From Windows 95 on a CD to monthly billing subscriptions - The issues of monthly billing for the resale channel

Remember in 1995 when Windows 95 was released and everyone owned a copy on CD with the key written across the front of it in big, bold, black writing?

That was the time when everyone bought software and owned it outright for the life cycle of the product.

If it was an original copy that was bought, it was usually purchased from a retail shop and the shop made margin on the overall total cost of the product.

Since those days we have seen a range of billing cycles and contract terms that tend to suit the type of product that is being sold.

In resale, a lot of products were switched over the annual billing and annual contracts. This was particularly true in the cybersecurity world where licences would be sold into companies by resellers annually and renewed the following year.

A lot of SaaS products adopted the monthly billing schedule too along with products that stuck with the perpetual licensing model such as on prem server products.

The turn of the century saw the rise of the MSP who like to package things up and bill out monthly.

The MSP works by getting a tiered price for a product from a vendor and the more seats they have under management, the cheaper those overall seats cost to the MSP. The more they manage, the more money they make. The benefits here is that they can scale up and down each month quite easily due to the flexible billing mechanism.

MSP’s are still quite regional though, with the mass majority being located in North American and Northern Europe. When we look at the Asian markets, Latin America and Southern Europe, there is a still a huge emphasis on resale.

How can resale still benefit from this switch over to monthly billing?

Is it fair to give the reseller a margin on the original bill which is just a percentage of 1/12th of the price of the solution that they would typically get around 15% - 25% of the annual price on annual billing?

Would it be logical to give the reseller a percentage of the monthly bill so that they can attain monthly recurring revenue just like the MSP’s and vendors?

On the first option, it isn’t worth the while of the reseller unless they are selling absolute volumes of any particular solution. This model works well for affiliates who are able to generate business at scale through content marketing and video advertising but for the value added reseller who needs to put a lot of effort into individual sales, it doesn’t really work.

If the reseller is offering additional services such as 1st line support, implementation and customer success management from their side, what’s the problem with giving the margin monthly to maintain that customer?

It’s not an MSP model where the reseller is managing the licence but instead supporting the customer. That warrants the monthly margin for the reseller and takes the onus away from the vendor for maintaining that relationship.

The second option seems to work in theory.

Should the margin be the same for the initial month as it is for the rest of the term?

Incentivising this monthly billing mechanism in the channel is a challenge and finding what is fair for everyone is one of the hardest things. It takes time for a reseller to become profitable on a monthly recurring revenue model but over time it becomes more sustainable. It’s a guaranteed income for everyone which ensures that they don’t need to chase deals every month to stay above water once they get to a certain level of customers.

The question here is a similar one to the new business margin vs renewal margin. Lowering the margin for the following months after the initial deal could incentivise the acquisition of new business from the reseller but it could also remove the support mechanism put in place for their customers with the incentive being lower for maintaining customers than obtaining new ones.

It’s just as hard to maintain a customer than it is to onboard a new one. There are entire departments within vendors that are dedicated to customer success and support. Why should it be different for the reseller?

Is the difficulty really in managing the processes of different billing cycles?

It has forever been a challenge in the channel to manage different billing cycles and renewal dates with differing contract terms across the board.

Lots of spreadsheets and lots of heavy customisation of CRM systems that are not built to support those different billing cycles across multiple different companies.

Maybe this is the hardest thing to switch over for the channel.

Creating that new product that requires a bill to be sent every month as opposed to every year. Calculating the amounts on upsells on a monthly basis, according to the original contract term.

This becomes a pain when managing 100’s or 1000’s of licences in the channel with varying billing cycles and contract lengths.

Adding services onto the product cost

It’s what the MSP’s do so why can’t resellers do this too?

Granted, the MSP is managing the licence on behalf of the customer but the resellers can do this in another way too. They can offer first line support for the products that are consumed by their customer. They won’t be managing the licence on behalf of the customer but instead supporting it so the customer doesn’t need to go directly to the vendor.

It’s local support that is billed by the reseller on top of the cost of the licence on a monthly basis.

What about offering training for their products where they can bill the training at the start of the term and still make the monthly recurring revenue?

Training is a massive industry and if the resellers were to branch out to this and bill the training along with implementation and dedicated support, they would be on the same track as the MSP but with a different model of providing the products.

Summary

Times change! We’ve gone from everything being perpetual licencing to annual billing and monthly billing.

The vendors that are working with annual billing but want to offer monthly billing options can do this but they need to think about the incentive for the partners.

MSP’s are living this way by offering additional services and billing extras on top of the cost of the licence to them. Reseller can do exactly the same but need to think about it a little differently.

Switching to a monthly billing mechanism is easy when you have the infrastructure to support it.

Spreadsheets aren’t going to cut it when working with multiple billing schedules and contract lengths. Instead, you are going to need an automated system to calculate the upells, renewals and bills that are generated every month.

Channelyze.io allows for everything that we have covered in this article so if you are considering setting up alternate billing cycles and contract lengths, feel free to book a demo at https://calendly.com/channelyze-prm/30min