It is a legitimate question that many SaaS companies raise when they want to build their partner program. Indeed, the compensation of resellers is not easy to determine.
You should find a compensation model that is stimulating for your partners while not risking your profitability.
In this article, we detail the models that are usually used by SaaS companies to remunerate their partners as well as the commission levels.
How to compensate your SaaS reseller based on ACV (Annual Contract Value)?
It is common for SaaS companies to pay their partners based on ACV (Annual Contract Value). The main reason behind this is often the length of time (1 year) while the customer is committed.
Therefore, it would be silly to pay a partner over a longer duration than during the one the customer is committed. Then the remuneration is calculated as a percentage of the ACV which ranges from 10 to 40% depending on several criteria.
On one hand, companies tend to be more generous on this percentage when their product does not provide many services opportunities and when the amount of the ACV is low. On the other hand, when the product includes a lot of services (training, integration, etc.) or when the ACV is fairly high, the percentage is often lower.
Of course, to determine the right percentage of commission, you need to have a good idea of the average LTV (Lifetime Value) of your customers as well as the TCV (Total Contract Value).
Let’s take two scenarios.
In the first case, Customer A uses your product for 6 years, but you only pay your partner 30% of the ACV i.e. 30% of the contract value of the 1st year. You, therefore, have 5 years of subscription on which you do not pay your partner.
In the 2nd case, the customer uses your product for 2 years and there again you pay your partner 30% of the ACV. But in this case, you only have 1 year of subscription on which you don’t pay your partner. Now you understand that the impact on your profitability is not the same in both cases.
Another element to take into account is the CAC (Customer Acquisition Cost). If it is too high, i.e. if the partner has to invest a lot to sign a new customer, he will want to obtain compensation consistently with his efforts and investment.
In summary, you have to consider among others the value of the ACV, the opportunity for the partner to sell additional services (or not), the average LTV of your customers, the CAC, the TCV and also the possibility for the reseller to upsell or not. Let’s talk about upsell later on.
Should you compensate your SaaS reseller based on TCV (Total Contract Value)?
According to Profitwell, Total contract value “measures how much value a contract is worth once executed. It includes any recurring revenue from the contract, as well as all one-time charges like professional service fees, onboarding fees, and any other charges incurred throughout the contract term”.
As a result, it is not recommended to pay your partners on this basis. If you consider that your ACV is too low to make the partner’s commission attractive, it is better to increase the percentage rather than the calculation base.
Although it is rare, some companies still remunerate their partners over a contract term that is longer than the first 12 months, when the partner manages to secure the client’s commitment over several years and eventually manage to get the payment upfront.
Should you compensate your SaaS reseller on upsell?
Many SaaS companies employ Customer Success teams that take over once the customer has been signed by a reseller. Their role is to make sure the customer is happy but also to identify upsell’s opportunities for direct salespeople. But, generally, partners don’t get paid on upsell since they are not the ones who generate it.
Alternatively, if it’s the partner who generates the upsell and who signs it, he then gets paid.
As it happens, some companies send the customer back to their partner for the upsell when it is a customer who was initially brought by the reseller. Especially if it is a customer that matches a segment on which the company does not want to concentrate its efforts.
It is indeed challenging with products where the customer can just log on to the platform and add one or more users with his bill automatically adjusting. In this case, the reseller is not paid on the upsell because his contribution can be difficult to measure, even if he could have strongly contributed to the upsell. Otherwise, it gets too complex.
Should you compensate your SaaS reseller on renewal?
Renewal is always a critical step.
Some companies consider that resellers can achieve better renewal rates than direct teams. Therefore, they want to encourage resellers by paying them on renewal.
Others believe that renewal rates are similar with or without resellers and that the value added by resellers is consequently low. It all depends on your product stickiness, market segment, competition, etc.
So it’s a decision that has to be made based on the challenges you face. It also depends on whether part of the work is done by the reseller or not i.e. level 1 support, etc.
If you decide to pay your resellers on renewal, you can do it either at the same level of commission than for the first initial contract or at a lower level.
Should you have some tiering for the commission of your SaaS reseller?
Usually, this is a good idea when you want to motivate your resellers to achieve more. However, the issue regarding this is that you must think about what would happen if your reseller was potentially less successful.
Let’s say you have 3 Tiers. 15% for the 3rd Tier, 20% for the 2nd Tier and 25% for the 1st Tier.
In the first and second year, your reseller is very good and ends up in the 1st Tier. But in the 3rd year, he is in Tier 3 because he didn’t perform well enough. As a result, his new commission percentage is 15% instead of 25%.
Should this new percentage apply solely to a new business or to upsell and renewal as well?
If his new 15% applies to everything, it can become a problem for your reseller because it can affect his plans, strategy and profitability.
Therefore, you need to use this tiering system smartly enough to make it motivating for the reseller.
Keep in mind to define the right remuneration model for your resellers, not only based on your calculations on commissions but also on all the associated services that your solution allows them to sell (training, integration, change management, etc.).
In some cases, when the service part is interesting enough, resellers are not even interested in commissions anymore.
Preferably, make sure to select a compensation model that will not be impacting either of your short-term or long-term profitability strategies.