Tuesday, 5 July 2011

Making Money in The Cloud

If you are a reseller you may understand the potential for reselling in The Cloud. The problem for most will be, how can I make money out of selling in The Cloud?

At first sight things don't look too good and it's confusing. Everyone seems to want a piece of the action. There are vendors with their software wanting resellers to buy into new certifications. There are hosting companies wanting a slice of the action. Then there are service providers who are offering to add a billing and management layer to the applications resellers want to resell. And then take a look at the margins on offer from the vendor.

Let's be honest, it isn't looking exciting. By the time a reseller has potentially paid hosting fees and for a management player the thin margin from a starting price of £4/user/month at Microsoft 365 is not that compelling. Even if the reseller just acts as an agent to Microsoft, the fees are pretty low although at least there is no slice paid to hosting companies or management layers.

For those who have some investment money, building their own hosting centre is a huge risk - there is massive over capacity in hosting centres all over the place and pricing is already aggressive. Besides, for every reseller who attempts this, it risks prices going up when Cloud is about reducing costs to SMEs.

So you have to be pretty confident that you can sell an awful lot of seats to make it all worthwhile. And here's the rub. The margins on offer are not particularly conducive to making a market on this.

Traditional software vendors talk blithely about The Cloud being a new, incremental opportunity yet they apply traditional pricing and margin strategies to it. The risk with that approach is that resellers will just stick to what they know. These traditional vendors may fancy their chances of working direct but, as in the case of Microsoft, they got where there are by using a leveraged model of channel sales. As Microsoft goes to build its Cloud business, there is a strong likelihood that its biggest competition will be its own traditional channel selling on-premise solutions as usual. The danger here is that by adopting this strategy, Microsoft is taking its eye off its main competition in The Cloud - Google.

In fairness, original SaaS vendors like Salesforce.com and Google never leveraged a channel and sold mainly direct. Only recently have they adopted channel as a route to market on a more wide scale. There is good reason for this as selling SaaS takes a completely different approach to selling on-premise.

The key difference is this - to sell SaaS successfully the sale itself is only the start in the journey. Driving usage and adoption is the critical factor to long term success. It is why SaaS vendors trusted their own sales teams to do this as resellers, like traditional software vendors, end their journey at the sale itself. Sure, you keep your relationship to get upgrades, but you are not worried about adoption as if a licence isn't used then you still get the money. In SaaS/Cloud, if a licence does not get used it won't be bought again. If usage is not high, companies will question value. If adoption is not achieved then renewals will dwindle.

It's a different selling world. It's a different reward model for salespeople.

The biggest mistake a vendor can make in The Cloud is to not reward beyond
the point of an initial sale as this is only the start of the journey to success. Driving usage, adoption and customer experience is vital to success. If the subsequent rewards for renewals and uplifts in licences aren't there, then salespeople will switch off.

At PlaceWare this was the driving force for salespeople. At Salesforce.com it is the critical factor to success. Monthly billing models mean that renewals have to be a minimum of 60-70% but you want most renewals to increase licences at the anniversary of the sale. You can only achieve that if the salespeople remain actively motivated.

Already, this is where vendors with the strategy of taking existing price and margin structures and amortising them to mimic Cloud risk failure. No names and no pack drill but some of the biggest vendors in the world are making this huge mistake. It means that there is zero incentive for the channel to engage.

If the channel doesn't engage, they risk losing their biggest advantage over Google. The advantage is using an experienced, loyal set of foot soldiers in their thousands who call on the same customers daily. This loyal salesforce believe in the vendor but need to make money.
For Google, if it now comes to a straight direct fight with the likes of Microsoft then things have changed. Google is a web only company and is now one of the biggest brands in the world. They are the lionshare of all search in the market and they are by far the largest advertising system online. The message is that Microsoft needs to include its channel to help it win.

We thought we would never say these words but Microsoft are no longer dominant enough to win a direct fight with Google in The Cloud. That battle has already been lost.

1 comment:

Cloud Tribe said...

A great blog. From my experience; To make money from selling cloud based services vendors need to sell multiple services bundled together with an infrastructure support contract. For example. Hosted Exchange, Online Back-up, File Sharing and Hosted VoIP with a support contract (covering both the cloud services and infrastructure). The big boys (Microsoft / Google are helping raise the profile of cloud based services however resellers would be mad to recommend their services as the margins are so low and they loose ownership of the customer.