price Sales AuthorityWalk-Away Price
Innovative Differentiated Commoditized
Set different sales discount thresholds based on product type
Has manager & executive review become a rubber-
stamp process? What are the latest win-loss trends?
Product lifecycle guidelinesMany software companies have vast product portfo-
lios, ranging from cutting edge innovations that are IP-
protected to commodity or me-too type products. The
key is to integrate the product categorization view with
the deal discounting strategy and approval process.
The level of discount available to the sales team for a
highly innovative new product should be very small
compared to the discount level available for a commod-
ity product that has a price-driven purchasing decision.
In the middle, you have products that are differentiatedon certain elements, but whose competitors can also
claim unique selling propositions. For these, sales still
needs moderate discount flexibility.
Approval volume and frequency targets
Set discount thresholds that enable your stated corpo-
rate objectives (e.g., our sales team should be able to
close 80% of the deals on their own) or simply mir-
ror the reality of the human resources available (e.g.,
we can only expect execs to review one deal per day).
Either way, ensure the discount levels at each step in
the process reflect the objectives so that available re-
sources can handle the volume of deals flowing through
and the deal approval process does not become the
bottleneck.
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Simon-Kucher & Partners Software Insights | Spring 2014 13
Neutral representation
One of the best practices we have observed in the deal
escalation process is the involvement of Pricing, Prod-
uct Management and Finance teams at higher levels
of the escalation process. This is particularly important
for complex deals e.g., mix of different types of prod-
ucts, strategic customers, and high levels of discounts
expected. The involvement can be either consultative
in nature such as deep-dive into the product value
proposition, competitive bid evaluation, etc. or it can
be an explicit approval required by the teams depend-
ing upon the deal size. Large companies with a high
volume of deal making also benefit from implement-
ing a pricing system with price execution and analyt-
ics modules that helps automate the rules and process
flow, as well as enable what-if scenario and advanced
pricing analyses to support rapid decision-making.
Conclusion
We see software companies putting more focus on
optimizing their pricing and more C-level executives
getting involved in the decision-making; however, on
average they realize only about 50% of planned price
increases1. A key differentiator between more success-
ful and less successful pricers is the maturity and so-
phistication of the processes and resources underpin-
ning the effort. When designed and executed well, the
deal escalation process can become a strategic asset
for your organization in helping defend the value of
your products and ultimately, profitability itself.
1 Simon-Kucher Global Pricing Study 2013
-100%
-$0 $100 $200 $300 $400 -$500+
--80%
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
Deal Size (Thousands)
Delta:Targetvs.Approved
-100%
-$0 $100 $200 $300 $400 -$500+
--80%
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
Deal Size (Thousands)
Delta:Targetvs.Approved
Before: Only 16% of escalationsresulted in price changes, with nomeasured impact on deal success
After:45% of escalations resultedin price changes. 90% of them ata higher price, with no negative
impact on deal succes
Example: Before and after impact of a successful deal escalation process
Deepak Sharmais a Director in Simon-Kuchers Silicon Valley Office. He has a decade of experience in
both Software Product Management and marketing consulting.
E-Mail:[email protected]
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Companies often build out partner models so that they
can scale their business without scaling their sales
expenses; however, in doing so they often lose their
connection with their end customer, their ability to
value-sell, and their support quality control. Many
companies are not taking full advantage of their
partner programs to mitigate these factors, largelybecause they do not properly measure and incentiv-
ize value-adding activities.
In this article, I will lay out a practical guide to develop-
ing a channel partner program that reinforces value-
add throughout your distribution network.
The opportunity cost to a company of not systematical-
ly recognizing value-add as part of its channel partner
strategy can be significant; for example, a company
may be
Under-valuing certain existing
customersthat add value through
factors other than volume, such as
superior service and expertise,
global reach, or end-customer
financing
Not growing new strategic
partnersthat are willing to offer
unique or larger rewards
compared to the entrenched players
Offering discounts and other incentives
that are pure price concessions
Using intransparent, inconsistent, or
unscalable rules and guidance
The key aspects of a value-based partner program
The specifics of any value-oriented partner program
will be unique to your business, and should be custom-
ized toward your individual priorities; however, most
strong programs should strive to include four features.
1. A consistent set of policies defining your rulesof engagementwith the customers in your chan-
nel. These may be defined universally or for each
route-to-market.
2. A formal classification structure based on
objective criteria to categorize your partners
based on their contribution to your business; the
key dimension should likely include their perfor-
mance on the value-add criteria which contribute
most to your success.
3. A predefined set of benefitsto incen-
tivize desired behavior and increase
performance from your custom-
ers, often including but not
limited to a carefully de-
signed discount & rebate
structure.
4. A tiered reward
structure that incentivizes
continued performance im-
provement over time, with each
tier providing additional benefits
as performance improves along the
value-add dimension. This ensures that part-
ners are rewarded to continually invest in your busi-
ness, instead of making a one-time improvement.
Designing yourchannel partnerprogram aroundvalue-addcan
positively impact your business
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Creating a value-based channel program
Creating a world-class channel partner program in-
volves careful planning and change management; it
can best be achieved via a disciplined, collaborative,
and evidence-driven process [Figure 1].
Step 1 Objectives
The first and most crucial step in your success is
determining the objectives you wish to achieve;
although a program focused on value-add activities
can have enormous benefits, it is not necessarily ideal
for everyone. The Simon-Kucher framework shown
below can help you compare the benefits of a program
based on value-add versus a more traditional route-to-market approach (Figure 2).
As you can see, each program type has unique advan-
tages and disadvantages; the type of structure you se-
lect should be driven by your strategic goals.
Step 2 - Activities
Once you choose a partner program structure, you
are ready to define the activities you wish to enforce.
Your partners are often the face of your brand, and so
while volume is a common starting point, other broad
measurements of your partners value should be con-
sidered:
Technical expertise
The end-customers satisfaction with your
partners ongoing services
Define the activities that add the most value to
your business, and which you want to enforce
Discover what benefits are most desired
by your customers
Step :Activities
Define your objectives and select the mostrelevant program type
Step :Benefits
Create a tiered structure around these activitiesand benefits, with more advanced tiers requiringgreater value-add and offering larger benefits
Launch the program after socializing it withinternal stakeholders and external customers
Step 4:Structure
Step 5:Socialize& Launch
2
3
4
5
Step1:Objectives
1
Support of your brand
Information sharing or operational support for
your supply chain
Geographic or cross-industry reach
Investment in cross-product sales
Any activity you include should not only provide clear
value to the business, but also be based on objectively
measurable criteria.
Step 3 Benefits
In order to incentivize partner buy-in to your program,
the proper set of benefits is key. While discounts and
rebates can be an integral part of your program, they
are often a zero-sum game between you and your part-
ner. Instead, look for a Third Way that provides your top
partners with additional benefits that help them better
integrate into your value chain, growing your business.
For example, ask yourself
Can we more closely tie our marketing
activities?
Can I provide leads or support for their sales
cycle?
Can I improve the technical competencies of
their workforce?
Can I develop better information sharing and
offer superior access?
Step 4 Structure
Next we must choose a structure that will define the
tiers our partners can achieve.
The first option is to offer a Medal Program with distinct
and specific activity requirements for each tier; this en-
sures that all members of your program will focus onthe specific activities you select. This does provide a
consistent view downstream as to preferred partners
that can be used to drive closer relationships. However,
this option provides little flexibility for your partners,
yielding a less diverse network.
Figure 1: Key steps to create a value-based channel program
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Simon-Kucher & Partners Software Insights | Spring 2014 16
Route-to-Market Hybrid Value-Add
Benefits Minimizes channel conflicts
Preserves existing routes-to-
market
Simplest program structure
Incentivizes partner value-add
Actively manages channel conflicts
Preserves existing route-to-market system
Strongly incentivizes partner
sales
Provides a single lens across
partners
Disadvantages Limited incentive for partners to
increase value-add
No clear differentiation of high-
value partners
Additional complexity to setup and
manage
Inability to manage discount gaps
could disrupt some routes-to-
market
Examples Rewards are based on partner
type in a multi-tiered
environment (OEMs,
distributors, resellers), with no
overlap between discount levels
to ensure margins for all
partners.
Rewards based on combination of
position in route-to-market and value add
Perfrormance based on degree to which
partners fulfill their role (building on top of
products, carrying inventory and offering
expertise and financing, end-customer
tehchnical knowledge and support)
Loyalty reinforced through program
Performance based largely on
volume and to a lesser degree on
how partners fulfill their role
(building on top of products,
carrying inventory and offering
expertise and financing, end-
customer tehchnical knowledge
and support)
Route-to-Market Value-Add
The second option is to create a point-based structure,
where each tier requires a certain score to be achieved;
each activity is then assigned a number of points based
on the value it provides. This offers significantly more
flexibility than the medal program by allowing your part-
ners to choose the activities that best fit their individual
strategies. However, it can add complexity and reduces
control over your partners value focus.
Step 5 Socialize & Launch
The final step is to obtain buy-in from internal and ex-
ternal stakeholders before launch. Ideally, this process
should begin as the activities and benefits are still be-
ing defined; partners should be given the opportunity
to provide feedback, which will inform your develop-
ment process.
When the program is released, all aspects of the part-
nership should be well documented and published. If
the economics of your business allow it, account man-
agers should work with partners to develop individual-
ized paths to success highlighting the key steps each
partner can take to increase in tier. This will maximize
the benefit that both you and your partners see from
the program.
Conclusion
Structuring your channel partner program around val-
ue-adding activities can provide a path to achieve your
goals by aligning your partners rewards with your own.
This type of structure is flexible, allowing for inclusion of
the specific activities most important to your business.
It also improves service for your end customers, by in-
creasing the value orientation of your overall channel
structure. However, it is not a one-size-fits-all solution;
understanding the priorities of your unique business
is key to determining the proper extent of inclusion
of value-add activities in your overall channel partner
strategy. For those that do choose to develop this type
of program, a structured, collaborative, and evidence-
driven process is the best approach to development.
Figure 2: Title
David Turnquistis a consultant in Simon-Kuchers Silicon Valley Office and an active
contributor to the software team.
E-Mail: [email protected]
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Simon-Kucher & Partners Software Insights | Spring 2014 17
Insight Venture Partners is a leading global private equity and venture capital firm founded in 1995. The firm has
raised more than $7.6 billion and invested in more than 200+ growth-stage software, eCommerce, internet, and data
companies.
Hilary Gosher manages Insight Onsite, the firms team of operations and growth experts who work with Insights
portfolio companies. Hilary founded this team in 2000 and has worked alongside many technology executive teams
advising on day-to-day strategy, operations, M&A and post-merger integration to drive enterprise value She is also an
Adjunct Professor at NYUs Stern School of Business.
Simon-Kucher: Lets start with investment philoso-
phy; in your view what are the types of things you are
looking for when you are evaluating whether to invest
in a software business?
H.G.: We are primarily momentum investors, so we
are looking for growth. As evidence of market demand
and product/market fit there is nothing quite like visible
quarter-over-quarter growth. 50-100% annual growth
is a good target to get a sense as to whether the com-
pany has found their sweet spot. Secondly, we look to
make sure there is a really large market opportunity
solving pain points that customers are willing to spend
money to address. Finally, we want to see an attractive
customer lifetime value relative to customer acquisi-
tion costs, as an indicator that the business will scale
efficiently.
Simon-Kucher: How concerned are you with the
company establishing their monetization strategy
before you invest?
H.G.:Even in a Series A investment we tend to get in-
volved with companies that have a business model in
place that we will help to refine. Monetization is not
paramount, but we need to be convinced of a solid
path to getting there. Nothing speaks to value propo-
sition more than existing paying customers. In many
cases our Onsite team will work with management to
tune up the business or we will help bring
in specialists to support us.
interview
Hilary GosherwithManaging Director, Insight Venture Partners
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Simon-Kucher & Partners Software Insights | Spring 2014 18
Simon-Kucher: What type of background do you look
for in the management team you are backing?
H.G.:If it is a disruptive technology we are very much
trying to understand the pure technical capability of
founders because they are the ones with the initial vi-
sion of the product, its capability, and the market need.
In later stage investments, we are more focused on
managements track record of scaling a company prof-
itably.
Simon-Kucher: What stands out
about the growth trajectories of
some of your portfolio companies
you are really excited about?
H.G.: Two companies come to
mind: AirWatch, a mobile device/
BYOD management company,
was an Insight investment, expe-
riencing high quarter-on-quarter
growth rates before they were ac-
quired by VMware in January this
year. The other is New Relic, an
application performance manage-
ment company that targets SMB
and Enterprise markets with re-
markable year-over-year growth.
They have a very high velocity
sales process and great lead nur-
turing conversion rates.
Simon-Kucher: What are the most common pricing
pitfalls that you first see with the companies that you
invest in and what are some examples of some com-
panies that do a good job of pricing?
All companies start
off with a very
simplistic pricingstrategy. What
happens is that the
end-market and
end-users get more
complex and they
then start to realize
they are leavingmoney on the table
H.G.:All companies start offwith a very simplistic pric-
ing strategy. What happens is that the end-market and
end-users get more complex as the company grows.
Management starts to realize that they are leaving
money on the table because they are not optimizing
pricing for the different buyer personas, use cases,or markets. The trickiest balancing act is having a
simple structure that a salesperson can explain easily
versus a model that takes into the account the end-user
nuances.
Simon-Kucher: When does a
channel strategy start to help scale
a business?
H.G.: We find that companies do
well starting out with a direct salesmodel domestically. This allows
them to keep the pulse of the cus-
tomer pain points and the market
needs. As they start to expand in-
ternationally channel partner rela-
tionships become important.
Simon-Kucher:Any last words
of advice to software startups out
there?
H.G.: A few years ago freemium
was a very hot strategy, but inves-
tors have come to realize that it is
not really a pricing strategy or business model, it is just
one of many lead generation strategies. An extra de-
gree of caution is needed to go that route, as you need
to really understand the conversion rates and how it
fits with your product profile and impacts customer
lifetime value.
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Simon-Kucher & Partners Software Insights | Spring 2014 19
Upcoming Events: Youre invited!
Atlanta Pricing Strategy Forum
Hosted by Simon-Kucher
June 4, 2014 | 12:30pm - 6pm
Four Seasons Hotel, Atlanta, GA
During this afternoon program you will have the oppor-
tunity to build connections with fellow senior leaders
and learn how other executives and thought leaders
at leading Southeastern companies are solving some
of the most pressing pricing, marketing, and sales
challenges.
This forum will feature the following presentations:
Get Your Segmentation Offthe Shelf and to the
Bank: Applying and Monetizing on Segmentation
Strategy | Patrick Dodson, Senior Director of
Customer Strategy, Insights and Analytics at
Manheim
Making the Transformation to Value-Based
Pricing | Mary Pat Donnellon, Vice President
Marketing at Blackbaud Value Selling:Sales Strategies to Capture More
Value | David Monnot, Senior Sales at Doka USA
Register by emailing:[email protected]
Software Monetization: Pricing and
Licensing Trends Summit
Hosted by Simon-Kucher & Safenet
June 12, 2014 | 12:00pm 6pm
The Conference Center at Waltham
Woods
Join us for an educational half-day summit, focused
on software monetization, pricing and licensing
challenges faced by software developers today and
best practices for achieving long-term success.
Simon-Kucher
EVENTS
June 4
June 4
This summit will feature the following presentations:
Licensing Trends| David DiMillo, Principal
Consultant, Software Licensing Professional
Services at SafeNet
Software Business Model Transformation:The
Gap Between Pricing Strategy and Execution
| Kevin Cabral, Head of Corporate Planning &
Analysis at Progress Software
Packaging Best Practices:Helping Customers &
Your Sales Team Land & Expand | Joshua Bloom,
Partner at Simon-Kucher & Partners
Register by emailing:[email protected]
Catch us at the following events:
IQPC Pricing Strategies Series
August 19-20, 2014 | Chicago, IL
The Pricing Strategies Series consists
of two one-day events: one focused on
B2B pricing; the other focused on B2C
pricing.
Register by visiting: www.pricingstrategiesseries.com
PPS 25th Annual Fall Pricing Workshops
& Conference
October 21-24, 2014
Wynn Hotel in Las Vegas, NV
PPS Conferences bring hands-on work-
shops and high-level speakers from the
worlds of business and academia, providing a diverse
environment for training and connecting to esteemed
professionals in the pricing world.
Register by visiting:www.pricingsociety.com
August
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Simon-Kucher is a global consulting firm specializing in strategy, marketing, pricing and sales.Founded in 1985, our practice is built on evidence-based, practical strategies for profit improvement.
Simon-Kucher reaches newgrowth milestones Our proven record:
About
Simon-Kucher & Partners
We support market leaders across industries and
countries. Our specialized software consulting prac-
tice has worked with the worlds leading software
vendors to extract premium value for their products
and services in a variety of markets and competitive
environments.
Projects completed in
the last 3 years alone
Pricing professionals
located across
27 offices worldwide
Percent growth
in revenue
Books written on
pricing and business
management
2-10+
2,000+ 700+
40+
www.simon-kucher.com
Silicon Valley Office
100 View Street, Suite 102
Mountain View, CA 94041phone: +1 650 641 4300
Software Practice
2013 was another successful year for Simon-Kucher &
Partners:
Revenue surpassed USD 200 million mark for
the first time
The firm was proud to announce the opening of
offices in Sao Paulo and Santiago de Chile, as we
now operate out of 27 offices across 22 different
countries
We crossed the 700 employee mark and con-
tinue to recruit exceptional talent around the world
Simon-Kuchers global presence: over 700
dedicated professionals in 27 offices worldwide