3rd Day of Marketplace – 3% Fees

Article #3 and I’m writing about the 3% agency fees that Microsoft charges SaaS and Software companies for selling to customers through the Commercial Marketplace.

Agency Fees

Over a year ago at Inspire 2021, Microsoft chose to reduce fees for transactable offers in the marketplace to 3% — down significantly from an industry standard of 20%. This applies to every transactable application published in the commercial marketplace and demonstrates commitment to the success of all partners in creating value on the Microsoft cloud platform by giving partners more margin to invest in growth.

One of the more frequently asked questions about these fees comes up when the first sizeable deal starts getting negotiated for transaction through marketplace: “Who pays these fees and when?”.

The answer is they get deducted at the time of publisher payout. They are not passed-on nor added to the price the customer sees. This answer however, doesn’t tell the whole story as the root of this question can cause confusion during a deal, delaying the close and often needs some further exploration.

Payments/Collections

Accounts receivable, payment or debt collections are all necessary parts of doing business and depending on the business they can put a percentage of revenue at risk, increasing the cost of sale and causing compliance issues.

Issues in this space can range from slow payment cycles, disputes, interchange fees, errors, customer dissatisfaction, reputational damage and accounting issues. The risk and costs vary by industry but all are real costs of doing business.

Microsoft dropping to a 3% agency fee has been well received by the founders, CEOs and CFOs I have had the pleasure of speaking with over the past year. It seems like a reasonable rate in exchange for providing access to so many customers, handling the distribution of the cloud software or SaaS, billing and invoicing in over 140 countries and 17 currencies and even handling sales tax in many markets.

Where these agency fees can become a sticking point is when the SaaS or Software company publishes the transactable offer and hasn’t yet agreed the quota recognition for their salespeople via marketplace. Sellers can be negotiating a multi-year deal for millions of dollars and suddenly realise that the deal may give them 3% lower revenue recognition than the price they are negotiating with the customer.

How should they proceed? Perhaps pass these fees on to the customer? My observation has been that attempting to pass fees on usually results in a customer rejecting the offer, not wishing to pay anymore to use the marketplace. This slows the deal down. The best answer is often to get agreement internally that the full revenue will be recognized against quota.

Microsoft’s agency fees are no different to the collection fees that are a necessary cost of doing business and many salespeople usually do not have these fees deducted from their attainment, they're commonly paid on revenue.

Selling Globally

As mentioned, Microsoft provides SaaS and Software companies access to customers and partners as well as their Azure Cloud Commitments; they will bill and invoice customers and take on risk during that process; they will perform exchange for 17 major currencies and payout in a local bank account and help manage the sales tax in many different markets.

This all seems pretty good but where would it be most useful as part of a go to market approach? Overwhelmingly, the answer seems to be when starting to do business in overseas markets where accessing new customers can be challenging without hiring locally and the cost to setup can be prohibitive, especially when simply speculating in that market.

This ability for the Commercial Marketplace to take on some of this heavy lift to support with some of the awareness, access to trials/demos, distribution, commercial agreements, payments and collections and connecting customers means much less investment is required to do business in these new markets.

This applies regardless of approach, whether doing large, infrequent sales led deals, privately offered to large enterprises or high velocity sales that are more product led or consumption based.

I will also add that using Microsoft's Commercial Marketplace will need planning around the customer journey to deliver the best possible customer experience from transaction to onboarding and to get comfortable with the channel to perform repeatable transactions.

It’s incredibly powerful when done well and I have seen start-ups with small teams take the marketplace seriously and reach enterprise customers in multiple countries, providing them with true global scale when integrated properly into their go to market approach.

If you are thinking about publishing your offer into the Microsoft Commercial Marketplace then I would advise joining the Microsoft Startups program (if you’re a startup) and the Microsoft ISV Success Program (if you’re a more mature software or SaaS business).

If you wish to learn more there is a short course on Sell through the commercial marketplace and a more detailed site Mastering the Marketplace to go deeper into the technology and guidance.

Thanks for reading!

--Matt Furse, Senior Partner Development Manager and Marketplace Evangelist

Previous Articles in Series

1. First Day of Marketplace: One Marketplace Summit and a $1tn opportunity
2. 2nd Day of Marketplace – Two Store Fronts