Madison Laird's blog

SaaS Channel Complications Manifested at Microsoft

Today Microsoft announced that they would shift their billing strategy for SaaS away from customer direct billing, instead allowing partners to bill customers directly. One month ago I argued that SaaS models would require new perspectives on channel investments by established vendors, and that these perspectives would be both far reaching and expensive. Microsoft's announcement is a manifestation of the issues I raised in that post. Diving deeper into this announcement provides more clarity and detail on the issues that post raises.

1. Channel leverage is catching up to the SaaS model. The SaaS model isn't necessarily a way to get closer to the customer. One of the often-touted benefits of SaaS is the fact that this model represents a way to get closer to the customer, a way to minimize "disintermediation," the tendency of a channel partner to gain influence over a customer's buying decisions, even to the point that the decision over the vendor being used in delivery was no longer the customer's, but the channel partner. Vendors often grapples with this issue in a managed services environment. When a vendor uses a managed service provider as a route to market, the managed service provider could often replace one vendor's product with another vendor's product without customer visibility. A SaaS model where partners are "holding the paper" to the SaaS offering and delivering the bill to the customer gets one step closer to that world.

2. Billing control is pricing control. Make no mistake about it, this decision is not just about billing. When a vendor gives up the ability to present the bill to the customer, the vendor no longer has control over the customer's buy price. The vendor's pricing is, in this case, channel facing, not customer facing. The difference between control over the street price and an MSRP is vast. As vendors develop the ability to accomodate channels in order to expand market coverage and enhance customer experience, they will inevitably lose control over the pricing of their SaaS offering, and their business models will begin to look more and more like premise-based solutions.

3. Investment is required to accomodate channel based pricing. While there may not be a quantified dollar amount they're willing to disclose, be sure that the decision to switch from an end user billing model to a model that accomodates channel billing will be expensive to Microsoft. The difference between enabling end-user-based pricing and billing and partner-based pricing and billing is dramatic. Turning systems and processes from one model to another will no doubt be a consuming and expensive process.

Enabling partner facing models on SaaS was no doubt a major decision for Microsoft. The need to make this major adaptation midstream underscores the importance of getting channel requirements right for SaaS investments. Put an exclamation point after my previous post. Vendors who do not gear their investments, particularly channel investments, appropriately to the SaaS market opportunity, will find it very difficult to realize a return on their investments.

posted by No Fun Charlie @ 5:38 PM