CCC RECAP: Selling Digital Services

Tech vendors have two basic options for selling digital services. Each has value, but the trade-offs are real.

By T.C. Doyle

Tech vendors have two basic business models they can choose for selling digital services and software subscriptions through partners. They can embrace a sell-to model that puts the channel partner at the heart of their technology transactions, or they can leverage a sell-thru model that reduces the role of the partner and emphasizes a closer relationship with end customers.

While both models are popular, they present vendors with very different benefits and trade-offs. In our Nov. 15 Channelnomics Community Call, Channelnomics examined the differences between the two models in depth.

The Model of the Moment

If the tech industry were high school, then MSPs would be holding court at the cool table in the cafeteria. There are good reasons why. MSPs have stable businesses thanks to their embrace of monthly recurring revenue (MRR) and close partnerships with the likes of Datto, Microsoft, and Webroot. They also have a proven ability to support customers economically and efficiently.

MSPs are a big reason why the sell-to business model is so popular. Under that model, MSPs buy licenses from vendors and assume responsibility for the payment of goods and services that are ultimately consumed by end customers. With these licenses, partners build internal tech stacks consisting of office productivity applications, cybersecurity software, collaboration technologies, and more. From these stacks, partners create bundles of digital services that they sell to end customers for a monthly or annual fee.

In a sell-thru model, by contrast, partners may take ownership of licenses, but end customers are ultimately responsible for payment. What’s more, digital services and products are created and packaged by the developer, not the intermediary partner. While a partner generally has some influence over how tech goods and services are priced, the vendor has significantly more influence over how its goods and services are taken to market. This distinction is meaningful for vendors as it often influences how much money they’ll make from partner engagements, how much direct influence they’ll have with customers, and more.

In our November 2022 community call, Channelnomics CEO and Chief Analyst Larry Walsh discussed the pros and cons of each model.

At first blush, the sell-to model offers vendors a number of advantages. It offers infrastructure for service delivery, access to existing customer relationships, technological wherewithal, and the cascading benefits of a recurring business models. That’s a lot to like.

The model also offers downstream partners plenty of benefits, not the least of which is an average of 30% net profit on the sale of managed services. The model is scalable and manageable. It incentivizes partners to perform and localizes risk within them. These reasons help explain why the sell-to model is popular model among vendors and MSPs today.

But there are downsides. One is that the sell-to model puts limits on top- and bottom-line channel performance, according to Walsh. Also, vendors lose control over pricing, service delivery, branding, and more.

By contrast, a sell-thru model offers vendors greater revenue and profit potential, not to mention more control over how their products and services are positioned, priced, and sold to end customers.

Both models, Walsh noted, offer benefits and trade-offs. If you’re a vendor trying to decide which model is best for you, reach out to us. Channelnomics can walk you through the economics of each, plus help you define the role of your partners in your go-to-market equation and assess the alternatives to your model of choice.

JUST LAUNCHED: CQ Magazine, Volume 3 — Channelnomics is proud to announce the release of the fall edition of Channelnomics Quarterly. CQ Magazine is the industry’s first publication devoted exclusively to channel professionals. This quarter, we take a look at the vendor-partner disconnect and what causes it. Our view: Vendors often have flawed ideas about the basics of partner economics, go-to-market motions, and business priorities. Our cover story unpacks some of those misunderstandings. The issue also includes a Q&A with Hitachi Vantara channel chief Kim King, who shares how her company created an effective configure, price, quote (CPQ) engine while simultaneously improving its ease-of-doing-business (EODB) quotient. In addition, we offer marketing insights from 360insights, advanced thinking on partner automation best practices from Mindmatrix, and wisdom on channel program development from our own Larry Walsh.

CONVERSATIONS WE’RE HAVING: You’re Missing Good Insights If You’re Not Tuned Into Changing Channels — After a brief hiatus, Channelnomics is back with new episodes of Changing Channels, the podcast for vendor channel professionals. Here’s a sampling of what you’ll hear about in two recent shows.

You probably have enough partners and the right ones you need: In this podcast, Tanium channel chief Todd Palmer talks to Walsh about what amounts to a fool’s errand for many channel professionals: finding the “right” partners. Palmer, a longtime channel veteran, tells Walsh that he’s never worked for a vendor that adequately serves the needs of all its existing partners. As for finding new ones that are exactly the right fit? Palmer says you’re better off making the most of the ones that you already have. It’s a man-bites-dog viewpoint that you don’t want to miss. Tune in here.

Think distributors have nothing to offer SaaS companies? Think again. In this episode of Changing Channels, Walsh converses with Eric Buck, director of commercial partners and global distribution at Google Cloud. Buck offers a surprisingly strong endorsement of why software vendors looking to increase the sale of digital services through partners should work with distributors. Buck offers non-obvious and meaningful insights that any channel leaders will appreciate. You can find this episode of Changing Channels here.

NEW IN CIQ: Take a Step Back From Your Channel Satisfaction Research

It’s the end of the year and a time when many vendors think about polling their partners to see how they’re doing. Makes perfect sense, right? Maybe not if you’re measuring satisfaction — or anything else, for that matter — in a flawed manner. If you find yourself struggling with partner satisfaction (PSAT) research, be sure to check our new report for CiQ subscribers. Outsourcing partner surveys to a third-party research specialist can help broaden perspective, add richness, and bolster trust in this important, actionable feedback data. For a host of reasons, partner satisfaction typically works best when left in the hands of third-party research professionals. Read our report to find out why.

Don’t miss the next CiQ Community Call on Dec. 13, when we’ll hold our annual year-end review of trends and developments that impacted channel professionals everywhere. Our community calls, which take place on the third Tuesday of each month (except in December), are now open to any channel professional and practitioner. Meanwhile, if you’re a CiQ subscriber looking to request your monthly one-on-one call or schedule your annual channel program review, send an e-mail to info@channelnomics.com.