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Software Sales & Marketing Deal Structures?
Entrepreneurs asks: "My business partner and I run a small but growing software company. For approximately the past two years, we have been collaborating with some outstanding overseas developers, have established a strong relationship with this group, and plan on continuing our collaboration with them in the future. As a means of jump-starting our business, we have entered into discussions with this same group regarding some would-be sales and marketing deals in which they would develop and support some products while we would be solely responsible for sales, marketing and would bear all costs associated with these activities. Both parties are in essentially in agreement as to the overarching roles that would be played, but we are as yet far apart in regards to our respective perception as to what represents a fair deal structure (% revenues) for the developer as opposed to the sales/marketing partner. What wisdom can Slashdot readers offer regarding the typical structure of software sales and marketing agreements?"
"Previous experience in the biotechnology industry (an industry that I argue shares several similarities to the software industry) tells me that sales/marketing partners typically get anywhere from 60 to 75% of topline revenues, with the remainder going to the development company. Our overseas partners are essentially arguing for the exact opposite, something to which we would never agree, as we believe it would represent an abandonment of our fiduciary responsibilities. Having never negotiated a deal such as this, we are somewhat at a loss as to what the industry standard terms are for situations such as this and have had a difficult time obtaining quality information that addresses our situation."
The sales organization is VERY important to the marketing of a product, and can get quite cash intensive. For instance, several forms of insurance give 80% or better to the agency that sells the policies and only 20% to the actual insurer. While with some products a manufacturer can sell the product directly and reap these rewards itself, when a product needs someone to actually go out and sell it, that effort deserves a reward.
On the other hand, without the manufacturer (in your case, the software author), the product you're selling wouldn't even exist, and you need to give them enough income to make it worth their while to improve the product and give you new products to sell.
I would recommend some sort of performance-based arrangement, where your percentage goes up if you sell additional packages. This should satisfy both requirements.
This is just one of the resources available to entrepreneurs. You need to reach out to business people with experience, not just broadcast to the /. crowd. I strongly suggest you search out mentors in your local business community.
"This mission is too important to allow you to jeopardize it." -- HAL
After mulling over this question for a while, I realized that it is absolutely impossible to figure out an appropriate split with the data at hand. My first concern is the software itself... are we talking $20 screen savers or multimillion dollar data mining tools here? The developers need the marketers, and vice versa, but who needs who the most is going to depend a lot on product, placement, and pricing.
My next interest would be in the costs to both parties. The developers certainly deserve a nice share beyond production costs, but if the products they create are trying to find a home in a mature, saturated market, then initial promotional costs could be huge. Without hard numbers, I can't even guess who's screwing who here - and I certainly couldn't predict who would profit most from the relationship in a year or two.
For now, put the negotiators on both sides to work on establishing real measures of production and marketing costs that all parties can agree upon... then split every dollar above that 50-50.
-Tim, 10 Minute MBA
Vanya's Law: "In any culture without irony, fart jokes will be the highest form of humor."
Hi,
My dad has a similar set-up. Basically the real question is were are the risks. Are you paying them from sales, contract or an hourly rate.
If it is just from sales then it is generally 50/50 (equal risk). If you don't get a sale then they don't get money and if you don't have a product you can't make money.
If they are getting an hourly rate or a contract payment then they should get less after all they are risking a lot less.
It also depends on your marketing strategy are you the only suppliers or do you have affiliates? If you have affiliates then you generally split the wholesale price and you keep the commission. The main reason being that if the programmer think it is unfair there is nothing that stops him/her from being an affiliate and getting the same commission if they think it is that easy (Exactly the same deal for you and them).
Just remember that you could get other developers and they could get other marketers but together it is better for both of you.
The main thing to keep in mind is that you are talking about risk not skill. You could be amazing or they could be amazing but the commission isn't based on that as it hasn't happened yet. I don't care if you're both pathetic or great at your jobs, if the product doesn't ship you both get nothing. If one group is risking less because they are getting paid something even if a product doesn't ship then they are risking less and should get paid less. That is why sales people can earn more because it is a lot easier for them to earn less.
If you aren't fair why should they put in effort to make it a good product and why should you bother trying to sell it?
I have a similar issue with an intern.
You have to ask some questions about your product and the total value of each component of the process. Who is responsible for:
- determining the market
- setting the price
- paying for sales and marketing expenses
- acquiring and negotiating with customers/clients
- determining the products feature set
- establishing what the product will do, who will buy it, how much they'll pay etc.
I can continue, but the sad reality for developers like your partners is that while their code is of value, they haven't created the "product" just the code to execute it. If you've done all the other work, then they deserve about 10-20%. If you've actually done the other work, you can take your development specs to another developer. If they came to you with a finished product and all you had to do was sell it, then things reverse, but the percentages are highly variable depending upon the product and your market. If you're selling to small niche that requires special relationships just to get customer attention you get 30-60%. If you're selling a "me too" product with broad appeal you become the commodity as they can replace you quite easily with another sales partner.
Some simple questions to frame this are:
If you walked away could they:
- replace you quickly
- continue to develop the product with features it's customer base wants
- acquire new clients and or expand reach within existing clients
I've had the opportunity to watch scenarios like this play out over the years. Companies that don't reward the sales channel properly fail. It's that simple. Developers usually have little concept of how hard that process actually is. It's somewhat of an ignorance-based arrogance.
Of course at the end of the day all negitations boil down to how much each party needs the other. My guess is that these guys would have no means for selling the product without you and that you could find another means for developing it.
After writing this, I'm beginning to realize that the 20% I offered my developer is actually too high. Simply put, he would have no product without me, just the untapped, unfocused ability to write code.
Having been in VC previously without some due diligence info it is impractical to advise you on what the %'s should be. With that said I would make some suggestions on who to best evaluate the situation so as to negotiating the best contract. I assume that neither company has any $$$ otherwise it would be more cut and dry. Company with the capital rules as long as they are putting up the money! If you think it is about putting up the money get outside financial advice on double reviewing the other companies books and audits. Unbelievable the amount of Bulls**t financials or crazy "un-audited" financials floating around. Next I would honestly evaluate how much the maximum gross and net revenue the contract could generate (avg or middle case, please!) and then discount at least 50% off that. With those numbers is it still something you want? If so, can either side easily go somewhere else and get what they want out of the deal. If not, then once again it becomes easy. Whomever needs the other guy the most loses. See, where I am going? If they have nothing with out your presence in the US or if the product has great potential, but is unproven then that is the reality of today. Too often deals are struck on the 'best-case-scenario' which is really 'IFcome' not "Income". Bottom line is negotiate from a position of strength and today's reality. Structure something short-term a average terms, but build in both the ability to bailout if things suck and the right to take much more and then some if things work out. Structure your deal so that if you exceed the expectations then you are rewarded greatly. It shows the confidence you have in your abilities and strengths. i can promise you that the Asians are much more fearful of losing you than you are of them. They only need a short time to figure out that the US is vastly different than they think it is and with a strong US partner they are lost. It is a fallacy that great products sell themselves just as it is that great management can turn around a crappy company. Ultimately you know what you have or need and that should guide you in your efforts. PS - Who exactly do you think you have a fiduciary resonsibility to? Are you a public company? Non-affiliated shareholders?
Relax, aren't you lucky that it is only my Opinion?