When vendors enter managed services, they need to make choices on how they sell licenses to their partners and consider the associated risks.
At Channelnomics, we field questions about best practices, partner strategies, and channel programs every day. In this series, called “Ask Channelnomics,” we answer some of the questions we receive most from vendors.
Question: We’re launching a managed-service program under which MSPs will sell and manage customer licenses. Should we require them to purchase license blocks up-front or allow them to buy as needed?
Answer: Choosing between on-demand (pay-as-you-go) and bulk licensing isn’t about which is better; it’s about which aligns best with your products, business model, market opportunities, and the MSP’s risk tolerance.
Before diving into the explanation, let’s define these sales models.
When selling to MSPs (where the MSP is the customer), the vendor provides software or Software-as-a-Service (SaaS) licenses to the partner. The MSP then uses the licenses to deliver a service on behalf of the vendor to the end customer or to incorporate the software into its own technology stack for independent service delivery.
Understanding the Sales Models
On-demand licensing allows partners to purchase licenses as needed, increasing their number of contracted licenses based on sales. This model offers flexibility, enabling MSPs to acquire licenses without significant up-front costs. It’s particularly beneficial for smaller or niche-focused MSPs that need to manage cash flow carefully or lack predictable demand. However, this approach removes the urgency to sell, as there’s no immediate financial pressure. Additionally, vendors take on some risk since they may struggle to forecast revenue and allocate resources efficiently if MSPs purchase sporadically.
In contrast, bulk licensing requires MSPs to purchase a set number of licenses up-front and hold them in inventory. Larger, well-established MSPs with predictable demand often prefer this model, as they can negotiate lower per-license costs and integrate the software into their broader service stack. Since the MSP assumes the cost of the licenses, there’s a strong incentive to prioritize selling services that generate revenue to cover the expense. However, this model can create cash-flow constraints, particularly for MSPs operating on thin margins. Vendors looking to drive bulk purchases should consider flexible payment terms or financing options to reduce financial strain on partners.
Vendor Considerations
Vendors selling to or through MSPs must carefully assess the economic impact of each model and the risk exposure they’re asking partners to assume. Bulk licensing benefits vendors by providing immediate revenue and incentivizing MSPs to maximize utilization, but it can be inequitable if market demand is insufficient, preventing partners from achieving a quick return on investment. Vendors should also recognize that MSPs tend to be risk-averse and won’t invest in a software solution that lacks a clear use case and market viability.
If market conditions favor bulk purchasing, vendors should offer reasonable acquisition options and provide appropriate discounts to mitigate the MSP’s financial risk. While this doesn’t guarantee sales, it reduces exposure if the MSP struggles to sell the licenses. In competitive markets, where rival vendors may offer more flexible licensing terms, failing to provide risk mitigation strategies could drive MSPs toward alternative solutions.
Conversely, vendors offering on-demand licensing face less pressure to provide steep discounts. If an MSP isn’t fully committed to selling and purchases licenses infrequently or inconsistently, the vendor can justify charging a higher price per license. The MSP’s pricing model should support a reasonable markup on services to ensure a sustainable profit margin. Vendors should also consider setting minimum purchase commitments or tiered pricing structures to ensure partners remain engaged in the sales process.
Hybrid and Competitive Models
While vendors should avoid unnecessary bifurcation, some successfully blend both models through structured incentives. For instance, an MSP may start with an on-demand model but receive discounts or additional benefits if they commit to a certain purchase volume over time. This can help vendors gradually transition MSPs toward a more predictable revenue model while still offering flexibility.
Additionally, vendors must consider how their licensing strategy compares to that of competitors. If a rival vendor provides better pricing incentives, greater flexibility, or superior partner support, an MSP may opt for that vendor’s solution instead. Vendors should continuously evaluate market conditions and adjust their licensing terms to remain competitive while maintaining sustainable profitability.
A vendor can offer both options, but the economics should align with market conditions. MSPs can choose to take on more risk by purchasing in bulk at a lower per-license cost or they can opt for the flexibility of pay-as-you-go at a higher price.
Vendors should establish qualification criteria for purchasing options, but experience shows that partners tend to gravitate toward the model that best fits their business. Channelnomics advises vendors to select a single approach rather than bifurcating unnecessarily, which can dilute resources and complicate execution. However, strategic hybrid models and competitive considerations should not be overlooked.
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