The following guide defines and explains the various SaaS sales models, how to choose the right distribution channel for your SaaS company, and a framework to help think about which sales channels make sense under which situation.
Every SaaS company needs sales. This is not subject to debate. What is subject to much debate is which model to use to best generate sales. Rather than thinking of the outcome of generating sales, it’s more useful to think of generating SaaS sales in terms of distribution channels and sales models.
A distribution channel is a means by which to reach a customer in the marketplace, engage in a sales process, and ultimately close a deal. As I emphasize in my book Extreme Revenue Growth, it’s strategically vital to choose your distribution channel wisely. Many founders think about “the product.” When someone says, “I have a great idea for a startup,” they’re invariably talking about the product. The better founders think about the problem the customer possesses but can’t solve. The professional CEO thinks about distribution channels and sales models.
There must be strategic alignment between the customer, the sales model, and the product design. Depending on which customer segment you target and which sales model you choose, you build the product differently. This is a vital consideration that’s often overlooked by founders who fail to cross the chasm to become a professional CEO.
With this in mind, let’s look at the distribution channel options to generate SaaS sales.
Contents of this Guide
Direct SaaS Sales Channels
- eCommerce-Based Sales Channel
- Telephone-Based Sales Force
- Field-Based Sales Force
Indirect SaaS Sales Channels
- Reseller Channel
- OEM Channel
- Sell with Services Partners
- Sell through Services Partners
How to Choose Your SaaS Sales Channel
Direct SaaS Sales Channels
With direct sales channels, the SaaS company has direct contact with the buyer and user of the product. They know the name, address, and billing information of the customer. The customer perceives a direct relationship with the SaaS company. The agreement is between the SaaS company and the customer. The SaaS company bills the customer directly. When the average person thinks about a sales force, they think about a direct sales channel.
eCommerce-Based Sales Channel (Self-Service)
An eCommerce-based sales channel contacts the customer, delivers the sales message, and closes the financial transaction entirely online. This is the most commonly used channel for consumer and small business customer segments. Examples of companies using this model for consumer and SMB (small- and medium-sized business) customer segments are Apple iCloud, Dropbox, Evernote, Zoom, Shopify, and Salesforce.
For all of these SaaS products, you or I can visit their websites, learn about their products, and subscribe, all in a matter of minutes. The entire sales process is digital.
The selection of this kind of channel is typically driven by the annual contract value (ACV). If a customer is only worth $100 in contract value per year for a consumer business, the economics of other distribution channels simply aren’t feasible.
Telephone-Based Sales Force (Inbound & Outbound)
The next step up from an eCommerce sales channel is a telephone-based sales force. This involves teams of sales professionals on the phones, closing deals. The telephone sales force can be used in two capacities. It can be used to field inbound inquiries from prospects. This involves a prospect calling the company to learn more about its products. This is often referred to as “inbound sales” because the prospect is initiating the call (or sometimes filling out a form requesting a phone call) and is calling “in” to the company. Inbound sales typically involve effective lead generation marketing that starts the sales education process digitally and then directs the prospect to a telephone-based sales rep to close the sale. This is an offline-to-online sales process.
The other common model for a telephone-based sales force is to do “outbound” sales. In this approach, the sales force makes outbound phone calls to contact, qualify, and begin the sales process entirely by phone. This is referred to as “outbound” sales because an employee of the SaaS company is calling “out” to the marketplace to reach a prospect.
In some SaaS companies, the call center sales force is entirely inbound-focused. In others, it is entirely outbound. In some companies, a single sales force handles both inbound and outbound sales calls. In others, there are two separate sub-teams — one focused on inbound and the other on outbound.
The right configuration depends a lot on the effectiveness of marketing efforts and the cost of those efforts. In my experience, it makes sense to start with a marketing-enabled sales effort where leads are handed off to the sales team as inbound leads. However, lead generation channels tend to get more expensive on a cost-per-lead basis as the volume of leads increases. You eventually hit a diminishing returns curve.
In these situations, you can make one of three choices: 1) you maintain the existing pace of new customer acquisition at a steady rate – one where you’re comfortable with the ratio of life-time value of the customer (LTV) versus customer acquisition cost (CAC) (the LTV/CAC ratio); 2) you improve the LTV of the customer via upsells, cross-sells, and reduced churn (which creates more room to increase spending on customer acquisition, thus moving further out on the diminishing returns curve); or 3) you switch to outbound lead generation.
Usually, outbound sales calls are more expensive (a.k.a. less effective on a per-call basis) because the prospects may have very little awareness of your company and products. The conversation starts from a point of much lower awareness compared to a lead that has been cultivated for many weeks or months. It is the difference between “cold” calls versus “warm” calls.
However, as you run out of volume for warm calls and incremental inbound calls get more expensive to generate, there comes a transition point where, suddenly, the economics of outbound calls are comparable to and maybe even less expensive than the cost of the incremental inbound lead. It’s at this point that the SaaS sales organizations will start incorporating outbound calls.
Amongst the companies I work with, this has happened in the $15-million to $25-million annual recurring revenue (ARR) range. This is not a hard and fast rule. The ARR level doesn’t cause the switch to outbound calls. It’s the key performance metrics of the CAC relative to the LTV that drive the decision-making. The fact that this seems to happen around $15 million in ARR is a correlation, not causation.
In the pre-SaaS days, the rule of thumb was that a telephone sales force was economically feasible for a one-time license sale of $1,000-$10,000. These days, I’ve seen phone sales work for an AVC range of $1,000-$100,000. However, the caliber of the individual sales reps and supporting resources (such as sales engineers) needs to be very high as one approaches the $100,000 AVC range.
Field-Based Sales Force
A field-based sales force has been the classic, “go-to” distribution model for enterprise software sales and now enterprise SaaS sales. In the pre-SaaS days, this is what it took to sell the $1 million-$20 million deals. In today’s world, this very loosely translates into $100,000-$1 million+ ACV. From a customer’s point of view, when you buy a product that’s in the ACV range to be sold by a telephone sales force, you’re buying “the product.” For deals in the $100,000-$1 million+ ACV range, you aren’t just buying the product, you’re buying “the company.” When the salesperson sells to an enterprise buyer, she isn’t just selling the product, she is also selling herself and her ability to deliver.
When an enterprise buyer buys something of this deal size, it is quite often a “bet your career” move. Years ago, when chief information officers and VPs of sales wanted to switch from classic enterprise sales force automation (e.g., Siebel Systems) to Salesforce, it was a bet your career move. If you were wrong, if you made the wrong choice, or if you made the right choice but it was executed poorly, you were fired and your résumé was ruined.
In addition, enterprise customers, and thus enterprise deals, have more technical complexity. Integration needs are typically much more extensive for Fortune 500 and Global 2000 customers than SMB customers. If you’re selling a SaaS product to a functional executive, such as a vice president of marketing or sales, for a Global 2000 company, and your solution needs to integrate with existing systems, the information technology team will need to get involved and approve a deal.
These deals typically involve multiple decision-makers and decision-influencers with varied needs. This is a more complex sale technically, functionally, and politically. It is also a sale that demands a lot of trust and relationship-building. It is quite common for SaaS company executives to get involved in closing a deal and serve as an executive sponsor for the customer after the contract is signed.
In essence, the customer wants assurance that, if something goes wrong, there will be one or preferably two people with power whom they can call to expedite help.
When I used to run the eCommerce product line for Art Technology Group (since acquired by Oracle and rebranded Oracle Commerce Cloud), one of the first things I did when I took over P&L was fly around the world to my top customers to say hello, apologize for past mistakes we made as a company (during our hyper-growth phase), and to say, “If there’s anything you need that’s not working, call me. I will personally take care of it.” I called this my “World Apology Tour.”
In addition, strong enterprise field sales reps know that sales at this level are very much a “relationship-based sale.” They know that the customer is betting their career on them. Seasoned reps know that if they screw over a customer by over-promising and under-delivering, that customer will not be a repeat customer at their current and/or future employers. This is one reason why seasoned enterprise sales reps push really hard on the product and professional services team to make sure that the promises she makes to the customer will be kept by every other part of the organization. You see, the enterprise sales rep is betting her career on the sale too.
With all this career betting going on, the key is relationships… and relationships are built more easily in person.
Indirect SaaS Sales Channels
Indirect sales channels refer to one’s SaaS offering being sold through or in conjunction with another organization. The classic indirect sales channel in the offline world is the “middleman” or brick-and-mortar retailer. Procter & Gamble (P&G) generates upwards of $65 billion in sales a year. Yet neither you nor I can buy Tide detergent, Gillette razors, or Crest toothpaste directly from them. When anyone buys those products, the receipt always says Walmart, Amazon, or some other retailer. This is a classic example of an indirect sales channel.
If you intend to sell through an indirect sales channel, it’s important to recognize that channel partners themselves are, in some sense, “users” of the product. Do you know why Bounty paper towels are packaged in bundles of 12 or 18? Do you know why the rolls of paper towels are lined up within the plastic wrap in a certain configuration? These decisions are not arbitrary. These decisions were intentional to meet the warehousing, transportation, and shelving requirements of the retailer.
Retail store shelves are set at a certain height. If you package a six-pack of paper towels in a way that’s too tall, it won’t fit on the shelf and the retailer won’t agree to sell it. If a manufacturer sells, say, a four-pack of a particular item, they are required to write on the packaging “This is a set. Do not open this box.” This message is intended to be read by the Amazon distribution center employee that receives inbound goods from manufacturers.
When you involve another party in your sales process, their needs must be considered for how you build your product, how you price it, your financial model, how you package it, and how you go to market (e.g., sales and marketing).
Several consumer brands have emerged that are geared toward millennials who spend more time on social media than watching cable TV. Some of these brands have Amazon as a primary sales channel. Two of the competitive advantages of selling consumer goods on Amazon are 1) the number of five-star reviews; and 2) sales velocity. The product with the most high-quality reviews tends to get better placement in Amazon product searches. (This is especially true if the refund rate on higher-rated products is substantially lower.) Products with better placement in Amazon search results tend to get more sales. Products that sell well also get better placement on Amazon searches. As a result, there is a positive self-reinforcing cycle to dominating the war for positive Amazon reviews.
Some of these consumer products have changed their product packaging to explicitly ask customers to leave an Amazon review. It’s actually on or attached to the package itself.
In addition, if you’ve ever bought furniture from Amazon, that box and manual will say, “If you need help or are missing a part, do not call the retailer. Call us instead at 800-XXX-XXXX.” They do this because many retailers do not like product returns (especially for large packages weighing 60+ lb, or 27+ kg). The retailer will often charge the manufacturer extensive handling fees to process the bulky and heavy return cluttering up their warehouse. Because of the demands of these indirect channel partners, the manufacturer has modified the product packaging, product documentation, and the customer service department’s staffing and role. This has implications for the financial model of the manufacturer.
I mention all these, hopefully relatable, examples to impart on you that choosing an indirect sales or distribution channel impacts… everything. It is not always just another way to sell a product. Those who embrace the channel’s peculiarities tend to achieve higher sales through the channel and have a competitive advantage. Some products are more (indirect sales) channel-friendly compared to others. Some companies are the same way.
Now let’s look at some indirect channel options for generating SaaS sales.
The simplest example of an online reseller channel for a SaaS product is the Apple or Android app store. The customer makes either a one-time purchase or a subscription purchase of the app in an app store. I’m an iPhone user, so I buy my apps from the Apple App Store. When I do, my credit card is charged and the credit card receipt shows “Apple App Store” (or something along those lines). If Apple charges me $100 for the subscription, the SaaS company gets a percentage of the sale.
One of the big advantages of using a reseller channel is access to customers. P&G wants its product in Walmart because tens of millions of shoppers walk through Walmart every week. It offers incredible access to customers. Consumer SaaS companies want to be in the app store because millions of prospective app buyers are looking through the app store each week and spending money. There’s a saying that goes: Why would someone rob a bank? Answer: Because that’s where the money is. Why use a reseller channel strategy? Because that’s where an awful lot of customers are.
Two of the big concerns with using a reseller channel are: 1) potentially having restricted access to the customer after the sale; and 2) the customer perceiving a relationship with the retailer, as opposed to the company that produces the product.
I probably have 100 apps on my phone. I own a bunch of apps from Google, Dropbox, Evernote. I perceive myself as a customer of these companies. For the other 90 or so miscellaneous apps, I have no idea which company made that product. I have an advanced calculator app that I use that can calculate square roots. I have no idea who made that app. I have a compass app that provides GPS coordinates that I use when I’m volunteering on search and rescue missions. I have no idea who made that app.
When your customer doesn’t have or doesn’t perceive a relationship with your company, you do not benefit from the halo effect of a positive user experience. I love my compass app because it gives me GPS coordinates in the preferred format used by my search and rescue unit. I would certainly trust the app developer enough to look at their other apps. The problem is, I have no idea who that developer is. In my mind, it wasn’t the app developer that solved my problem. It was the app store that solved my problem.
In addition, the app developer doesn’t have the means to market to me. The developer can’t educate me on the company’s other apps. At most, I can do an app purchase to upgrade the app. This limits the app developer’s access to me as a customer. This is intentional on the part of the reseller. The reseller wants “account control.”
This is one major tradeoff of using a reseller channel. You see this tradeoff at play between physical goods manufacturers and Amazon. The manufacturer doesn’t have the customer’s name or address (unless they are drop shipping to the customer). They don’t have the customer’s email address. They can’t conduct email marketing campaigns after the sale. Amazon has all the sales data… and if your product sells really well, Amazon will create a house-branded version of the product to compete with yours. So why bother with this channel? Because… Amazon has a ridiculous number of customers.
At this point, if a product isn’t available on Amazon, 90% of the time, I assume the product doesn’t exist.
One final point: In the reseller model, the company and brand name of the product being sold via the reseller is presented to the customer. Whether the customer pays attention to it is a different matter.
OEM Channel (Embed Your Product inside Someone Else’s Product)
Another kind of indirect distribution channel is the OEM channel. OEM stands for original equipment manufacturer. This term is a throwback to the hardware industry. The classic example of an OEM channel is what both Intel and Microsoft did in selling microprocessors and Windows operating systems to personal computer (PC) manufacturers like Dell. During the height of the PC era, a computer wasn’t considered a good computer unless it had “Intel Inside.” Similarly, during that era, nearly every personal computer was preinstalled with Microsoft Windows.
In this case, Dell would embed Intel chips and Microsoft’s OS into its products and sell the combined bundle for a “solution” price. Intel and Microsoft were “component” manufacturers whereas Dell manufactured the final equipment solution that the customer actually used.
In an OEM situation, the product being sold by Intel or Microsoft is either embedded within or bundled with other solution components. The component manufacturer doesn’t actually have a relationship with or even know the end customer. Billions of individuals use Intel products and Intel doesn’t know the name of a single one of those end users. They only have relationships with the Dells of the world. Dell has the customer relationship.
Microsoft had the same issue, but it compensated for this strategic vulnerability by having new Dell customers “register” their licensed copy of Windows directly with Microsoft. So, Microsoft found a way in the post-sales environment to build a direct relationship with the actual user of their product. This would later allow them to transition the customer to direct eCommerce sales channels for Windows upgrades and to sell other related SaaS offerings.
The SaaS industry is analogous to Dell. Cloud infrastructure providers like Amazon Web Services (AWS) and Microsoft Azure are “component manufacturers” that embed their offerings within the products of SaaS companies. So, infrastructure as a service (IaaS) relies extensively on an OEM-like strategy in selling through SaaS companies to the individuals who use their infrastructure.
Most Netflix subscribers have no idea that much of the Netflix experience is actually provided by Amazon Web Services.
To fully grasp when an OEM strategy makes sense, it’s important to go back to Geoffrey Moore’s concept of the “whole product” vs. what I term “your product.” Your product is what you sell to customers. The whole product is everything the customer needs, including your product, to get the outcome they want.
For example, you might sell a breakthrough SaaS product. In your world, the app is your product. From the customer’s point of view, your product is incomplete. The customer needs employees who know how to use your product. Your product needs documentation and training so that existing staff can learn the system. Or, it needs consultants who know your product and can help employees implement it. If it’s an enterprise client, they may need a 24/7 help desk in case they have problems. As one Fortune 500 CIO mentioned to me, “We can’t buy your product even though we actually think it is the best product out there. You aren’t suable enough for us. Your company is too small. We like our suppliers to be big, well-known companies with a lot of money so that, if we are really unhappy, we have the means to sue you or threaten to do so as means for you to take our technical support tickets seriously.”
Oh… that was an eye-opening comment for me when I was very early in my career in product management. For this Fortune 500 company, being suable was a whole-product requirement. Being easy to sue was clearly not on my product roadmap. This is the difference between your product and the whole product.
In situations where some other company in the ecosystem provides a greater critical mass of the whole product, it can make sense to consider an OEM-type channel SaaS sales strategy.
For example, let’s say your company provides sales tax calculation software for the thousands of local government jurisdictions that charge sales tax. This is a necessary part of any eCommerce solution. In this case, it would make sense to embed your sales tax calculator software service within other providers’ eCommerce shopping cart SaaS offerings.
The same might be true for a site-specific web search service or a whitelisted email delivery service.
While SaaS offerings like this arguably cross into the definition of IaaS, the key idea here is to consider if your product is truly a standalone product or adds more value to the end user by being embedded within someone else’s SaaS solution.
Sell with Services Partners (Sell Side-by-Side with a Service Provider’s “Billable Hours” Services Offering)
Another form of a quasi-indirect sales channel is to sell your SaaS offering alongside a partner. The classic example of this model is selling enterprise SaaS offerings side-by-side with an information technology consulting firm that will be doing the implementation, service, and integration work. Perhaps the Fortune 500 company buys a $1 million ACV SaaS product and then spends $2 million in consulting services to integrate the SaaS application with its entire back-end infrastructure.
From the customers’ standpoint, it is risky to buy the SaaS product without the guarantee that there will be someone skilled enough and available to help implement it. Similarly, it makes no sense to spend $2 million to implement a software service if you don’t even have a subscription to the software in question.
For a variety of practical, financial, and legal reasons, it makes sense to make the purchase decision and agreement execution process with the SaaS company and the system integrator concurrently. One is not useful without the other.
Because of the reduced risk to customers in a concurrent buying process, SaaS companies and system integrators have collaborated in going to market (e.g., coordinating their marketing and sales efforts) to propose a combined “solution set.” In this case, a solution set equates to Geoffrey Moore’s whole product, or at least a greater percentage of it.
Sometimes, a Global 2000 company will prefer to buy the software directly from the SaaS provider. In this scenario, the customer is hedging their bets. If the system integrator does a poor job on the implementation for some reason, the Global 2000 company has direct access to the SaaS product. In a worst-case scenario, the customer can replace the system integrator without losing any work progress that has been made to date.
Selling with services is only a quasi-indirect sales channel. It has elements of a direct relationship with the customer. It also has elements of making sure that your product, marketing, sales, and customer support efforts are “partner-friendly.”
Sell through Services Partners (Embed Your Product inside Someone Else’s “Billable Hours” Services Offering)
Another variation of leveraging services partners is to embed your SaaS offering inside a services partner’s business services offering. A simple example of this is how QuickBooks Online sells its service to certified public accountants (CPAs). In some cases, the CPA’s client couldn’t care less about which general ledger system is used to prepare financial statements and tax returns. What the client wants is to be able to pick up the phone and call the CPA. In this case, the CPA may prefer having her clients’ books all on QuickBooks Online. The CPA firm might buy 100 QuickBooks Online subscriptions for its 100 accounting clients. In this case, there is no direct billing or legal relationship between the SaaS company and the CPA’s client. They are really selling 100 subscriptions directly to the CPA firm. On the other end of the relationship chain, the price of the SaaS offering is embedded within the CPA’s service fees. The client never sees an invoice and may not even know that QuickBooks is being used on their behalf.
In this situation, the SaaS product is embedded within a total “business process outsourcing services” agreement. A business process outsourcing services agreement involves taking an entire business function, such as accounting, and outsourcing it to an outside service provider. In this context, the “service provider” provides human labor and expertise-based services (not software).
Selling through services partners is similar to the OEM channel in that you’re embedding your SaaS product within the solution that another company sells to its customers. In the case of OEM, the partner sells a technology product or service. In the case of selling through services partners, what’s being sold is basically some variation of billable hours.
How to Choose Your SaaS Sales Channel
Picking the right sales channel at a particular point in time in a company’s lifecycle is subject to many board-meeting debates. There is no universal, always true guideline. As much as I hate to say it, it depends.
What I can do is share what it depends on:
- How much customer feedback do you need? Do you already have a proven minimum viable product (MVP) that you know customers want to buy? (Indirect SaaS sales channels aren’t ideal for getting direct market feedback. If you sell via an eCommerce channel, you can track your entire sales funnel and track conversion rates. You can use pop-up chat boxes to engage with prospective customers and learn more about the buyer’s journey. Direct sales channels tend to be the best for learning.)
- What’s the life-time value of a customer (LTV)? The higher the LTV, the more options you have to utilize more expensive and more effective sales channels. The lower the LTV, the more you’re boxed into certain channels, such as eCommerce or telephone-based sales.
- What is the customer acquisition cost (CAC) on the current channel strategy? This helps you figure out your LTV/CAC ratio and how close you are to the point of diminishing returns on your current acquisition process.
- What segment of the market are you targeting? What other organizations in the ecosystem already have access to your ideal customer? If you’re selling to consumers, you can forget a field sales force. If you’re selling to Fortune 500 companies with seven-figure ACVs, you can forget an eCommerce channel. If the big technology consulting firms, in aggregate, have 100% access to your entire total addressable market (TAM), you have to take a very hard look at leveraging those pre-existing relationships rather than making the enormous investment to build your own direct channel.
- Which part of the product lifecycle is your product in? If you’re in a mature product category where customers know the product category and know they need it, you have more choices. If you’re in an emerging market where there’s a lot of market education that needs to be done to “create the market,” it’s hard to get a partner to take a major risk on a product category that hasn’t yet been proven viable. Partners are great for fulfilling relentless “active” market demand. Direct channels are better for figuring out what a market wants and how to unlock the “latent demand” potential that exists but hasn’t yet been accessed by anyone successfully.