Drilling Down Into Subscription Renewal Plans
At its partner conference in July Microsoft Corp., Redmond, Wash., announced that it would pay channel partners a margin of 12 percent when a solution provider first signs up a customer for its on-demand applications and 6 percent on subscription renewals.
Customers can purchase Microsoft software on a perpetual-license or subscription basis under the company's Enterprise Agreement volume licensing program or as a subscription from a reseller operating under a Service Provider Licensing Agreement. On-demand applications hosted by Microsoft are sold only on a subscription basis.
Perpetual licenses still account for the largest share of Microsoft's software sales, but revenue from software sold on a subscription basis is growing at least as fast, said Marcelo Prieto, director of Microsoft's worldwide licensing and pricing group.
Like other vendors, Microsoft sends notices to customers whose subscriptions are about to expire. But with on-premise and partner-hosted applications sold by solution providers, the job of getting customers to renew their subscriptions is pretty much left up to the channel partner, said Carlos Cruz, senior director of Microsoft's worldwide licensing and pricing group. Subscriptions for applications hosted by Microsoft are auto-renewing unless the customer cancels the deal and any channel partners involved in the deal still earn the 6 percent margin. "It's an ongoing annuity for the partner and for us," said Cruz. "So service quality has to remain very high."
Intuit Inc., Mountain View, Calif., pays channel partners a 15 percent margin for both initial contracts and subscription renewals for its recently unveiled on-demand Intuit Enterprise Suite applications. "We don't see a diminishing role for channel partners in the customer relationship," said B.J. Schaknowski, sales director for Intuit's mid-market group.
Sage Software (part of the U.K.-based Sage Group plc) lets partners decide whether they want to pursue subscription renewals for the vendor's on-demand CRM applications or leave it up to the vendor, said David van Toor, senior vice president and general manager of Sage CRM solutions North America. Sage sends customers renewal notices before subscriptions expire, but it pays channel partners of record for subscription renewals regardless of whether Sage or the partner processes the renewal. While most partners leave the chore to the company, van Toor said some solution providers do it themselves to take advantage of the enhanced cash flow. The margins vary by partner and channel program tier.
Salesforce.com Inc., San Francisco, sells its on-demand CRM applications only on a subscription basis. Channel partners earn 10 percent margins for subscription sales, but the company doesn't pay solution providers for subscription renewals. Salesforce positions its on-demand software as a platform for solution providers to build value-added products and services. Bobby Napiltonia, senior vice president of worldwide channels and alliances, makes it pretty clear Salesforce favors what he calls the "revolutionary" partners who take that approach more than traditional "evolutionary" resellers.
"There is more value in making a customer successful in expanding the CRM application into new areas than worrying about how to get [subscription] renewal revenue," Napiltonia said.
But other on-demand software vendors, whose products are sold only as subscriptions, are offering solution providers incentives for subscription renewals. On-demand ERP application vendor Intacct Corp., San Jose, Calif., does about 50 percent of its sales through channel partners—a number it expects to increase to 80 percent in the next 18 to 24 months, said Jerry Jalaba, channel sales vice president. Solution providers hold the contract with their customers and Intacct leaves all renewals up to them. "We don't interfere with that process at all," Jalaba said. Margins for both initial contracts and renewals start at 30 percent and generally range between 30 and 40 percent.
Because of the need for frequent product upgrades to handle rapidly evolving malware, security software is generally sold on a subscription basis more often than in other product categories.
Sophos Plc, an Abingdon, U.K.-based security software developer, sells its on-premise and Software-as-a-Service products exclusively through the channel on a subscription basis. Sophos pays its partners the same margins for new subscription sales— often multiyear deals—and for renewals, said Chris Doggett, director of global channel programs. Margins are "in the double digits" for partners that perform more of a fulfillment role, while those who take a more proactive selling role can earn margins of 20 percent to 35 percent. "Our margin structure is the same on the new [subscription] and renewal side," Doggett said. "We've got a good incentive in place."
Sophos does send e-mails and make calls to customers whose subscriptions are expiring in 90, 60 and 30 days. But Doggett emphasizes the company doesn't take renewal orders. Channel partners either take orders from customers themselves or they work with the Sophos Online Ordering (SOLO) Web site that lets them check the status of customer subscriptions.
"Our [subscription renewal] model is completely dependent on the channel," said David Roberts, senior vice president of America sales at Websense Inc., San Diego. The company pays margins on renewals, which Roberts didn't disclose, and offers higher margins when a renewal includes cross-sell and upsell efforts.
Websense is piloting an online automated system for subscription renewals, slated for rollout in January, but channel partners will have the final say on communications with customers, said Erin Malone, senior director of sales and channel programs. And partner margins stay the same no matter how the renewal is processed. The company also offers additional incentives for subscription renewals that migrate customers from Surf Control, which Websense acquired last year, to Websense software.
Trend Micro Inc., like Sophos, sells its on-premise and Software-as-a-Service security applications on a subscription basis exclusively through the channel. The Cupertino, Calif.-based company also maintains a customer database and will call and e-mail customers to get them to renew their expiring subscriptions—but only if the channel partners who initially sold the subscription say it's OK.
"Some partners like us to contact the customers because it takes some work off their plate," said Gil Morales, director of North America distribution sales. Even in those cases, all purchase orders go through the partner who earns the margin on the sale. The margins (which the company didn't disclose) fluctuate based on Trend Micro's immediate sales and marketing goals—in the third quarter the vendor offered an extra 5 percent margin on subscription sales and renewals, for example. And Morales said the company generally offers a little higher margin for initial sales given that they often require more work than renewals.