Why Reselling Software Is A Bad Idea

I speak from my personal experience in heading an organization M.SaaS Solutions Pte Ltd (www.msaas.com.sg) reselling Oracle software when I post about this topic. Given my biased experience on this matter, and the limited information out there giving guidance to potential resellers, especially when I was looking for information at the point of time, here goes.

Generally the business of reselling software comes in a couple of variants depending on the software vendor you are approaching but they would be very similar to either of the options below:-

1)      They set a recommended list price (think of it as the Manufacturer’s Suggested Retail Price or MSRP) on the market and provide the resellers a fixed discount percentage or margin to profit from. You can either sell above or below the list price, but unless you have a very good reason, my experience is that you end up selling below the list price and making very little margin on the software itself unless you are talking about multi-million dollar software deals.

2)      They set some sort of a percentage for the commission fee based on the final transaction of the software. So at the end of the day if you sell $100 of the software, you get X percentage amount of $100.

There might be difference in terms of how they charge for the software (per user, per transaction, etc.) or even in the frequency of the billing (i.e. monthly, annually) but it generally revolves around the same idea. Do note that the following applies to most key vendors like IBM, SAP, Oracle or any other big name software which you can think of. Startups and smaller organizations are a different beast altogether.

Now you might ask me, what’s so bad about reselling the software, considering there are advantages to a reseller model (another post for another time) to it like leveraging your vendor’s branding, product and marketing effort. Let’s explore a little deeper into the situation.

Razor Thin Margins on Software

If you think you are going to make a living of the margins gained from the resell of the software, think again! Most software companies provide you margins in the range of 20-40% depending on the type of software that you are selling and you might start to think ‘Hey, that’s not so bad, 20% out of $100,000 is $20,000!’. Well consider this, firstly, you are almost never ever going to get the said percentage because based on my experience no one sells at the list price and either the vendor or yourself will ultimately provide discounts to the customers because the competition is also providing similar discounts on their software or your customers demand it because it is such a big deal that you are involved in. So there goes probably half of your margins!

Secondly, if your average deal size is less than $100,000, it might not even be worth all your effort at the end of the day. Let’s assume you make 20% out of a $100,000 deal which would net you $20,000. Now that sounds like a good deal doesn’t it? Well, we haven’t factored in your cost of acquisition on the customer. By the time you deduct travelling and entertainment expenses, phone bills, your time and your consultant’s time in pursuing the deal itself, it would probably result in another $10,000. So you end up with 10% or $10,000 out of a $100,000 deal. Still think it’s worth the effort? Read on.

Your Fate Is Tied to The Vendor’s

This should be crystal clear to anyone who wants to resell software. Your fate is directly connected with your vendor’s, if they die you die, if they prosper you prosper and if they wither away so do you. Remember, you have basically no control over the message which is conveyed to your target market, its marketing strategy, how the software is designed and the pricing of the software. If you are someone who wants to have full control of your organization’s destiny or a control freak then reselling software is not for you.

This is important because if you selected a vendor with a vision and strategy which is not aligned to you or your organization, it WILL not end well. As an example, in my previous organization which focused on the low-end or the SMB CRM market, we went ahead with selecting Oracle as our software partner thinking we could leverage the Oracle brand name in the SMB market which had no penetration from Oracle. Well, big mistake on our side! Generally, in the enterprise market, Oracle is known for its database products and high prices (which they should be because they charge a premium for reliability). So we approached the low-end or SMB market, and ended up in conflict with Oracle’s vision and objectives to sell expensive software to Fortune 500 companies (despite them insisting that SMB market is their focus as well). So when we asked for better discounts to win customers they were denied, if we asked for joint marketing campaigns or advertising it will be rejected and little to no prioritization will be given to us considering the small deal sizes we were bringing in, compared to the multi-million dollar deals that Oracle was accustomed to. Probably the only times where Oracle stood in support with us was when we occasionally landed hundred thousand and million dollar deals with multinational corporations or local conglomerates.

Little to No Control Over The Software

This point is less important but still needs to be made known. With established software, you usually have zero to no control over how and what gets into the software itself. Think a particular feature sucks? Or you have repeated requests from customers and prospects on a certain feature or functionality? Good luck giving your feedback to the vendor. My experience with Oracle at least is that you will have to jump through hoops to get a request considered and even then, it does not guarantee anything. And don’t even think of making adding add-ons to the software as a long term strategy, your vendor can just choose to plug the functionality gap anytime and effectively shut you out of the market entirely. If you must rely on your customizations, either make sure you can evolve it into a product of your own or you position yourselves for acquisition by your vendor.

With all the points above, if you still think reselling is a good idea. Please go ahead by all means. Given my experience, it’s just not the most enjoyable experience overall. There are successful businesses that are built around the software reseller concept but those are either consulting companies or some software distributors which definitely carry more than one type of software.

If you really must go with the reseller model and adding in additional services, they are a few advice from myself:-

Pick your software or vendor wisely and carefully. Personally, my advice is not to settle for anything other than the market leader or the clear alternative in the market that you are planning to resell the software. Anything else will ensure you have a hard time selling to the market and getting recognized.

And just have zero expectations on making any significant money off the licenses (Trust me, you will be be happier when you DO make significant money on the software), just concentrate your effort to innovate around the software and offering services for the software which is being resold. Your bulk of the revenue definitely come from the consulting and support services, not the software licenses!

Lastly, and most importantly, make sure the vendor’s overall company vision is aligned with your organizations’, if not you will be in for a hell of a ride. Hope this helps those who have been considering reselling someone else’s software to make a living.

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Why Reselling Software Is A Bad Idea

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