software insights

7/25/2019 Software Insights

1/20

Navigating

the SaaStransition

software insights

Capturing valuethrough dealescalation

Channel strategyalignment

Interviews with

industry leaders

from InsightVenture Partnersand RightNowTechnologies

Spring 2014 Issue 1

PerspectivesonthesoftwareindustrybySimon-Kucher&Partners


2/20

Simon-Kucher & Partners Software Insights | Spring 2014 2

Contents3

4

5

8

10

14

17

19

20

WHATS HOT

EDITORS LETTER

TRANSITION TOSaaS

Wolfgang Mitschkes article on drivers of

successful perpetual-to-SaaS transitions will

draw on case studies from multiple companies

who have made it to the other side.

INTERVIEW WITH SUSAN CARSTENSEN,

RightNow

An in-depth interview with Susan Carstensen, the

former CFO & COO of RightNow Technologies,

which successfully navigated that journey.

DEAL ESCALATIONPROCESS

Deepak Sharmas article on deal escalation

will highlight how to establish structures that

reinforce value selling.

VALUE-BASEDCHANNEL STRATEGY

David Turnquists article will explore how

to extend this concept to your firms

indirect channels by constructing

value-based partner programs.

INTERVIEW WITH HILARY GOSHER,

Insight Venture Partners

Hilary Gosher, a Partner at Insight Venture

Partners, reveals in the interview how

successful software companies put all these

concepts together to scale their business.

SIMON-KUCHER NEWS

ABOUT SIMON-KUCHER

Editor-in-Chief

JOSHUA BLOOM

Graphics

ANKE SCHUMANN

HANNAH CHOI

GENEVIEVE SOLOMON

Please send inquiries and comments to:

[email protected]

8

14

10

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Feb Mar 2014Jan

-0.7%

5.1%

4.1 5.3 6

8.9

EnterpriseSoftware:

Infrastructure

EnterpriseSoftware:

Application

Security SaaS

31.4

23.4

13.313.6

Revenue MultipleEBITDA Multiple

Dow JonesUS Software Index

Dow JonesIndustrial Average

Endofyear2013

Strong start to the new year Attractive SaaS multiples

more likely to have...

defined renewal pricing

clauses in contracts optimized their

price metrics confidence in their sales

reps to enforce pricing guidelines

more likely to useROI/EVAtools inMarketing Collateral

more likely to have a definedpackagingstrategy

more deals through Deal desks

100%

150%

25%

50%

are

are

are

send

*Those who have driven revenue growth through pricing

Source: Simon-Kucher Software study 2013-14

Managingthet

ransitionto

SaaS/Cloudoffering

s

Successful pricers*...

2

Post-acquisitionpackaging & pricingharmonization

$60B

Software M&A activity*

$200B

*2014 software M&A report - Baird

Source: CAP IQ Source: CAP IQ

2008-

2009

2010-2014

1

Top Strategic Questions

we have been asked about

Whats

whats

HOT


4/20


W

elcome to the first issue of the Software Insights

Newsletter! At Simon-Kucher & Partners, wehave spent the last 28 years helping companies trans-

form their marketing and sales practices to realize the

value of innovative products. Nowhere is the pace of

change as fast as the software industry, and in this is-

sue we will explore how companies are dealing with

increasing pressure on existing business practices.

As computing resource costs

have rapidly declined, pres-

sure is coming from all sides:

customers who require more

flexible business models,

competitive entrants who can

more quickly gain a foothold,

and investors who demand

greater capital efficiency.

Inside this issue you will find perspectives from soft-

ware industry leaders and institutional investors, as

well as contributions from our Software Competency

Center experts who will distill our experience gained

from working with 100+ software companies.

Our goal in this newsletter is to capture the pulse of the

industry at a specific point in time through interviews

and news, while also providing deeper exploration into

the lasting content that has proven to be most relevant

across multiple engagements.

Capturing the value of your productsin a shifting landscape

editors letter

years of combined software

marketingexperience

software industry projects

in the last 2 years alone

Deepak Sharma

Director

Adam Echter

DirectorWolfgang Johann

Mitschke

Director

Joshua Bloom

PartnerMadhavan

Ramanujam

Partner

200+

50+

Matt Johnson

Managing Partner

Silicon Valley office

Joshua Bloom is a Partner in the Silicon Valley office of Simon-Kucher & Partners.

He leads the software industry practice in North America.

Joshua Bloom can be reached [email protected]

Please reach out if you have feedback

on these topics or if there are spe-cific areas you would like to

see us cover in future issues.

Happy reading!

G obal Softwarmpetency

Center


5/20


Software as a Service (SaaS) long ago established its

credentials as the future of software delivery. Still, we at

Simon-Kucher continue to receive requests to support

clients migrating from perpetual license models to sub-

scription models. The good news about being late to

the game is that companies just now embarking on the

journey to SaaS can learn from their predecessors. We

recently reached out to companies who have made the

transition in order to understand the common success

drivers and pitfalls.

The key learnings:

1. Revolutionary commitment:

Partial SaaS migrations do not unleash full SaaS

benefits

2. Simplicity in communication and pricing:

Concise packaging, pricing and contract terms

drive adoption

3. Pull then Push:

Use of carrots and a targeted price positioning

first, then sticks, motivate customer migration

4. Delivery extends to the entire organization:

Sales channels and customer support teams

need to be redesigned

Revolutionary commitment

The reason many traditional ISVs (Independent Soft-

ware Vendors) want to migrate to SaaS pricing and

delivery models is obvious: A quick look at trading mul-

tiples reveals that public markets bestow much higher

valuation multiples on pure SaaS business models.

[See Whats Hot page for latest figures]

So what is holding back a stampede towards switch-

ing to SaaS? Over the years, we have seen a de-

cline in concerns over SaaS security and control. It

seems that we are entering a period when the major

concerns are financial and developmental risks

borne by ISVs. In the short-term, companies moving

to SaaS typically experience a revenue flattening or

decline, as up-front revenue streams are re-distributed

over longer time horizons. Many companies have de-

scribed this hurdle as kicking an organizational drug

habit. Fostering a culture of transparency and over-

communicating operational & financial KPIs to the in-

vestor community is the only way to navigate this pe-

riod. Opaqueness is the enemy of favorable analyst

coverage.

The developmental risk is also one that can only be

overcome with a full commitment to a revolutionary

agenda. A successful SaaS strategy requires a multi-

tenancy product, for which development efforts go be-

yond normal product upgrades. Multiple companies

have failed in their attempts to reap the marketing ben-

efits of a SaaS offering without first building out a true

low cost architecture. The benefits of the single, multi-tenant architecture go beyond the IT stack savings that

can be passed on to the customer and extend into

the R&D and technical support challenges that have

historically eaten away at earnings. As long as you are

still supporting on-premise models, the cost benefits

of supporting a common solution will not be realized.

Many companieshave described this

hurdle as kicking anorganizational drug habit.

SaaS Transition:Learnings from the other side


6/20


The developmental risk is also one that can only be

overcome with a full commitment to a revolutionary

agenda. A successful SaaS strategy requires a multi-

tenancy product, for which development efforts go be-

yond normal product upgrades. Multiple companies

have failed in their attempts to reap the marketing ben-efits of a SaaS offering without first building out a true

low cost architecture. The benefits of the single, multi-

tenant architecture go beyond the IT stack savings that

can be passed on to the customer and extend into

the R&D and technical support challenges that have

historically eaten away at earnings. As long as you are

still supporting on premise models, the cost benefits

of supporting a common solution will not be realized.

Simplicity in communication

Due to a more mass market focus and sales approach,

the SaaS pricing model tends to be simple and helps

the customer self-select. This includes multiple as-

pects:

1. Packaging: Large price lists, customization and

complex implementations run counter to the ethos of

SaaS. In our recent case study interviews, we found the

transition process often involved a significant level of

offering simplification and re-packaging. Only compa-

nies that already had a simple ap-

proach in place for their on premise

software, like a 3-tier good/better/

best bundling structure, did not

change their packaging. All others

significantly simplified their pack-

aging, involving radical cutting of

line items on the price list.

2. Price metric/unit: The ten-

dency in SaaS is to move awayfrom large enterprise-wide license

agreements and to have a more land-and-expand fo-

cus. This translates into user-based pricing models at

a division level, and also a higher prevalence of usage-

based price metrics that tie pricing to value delivered

[Figure 1].

3. Payment and contract terms: Most SaaS com-

panies will offer an array of both contract lengths and

billing frequencies. Beware of offering deep discounts

on multi-year deals, as many companies find this leaves

money on the table and drives down the reference val-

ue at renewal.

Pull then Push: How to migrate

the existing base

To unleash the full SaaS transition

potential, most companies need to

migrate all of their customers to the

new SaaS product while minimizing

customer churn.

To compare pricing of perpetual li-

cense models with SaaS models,

a quick rule of thumb is to apply

break-even calculations using license and mainte-

nance costs from a customer perspective. Typical

break-even ranges are between 3 and 5 years. A

long break-even encourages customers to migrate to

SaaS models; a short break-even encourages custom-

ers to stay with the perpetual model.

Large price lists,customizationand complex

implementationsrun counter to the

ethos of SaaS.

Figure 1: User-based pricing metrics in subscription-based revenues.

Source: Simon-Kucher Software Pricing Study 2013

0%

10%

20%

30%

40%

50%

60%

70%

More than

Companies with (> or


7/20


factors to consider in how long a sales team should

participate in customer revenue is to understand the

upsell sales cycle. If it is realistic that they can go back

for an upsell within 2 years, they should maintain the

primary customer relationship.

The Professional Services team also needs to navigate

major upheaval, as implementation technical support

takes a back-seat to business process consulting.

Conclusion

Migrating fully to a SaaS model is an attractive option

for many ISVs,with higher valuationsfrom the Street

and more efficient product development and sales ef-

forts. Those who want to go down this path need more

than a product roadmap. To succeed, they need to re-

visit their packaging & pricing strategies, their financial

targets, and their sales & support capabilities and do

so in a transparent manner.

In addition to the price positioning, future SaaS com-

panies need to develop incentives for customers. A

churn-minimizing strategy is to start with positive

incentives, i.e. carrots. Such incentives can be cred-

its against migration professional services costs, sub-

scription discounts or special features only available inthe SaaS version.

At some point in the transition process, the last cus-

tomers need to be pushed a bit more vigorously. Such

stick incentives include maintenance price increases

and, finally, discontinuation of incremental perpetual li-

censes and support for the perpetual version.

Delivery extends to the entire organization

A successful transition to SaaS not only requires a new

licensing model, but also additional organizational

efforts [Figure 2].

Subscription businesses rely much more heavily onfield,

inside and internet sales, while external partner sales

become less relevant. This closer control of the sales

process also involves hiring more personnel to meet

that challenge.

With many companies we have worked with, one of

the trickiest hurdles is the incentive structure for

sales teams and channel partners. Most companies

want to maximize the renewal anchor and link commis-

sions to the first 1-2 years of subscription revenue to

account for the deferred income stream. One of the key

Importance of Sales Channel

Revenue share in % of total revenue

0%

10%

20%

30%

40%

50%

Field sales Inside sales Internet sales Channel partners

Companies with

more than

less than

25% subscription revenue

Figure 2: Sales approach of subscription vs. non subscription compan

Source: Simon-Kucher Software Pricing Study 2013

Wolfgang Mitschke is a Director based in Bonn, Germany and has also spent time in

Simon-Kuchers Silicon Valley Office. He has a decade of experience in both Software

Product Management and marketing consulting.

E-Mail:[email protected]

One of the trickiest hurdles isthe incentive structure of salesteams and channel partners


8/20


Susan Cartensen spent over 12 years as the CFO, COO, and SVP of Customer Experience at RightNow,

a SaaS CRM pioneer that was acquired by Oracle for $1.5B in 2011.

Simon-Kucher: What were the biggest company

transitions you steered in your time at RightNow?

S.C.:Over my 8 years as CFO, we really went all the

way from our start-up phase to becoming a public com-

pany. Through that process we raised multiple rounds

of funding and implemented the financial reporting,

systems, and controls of a public company. From a

business operations perspective we transitioned our

commercial model from being a mixed model to pure

SaaS. Originally we sold every combination of per-

petual and subscription licenses, as well as cloud and

on premise deployments. Transitioning to a pure SaaS

offering took a lot of time thought and energy. We had

to tackle everything from how you position when a

customer is up for renewal to how to migrate our exist-

ing base of perpetual license customers.

Simon-Kucher: What types of metrics did you track to

see if you were on course with your transition from a

mixed model to a SaaS model?

S.C.:For us, it was pretty black and white that we just

quit selling perpetual licenses. That immediately took

20% from our top line and turned us from profitable to

making a loss and we told the investment community

that would take a 2 year period to gain back our previ-

ous profit levels. We communicated a very clear time

frame and the expected financials.

Simon-Kucher: What was the rationale for switching

over new sales all at once to a SaaS model?

S.C.:We felt maintaining both would just be prolonging

the pain. In a SaaS business the revenue and recurring

revenue growth rate is what is important, so we ripped

the Band-Aid off and wanted to re-set the baseline of

expectations. Also, it is really hard to manage a sales

force with a mixed model; its hard to do foundational

tasks like setting quotas and easily understood sales

compensation plans.

Simon-Kucher: How did you set expectations with

your sales teams?

S.C.: Clearer incentive structures helped. Our sales

force and client success managers were also given

specific targets, responsibilities and times for getting

the conversions done.

Simon-Kucher: In terms of the SaaS offering, what

was the typical contract structure?

S.C.:After some experimenting, we settled on one year

ARR targets, which focused the company on makingsure that the customer is fully deployed and using the

service. It wasnt helpful to sell multiple years, as it can

degrade the unit pricing. If you maintain the upfront unit

pricing it pays you back over the lifetime value of the

customer because you have a higher base.

interview

Susan Carstensenwith


9/20


Simon-Kucher: How did you provide budgetary

certainty for customers with a standard one-year

contract?

S.C.:There was definitely customer fear that if they re-

ally liked the product and were on a one year contract

that we would significantly increase the price. In what

we thought was fairly innovative at the time, we set up a

cloud services agreement with a 6-year pricing prom-

ise. They could terminate after the first year, but at the

3rd year renewal, we could increase price by 9% (an

implied annual increase of 3%).

Simon-Kucher: What are some of the biggest

packaging and pricing challenges you faced with

new offerings?

S.C.:From the buyer perspective, its all about having

a simple pricing structure. We narrowed down our pric-

ing to incorporate two metrics: seats and sessions. The

packaging challenge was difficult, as we

struggled with how to incorporate new

developments. With a cool new

feature, there is a temptation to

create a separate SKU, as op-

posed to incorporating it into

an existing package. Ultimate-

ly, we were more effective when

we maintained the integrity of our

offering structure and increased

the overall pricing rather than setting

up too many SKUs.

Simon-Kucher: Finally, in your latest role as a Board

Member on multiple software companies, have you

seen the SaaS landscape changing at all?

S.C.: One trend that has surprised me is that there

has been a proliferation of SaaS business metrics,

even for public companies. Everyone defines churn in

a unique fashion and I would expect investors to start

putting more pressure on companies to come up with

common definitions.

From the buyer

perspective, itsall about having

a simple pricing

structure


10/20


Many software companies will spend a great deal of

effort optimizing and tinkering with product list prices

before turning to the more difficult internal task of opti-

mizing sales practices. Not only may this distract fromthe real challenges of value capture, but all of that work

may also be for naught if unchecked discounting can

reverse any list price modifications.

This hits the software world especially hard, where

variable costs are nearly zero in an on premise world

and negligible in a hosted environment. Never lose a

deal on price is a refrain we have heard at multiple

companies, in which a wild west culture has eroded

the companys price position in the market, left inexpe-rienced sales people adrift, and sometimes even an-

gered customers with inconsistency.

If your discounting patterns look like these, you may be

suffering from an ineffective deal escalation process:

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%0 100 200 300 400 500 600 700 800 900 1,000 1,100 1,200 1,300

%D

iscount

Deal Size in $ (Thousands)

Some of the smallest dealsreceived the highest levelsof discounts!

Broken escalation process: No correlation between discounts and size of deals

Establishing adeal escalationprocessthat reinforcesvalue-based selling


11/20


In our experience, companies with robust deal escala-

tions processes have put in place many of these guid-

ing principles to ensure value capture and a smooth

quoting processes:

Standardized deal checklist:step-by-step guide

to evaluate pricing of each deal and ensure

organizational alignment

Product lifecycle guidelines:Flexibility based on

degree of innovation across the product portfolio

Approval volume and frequency targets:Clear

expectations for managers and executives

Neutral representation:Inclusion of Product,

Finance, and Pricing teams at higher levels of

the approval process

Standardized deal checklist

The checklist serves as a framework for sales reps

to systematically think about deal preparation and then

quickly bring others up to speed with a consistent set

of information.

0%

5%

10%

15%

20%

25%

30%

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

PercentageofallDeals

Average Discount per Deal

Account

Executive

Sales

Director

VP Area

Sales

SVP

Country Sales

Global Head of

Sales

Sales Director and VP Area

Sales discount to their

maximum authority level!

Broken escalation process: Discount authority limits well exploited

Before focusing on the deal specifics, take a step back

to examine the customer relationship and under-

stand customer lifetime value. How do we expect

the relationship to evolve and what is the expected

purchase behavior in the future? How well have they

kept past commitments? This is also a natural place to

begin negotiations with customers.

Next, evaluate the deal context. What has their pric-

ing been historically in relation to other customers?

What concessions were necessary to close previous

deals? How close is the requested pricing to similar

deals for other customers in the segment (a key VSOE

issue)? How reliable is our competitive intelligence?

Do product capability comparisons against competi-

tors really hold up under a microscope? Consider con-

tamination effects. What other business with this cus-

tomer could be affected by aggressive concessions?

Unchecked discountingcan reverse any list pricemodifications.


12/20


How likely is it that this pricing trickles down to other

customers?

Instead of focusing solely on your own concessionsstrategy, take a step back to ensure the negotiation

has taken into account non-price elements. Is there a

way to expand the scope to include an up-sell or cross-

sell? Is there terms & conditions flexibility on public

references or joint white papers? Are there payment or

implementation approaches that will be optimized for

the vendor?

Finally, in the big picture, are you appropriatelylearn-

ing from a large number of deal data points?

Sample deal escalation checklist

Customer lifetime

value Evaluate relationship

Deal context

Deal strategy

Track & learn

Past:Historical pricing

Present:Competitive prices

Future:Price contamination

Up-sell / Cross-sell

Terms & Conditions

Monitor pricing changes

& win-loss data

Produc

ttype

List PriceTarget Price Sales AuthorityWalk-Away Price

Innovative Differentiated Commoditized

Set different sales discount thresholds based on product type

Has manager & executive review become a rubber-

stamp process? What are the latest win-loss trends?

Product lifecycle guidelinesMany software companies have vast product portfo-

lios, ranging from cutting edge innovations that are IP-

protected to commodity or me-too type products. The

key is to integrate the product categorization view with

the deal discounting strategy and approval process.

The level of discount available to the sales team for a

highly innovative new product should be very small

compared to the discount level available for a commod-

ity product that has a price-driven purchasing decision.

In the middle, you have products that are differentiatedon certain elements, but whose competitors can also

claim unique selling propositions. For these, sales still

needs moderate discount flexibility.

Approval volume and frequency targets

Set discount thresholds that enable your stated corpo-

rate objectives (e.g., our sales team should be able to

close 80% of the deals on their own) or simply mir-

ror the reality of the human resources available (e.g.,

we can only expect execs to review one deal per day).

Either way, ensure the discount levels at each step in

the process reflect the objectives so that available re-

sources can handle the volume of deals flowing through

and the deal approval process does not become the

bottleneck.


13/20


Neutral representation

One of the best practices we have observed in the deal

escalation process is the involvement of Pricing, Prod-

uct Management and Finance teams at higher levels

of the escalation process. This is particularly important

for complex deals e.g., mix of different types of prod-

ucts, strategic customers, and high levels of discounts

expected. The involvement can be either consultative

in nature such as deep-dive into the product value

proposition, competitive bid evaluation, etc. or it can

be an explicit approval required by the teams depend-

ing upon the deal size. Large companies with a high

volume of deal making also benefit from implement-

ing a pricing system with price execution and analyt-

ics modules that helps automate the rules and process

flow, as well as enable what-if scenario and advanced

pricing analyses to support rapid decision-making.

Conclusion

We see software companies putting more focus on

optimizing their pricing and more C-level executives

getting involved in the decision-making; however, on

average they realize only about 50% of planned price

increases1. A key differentiator between more success-

ful and less successful pricers is the maturity and so-

phistication of the processes and resources underpin-

ning the effort. When designed and executed well, the

deal escalation process can become a strategic asset

for your organization in helping defend the value of

your products and ultimately, profitability itself.

1 Simon-Kucher Global Pricing Study 2013

-100%

-$0 $100 $200 $300 $400 -$500+

--80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

Deal Size (Thousands)

Delta:Targetvs.Approved

-100%

-$0 $100 $200 $300 $400 -$500+

--80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

Deal Size (Thousands)

Delta:Targetvs.Approved

Before: Only 16% of escalationsresulted in price changes, with nomeasured impact on deal success

After:45% of escalations resultedin price changes. 90% of them ata higher price, with no negative

impact on deal succes

Example: Before and after impact of a successful deal escalation process

Deepak Sharmais a Director in Simon-Kuchers Silicon Valley Office. He has a decade of experience in

both Software Product Management and marketing consulting.

E-Mail:[email protected]


14/20


Companies often build out partner models so that they

can scale their business without scaling their sales

expenses; however, in doing so they often lose their

connection with their end customer, their ability to

value-sell, and their support quality control. Many

companies are not taking full advantage of their

partner programs to mitigate these factors, largelybecause they do not properly measure and incentiv-

ize value-adding activities.

In this article, I will lay out a practical guide to develop-

ing a channel partner program that reinforces value-

add throughout your distribution network.

The opportunity cost to a company of not systematical-

ly recognizing value-add as part of its channel partner

strategy can be significant; for example, a company

may be

Under-valuing certain existing

customersthat add value through

factors other than volume, such as

superior service and expertise,

global reach, or end-customer

financing

Not growing new strategic

partnersthat are willing to offer

unique or larger rewards

compared to the entrenched players

Offering discounts and other incentives

that are pure price concessions

Using intransparent, inconsistent, or

unscalable rules and guidance

The key aspects of a value-based partner program

The specifics of any value-oriented partner program

will be unique to your business, and should be custom-

ized toward your individual priorities; however, most

strong programs should strive to include four features.

1. A consistent set of policies defining your rulesof engagementwith the customers in your chan-

nel. These may be defined universally or for each

route-to-market.

2. A formal classification structure based on

objective criteria to categorize your partners

based on their contribution to your business; the

key dimension should likely include their perfor-

mance on the value-add criteria which contribute

most to your success.

3. A predefined set of benefitsto incen-

tivize desired behavior and increase

performance from your custom-

ers, often including but not

limited to a carefully de-

signed discount & rebate

structure.

4. A tiered reward

structure that incentivizes

continued performance im-

provement over time, with each

tier providing additional benefits

as performance improves along the

value-add dimension. This ensures that part-

ners are rewarded to continually invest in your busi-

ness, instead of making a one-time improvement.

Designing yourchannel partnerprogram aroundvalue-addcan

positively impact your business


15/20


Creating a value-based channel program

Creating a world-class channel partner program in-

volves careful planning and change management; it

can best be achieved via a disciplined, collaborative,

and evidence-driven process [Figure 1].

Step 1 Objectives

The first and most crucial step in your success is

determining the objectives you wish to achieve;

although a program focused on value-add activities

can have enormous benefits, it is not necessarily ideal

for everyone. The Simon-Kucher framework shown

below can help you compare the benefits of a program

based on value-add versus a more traditional route-to-market approach (Figure 2).

As you can see, each program type has unique advan-

tages and disadvantages; the type of structure you se-

lect should be driven by your strategic goals.

Step 2 - Activities

Once you choose a partner program structure, you

are ready to define the activities you wish to enforce.

Your partners are often the face of your brand, and so

while volume is a common starting point, other broad

measurements of your partners value should be con-

sidered:

Technical expertise

The end-customers satisfaction with your

partners ongoing services

Define the activities that add the most value to

your business, and which you want to enforce

Discover what benefits are most desired

by your customers

Step :Activities

Define your objectives and select the mostrelevant program type

Step :Benefits

Create a tiered structure around these activitiesand benefits, with more advanced tiers requiringgreater value-add and offering larger benefits

Launch the program after socializing it withinternal stakeholders and external customers

Step 4:Structure

Step 5:Socialize& Launch

2

3

4

5

Step1:Objectives

1

Support of your brand

Information sharing or operational support for

your supply chain

Geographic or cross-industry reach

Investment in cross-product sales

Any activity you include should not only provide clear

value to the business, but also be based on objectively

measurable criteria.

Step 3 Benefits

In order to incentivize partner buy-in to your program,

the proper set of benefits is key. While discounts and

rebates can be an integral part of your program, they

are often a zero-sum game between you and your part-

ner. Instead, look for a Third Way that provides your top

partners with additional benefits that help them better

integrate into your value chain, growing your business.

For example, ask yourself

Can we more closely tie our marketing

activities?

Can I provide leads or support for their sales

cycle?

Can I improve the technical competencies of

their workforce?

Can I develop better information sharing and

offer superior access?

Step 4 Structure

Next we must choose a structure that will define the

tiers our partners can achieve.

The first option is to offer a Medal Program with distinct

and specific activity requirements for each tier; this en-

sures that all members of your program will focus onthe specific activities you select. This does provide a

consistent view downstream as to preferred partners

that can be used to drive closer relationships. However,

this option provides little flexibility for your partners,

yielding a less diverse network.

Figure 1: Key steps to create a value-based channel program


16/20


Route-to-Market Hybrid Value-Add

Benefits Minimizes channel conflicts

Preserves existing routes-to-

market

Simplest program structure

Incentivizes partner value-add

Actively manages channel conflicts

Preserves existing route-to-market system

Strongly incentivizes partner

sales

Provides a single lens across

partners

Disadvantages Limited incentive for partners to

increase value-add

No clear differentiation of high-

value partners

Additional complexity to setup and

manage

Inability to manage discount gaps

could disrupt some routes-to-

market

Examples Rewards are based on partner

type in a multi-tiered

environment (OEMs,

distributors, resellers), with no

overlap between discount levels

to ensure margins for all

partners.

Rewards based on combination of

position in route-to-market and value add

Perfrormance based on degree to which

partners fulfill their role (building on top of

products, carrying inventory and offering

expertise and financing, end-customer

tehchnical knowledge and support)

Loyalty reinforced through program

Performance based largely on

volume and to a lesser degree on

how partners fulfill their role

(building on top of products,

carrying inventory and offering

expertise and financing, end-

customer tehchnical knowledge

and support)

Route-to-Market Value-Add

The second option is to create a point-based structure,

where each tier requires a certain score to be achieved;

each activity is then assigned a number of points based

on the value it provides. This offers significantly more

flexibility than the medal program by allowing your part-

ners to choose the activities that best fit their individual

strategies. However, it can add complexity and reduces

control over your partners value focus.

Step 5 Socialize & Launch

The final step is to obtain buy-in from internal and ex-

ternal stakeholders before launch. Ideally, this process

should begin as the activities and benefits are still be-

ing defined; partners should be given the opportunity

to provide feedback, which will inform your develop-

ment process.

When the program is released, all aspects of the part-

nership should be well documented and published. If

the economics of your business allow it, account man-

agers should work with partners to develop individual-

ized paths to success highlighting the key steps each

partner can take to increase in tier. This will maximize

the benefit that both you and your partners see from

the program.

Conclusion

Structuring your channel partner program around val-

ue-adding activities can provide a path to achieve your

goals by aligning your partners rewards with your own.

This type of structure is flexible, allowing for inclusion of

the specific activities most important to your business.

It also improves service for your end customers, by in-

creasing the value orientation of your overall channel

structure. However, it is not a one-size-fits-all solution;

understanding the priorities of your unique business

is key to determining the proper extent of inclusion

of value-add activities in your overall channel partner

strategy. For those that do choose to develop this type

of program, a structured, collaborative, and evidence-

driven process is the best approach to development.

Figure 2: Title

David Turnquistis a consultant in Simon-Kuchers Silicon Valley Office and an active

contributor to the software team.

E-Mail: [email protected]


17/20


Insight Venture Partners is a leading global private equity and venture capital firm founded in 1995. The firm has

raised more than $7.6 billion and invested in more than 200+ growth-stage software, eCommerce, internet, and data

companies.

Hilary Gosher manages Insight Onsite, the firms team of operations and growth experts who work with Insights

portfolio companies. Hilary founded this team in 2000 and has worked alongside many technology executive teams

advising on day-to-day strategy, operations, M&A and post-merger integration to drive enterprise value She is also an

Adjunct Professor at NYUs Stern School of Business.

Simon-Kucher: Lets start with investment philoso-

phy; in your view what are the types of things you are

looking for when you are evaluating whether to invest

in a software business?

H.G.: We are primarily momentum investors, so we

are looking for growth. As evidence of market demand

and product/market fit there is nothing quite like visible

quarter-over-quarter growth. 50-100% annual growth

is a good target to get a sense as to whether the com-

pany has found their sweet spot. Secondly, we look to

make sure there is a really large market opportunity

solving pain points that customers are willing to spend

money to address. Finally, we want to see an attractive

customer lifetime value relative to customer acquisi-

tion costs, as an indicator that the business will scale

efficiently.

Simon-Kucher: How concerned are you with the

company establishing their monetization strategy

before you invest?

H.G.:Even in a Series A investment we tend to get in-

volved with companies that have a business model in

place that we will help to refine. Monetization is not

paramount, but we need to be convinced of a solid

path to getting there. Nothing speaks to value propo-

sition more than existing paying customers. In many

cases our Onsite team will work with management to

tune up the business or we will help bring

in specialists to support us.

interview

Hilary GosherwithManaging Director, Insight Venture Partners


18/20


Simon-Kucher: What type of background do you look

for in the management team you are backing?

H.G.:If it is a disruptive technology we are very much

trying to understand the pure technical capability of

founders because they are the ones with the initial vi-

sion of the product, its capability, and the market need.

In later stage investments, we are more focused on

managements track record of scaling a company prof-

itably.

Simon-Kucher: What stands out

about the growth trajectories of

some of your portfolio companies

you are really excited about?

H.G.: Two companies come to

mind: AirWatch, a mobile device/

BYOD management company,

was an Insight investment, expe-

riencing high quarter-on-quarter

growth rates before they were ac-

quired by VMware in January this

year. The other is New Relic, an

application performance manage-

ment company that targets SMB

and Enterprise markets with re-

markable year-over-year growth.

They have a very high velocity

sales process and great lead nur-

turing conversion rates.

Simon-Kucher: What are the most common pricing

pitfalls that you first see with the companies that you

invest in and what are some examples of some com-

panies that do a good job of pricing?

All companies start

off with a very

simplistic pricingstrategy. What

happens is that the

end-market and

end-users get more

complex and they

then start to realize

they are leavingmoney on the table

H.G.:All companies start offwith a very simplistic pric-

ing strategy. What happens is that the end-market and

end-users get more complex as the company grows.

Management starts to realize that they are leaving

money on the table because they are not optimizing

pricing for the different buyer personas, use cases,or markets. The trickiest balancing act is having a

simple structure that a salesperson can explain easily

versus a model that takes into the account the end-user

nuances.

Simon-Kucher: When does a

channel strategy start to help scale

a business?

H.G.: We find that companies do

well starting out with a direct salesmodel domestically. This allows

them to keep the pulse of the cus-

tomer pain points and the market

needs. As they start to expand in-

ternationally channel partner rela-

tionships become important.

Simon-Kucher:Any last words

of advice to software startups out

there?

H.G.: A few years ago freemium

was a very hot strategy, but inves-

tors have come to realize that it is

not really a pricing strategy or business model, it is just

one of many lead generation strategies. An extra de-

gree of caution is needed to go that route, as you need

to really understand the conversion rates and how it

fits with your product profile and impacts customer

lifetime value.


19/20


Upcoming Events: Youre invited!

Atlanta Pricing Strategy Forum

Hosted by Simon-Kucher

June 4, 2014 | 12:30pm - 6pm

Four Seasons Hotel, Atlanta, GA

During this afternoon program you will have the oppor-

tunity to build connections with fellow senior leaders

and learn how other executives and thought leaders

at leading Southeastern companies are solving some

of the most pressing pricing, marketing, and sales

challenges.

This forum will feature the following presentations:

Get Your Segmentation Offthe Shelf and to the

Bank: Applying and Monetizing on Segmentation

Strategy | Patrick Dodson, Senior Director of

Customer Strategy, Insights and Analytics at

Manheim

Making the Transformation to Value-Based

Pricing | Mary Pat Donnellon, Vice President

Marketing at Blackbaud Value Selling:Sales Strategies to Capture More

Value | David Monnot, Senior Sales at Doka USA

Register by emailing:[email protected]

Software Monetization: Pricing and

Licensing Trends Summit

Hosted by Simon-Kucher & Safenet

June 12, 2014 | 12:00pm 6pm

The Conference Center at Waltham

Woods

Join us for an educational half-day summit, focused

on software monetization, pricing and licensing

challenges faced by software developers today and

best practices for achieving long-term success.

Simon-Kucher

EVENTS

June 4

June 4

This summit will feature the following presentations:

Licensing Trends| David DiMillo, Principal

Consultant, Software Licensing Professional

Services at SafeNet

Software Business Model Transformation:The

Gap Between Pricing Strategy and Execution

| Kevin Cabral, Head of Corporate Planning &

Analysis at Progress Software

Packaging Best Practices:Helping Customers &

Your Sales Team Land & Expand | Joshua Bloom,

Partner at Simon-Kucher & Partners

Register by emailing:[email protected]

Catch us at the following events:

IQPC Pricing Strategies Series

August 19-20, 2014 | Chicago, IL

The Pricing Strategies Series consists

of two one-day events: one focused on

B2B pricing; the other focused on B2C

pricing.

Register by visiting: www.pricingstrategiesseries.com

PPS 25th Annual Fall Pricing Workshops

& Conference

October 21-24, 2014

Wynn Hotel in Las Vegas, NV

PPS Conferences bring hands-on work-

shops and high-level speakers from the

worlds of business and academia, providing a diverse

environment for training and connecting to esteemed

professionals in the pricing world.

Register by visiting:www.pricingsociety.com

August

1 9 2 0

October

2 1 2 2 2 3 2 4


20/20

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Simon-Kucher is a global consulting firm specializing in strategy, marketing, pricing and sales.Founded in 1985, our practice is built on evidence-based, practical strategies for profit improvement.

Simon-Kucher reaches newgrowth milestones Our proven record:

About

Simon-Kucher & Partners

We support market leaders across industries and

countries. Our specialized software consulting prac-

tice has worked with the worlds leading software

vendors to extract premium value for their products

and services in a variety of markets and competitive

environments.

Projects completed in

the last 3 years alone

Pricing professionals

located across

27 offices worldwide

Percent growth

in revenue

Books written on

pricing and business

management

2-10+

2,000+ 700+

40+

www.simon-kucher.com

Silicon Valley Office

100 View Street, Suite 102

Mountain View, CA 94041phone: +1 650 641 4300

Software Practice

2013 was another successful year for Simon-Kucher &

Partners:

Revenue surpassed USD 200 million mark for

the first time

The firm was proud to announce the opening of

offices in Sao Paulo and Santiago de Chile, as we

now operate out of 27 offices across 22 different

countries

We crossed the 700 employee mark and con-

tinue to recruit exceptional talent around the world

Simon-Kuchers global presence: over 700

dedicated professionals in 27 offices worldwide

software insights

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