Getting to Yes, Repeatedly: XaaS Go-To-Market (GTM)

XaaS Success Key #3:  Go-To-Market

Part 2: XaaS Channels:  Changing Lanes

In my first article, “From Transaction To Relationship: 6 Keys To Winning In XaaS”,  I mentioned one of the great benefits of the recurring revenue model:  a direct relationship with your customer.  Indeed, XaaS can eliminate the distinction between decider, payer, and user, giving you a direct relationship with the actual user of your product or service.

Just You And Me:  Direct Selling

In fact, XaaS creates the opportunity – if not the need – for directly selling your product or service, bypassing indirect channels such as online retailers and online aggregators.  The benefits of direct sales are many:

• Lower perceived prices:  The cut earned by channel partners can vary wildly from industry to industry; one software solution I researched, for example, gave channel partners anywhere from 15% to 25% of the purchase price.  If you sell directly to the end user, at least one party is removed from the distribution chain, reducing that 15% to 25% to 0%.  Of course the option also exists to keep the price for the end user the same, increasing your profit, but that would preclude another key benefit, which is….
• Larger market size:  With a lower price, elasticity kicks in, making your product available to more customers, at the same per unit/per customer profitability for yourself.
• Data control:  Without others in the distribution chain, you directly collect, own and use customer-related data that helps optimize your price-product/service-promotion mix.  For example, by selling Creative Cloud directly through Adobe.com, instead of selling Creative Suite through Amazon.com, Adobe enjoyed exclusive rights to customer data and did not rely on another party which actually possessed the data to share it with them.
• Ownership:  In short, you own the customer, not somebody else, giving you the opportunity to market new products and services without adding another decision-making layer between you and customer.

However, there are some critical tradeoffs:

• Access:  Indirect distribution works because retailers and distributors aggregate supply across multiple vendors, giving customers more vendor choice with the simplicity of a single purchase and a single supplier.  A layperson example of this is the supermarket:  instead of shopping for vegetables, meat and dairy separately, a consumer can go to a single store, fill a single cart, and make a single purchase – and have a single company to turn to in case anything with that purchase goes wrong.
• Capabilities:  In XaaS Key #4, Right Capabilities, I will discuss more about the new skills you will need when moving to an XaaS world.  One of these is setting up an online storefront if you want to distribute direct; the challenges of doing this properly and the associated costs are unfortunately often ignored.  Another is providing provisioning services – such as customization, integration with other products/services, and customer training.  These require headcount, which can be very costly compared to distributors, who can train team members on multiple products and services, thus maximizing their productivity. 

The barriers to direct sales have been falling – creating more opportunity to sell XaaS solutions directly to your customers:

• Purchasing policy and process:  For B2B customers, traditionally multiple levels of approval from IT and finance were required for product and service purchases; as one XaaS vendor once told me, “your customer’s IT department is your enemy”.  Then the dreaded purchase order had to be cut – a costly process, both in terms of money and time.  On average, a purchase order required approving a vendor before any purchase could be made, then manually creating a purchase order document.  In total, it could take a month and over $100 just to create a purchase order.  With the growth in corporate cards, and the lower price point of a subscription service, now XaaS products and services can be purchased with a corporate card, and typically without any advance approval, or even a receipt for reimbursement.  
• Bundling/multi-vendor purchases:  Often products and services have been sold in bundles blending offerings from several vendors, delivering discounts and removing decision stress.  However, both B2B buyers and B2C shoppers have become more savvy in seeking out the best providers for different solutions, removing decision stress from the equation, and the already low perceived price points of XaaS solutions created by monthly payment makes discounts less noticeable. 

Never Say Never

So when do you opt for direct sales versus selling through channels?  Typically, indirect selling is still required in these situations:

• Lower customer awareness:  If your solution is extremely new, or you are extremely new to offering the solution, your channel partner can (hopefully) be a key asset in marketing the benefits of the new offer, giving you access to customers, and providing service after sales to ensure deployment success.
• Customized products:  Put simply, customization means headcount experienced at customizing.  Headcount can be expensive, especially if you’re a small company and you are not sure that headcount will be fully utilized at all times – that is, if you have lumpy order flows.  A channel partner well-equipped with skilled IT staff that can customize your product will still require you to spend, but probably not as much as you would on your own, as their staff will likely work on other vendors’ solutions as well.
• Customers with over 250 users:  Larger customer deployments will require more indirect selling – partially because they are more likely to require customization, partially because they will require, or try to require, you to use their preferred reseller, or because they want all purchases to go through the typical approval flows.  Which we’re kinda trying to get around, but you can’t always win.

Are We Still Friends?  New Channels

If selling indirect, through channels, is still the right path for your product or service, you may need to consider new channels.  Why?  I’ll elaborate further in XaaS Key #4, Right Capabilities, but your existing channel partner may also lack the key capabilities to successfully offer XaaS products and services.  

You should ask your existing channel partners about their development of these key XaaS capabilities:

• Recurring billing and recurring payment.  Don’t underestimate how difficult setting up these systems will be.  The good news is there’s an entire ecosystem to assist.  The question is whether your channel partner is using that ecosystem, or is just hoping everything will be ok.
• Pricing.  I discussed in XaaS Key #2, Right Product and Service Design, “Dude, Where’s My Predictable, Growing Revenue?”, that pricing for XaaS is an art – is your channel partner drawing cartoons, or masterpieces?
• Systems integration.  While IoT-enabled product features are not required for XaaS product offers, many product companies transitioning to XaaS are doing so as IoT sensing and computing enable them to offer entirely new monitoring, maintenance, and optimization features they previously could not.  Does your existing channel partner have any capabilities in doing the systems integration work to make sure your IoT solution and services actually work?  If not, you and your partner may have immense headaches.
• Marketing and sales.  You will be educating yourself, your employees, your shareholders and your customers on the new XaaS business model, and you need your channel partner to do this, too.  And also, your sales teams’ mindset will need to change from catching big fish to gathering many recurring units.  Is your channel partner retraining their sales force to do this?  Are they ready to explain why this new model is the best, from an end-user standpoint?

Best practice:  Educating your channel partner. In some cases, you may need to invest in retraining your channel partner, if that single partner is critical to your overall business.  

Example:  The lighting industry features a few large global players with many fragmented local players.  Lighting vendors such as Signify and LEDVANCE received multiple inquiries from channel partners on how to transition to IoT and XaaS business models enabled by IoT.  The transition isn’t trivial for you, nor is it trivial for your channel partners, and sometimes they need their suppliers to be a guide. 

Best practice:  Entirely new partners.  In the IT world, B2B sales of IT tools typically either requires your own sales person, or selling indirectly through IT resellers such as CDW or even Amazon.  Both are excellent companies; CDW has been slower to develop its own XaaS capabilities. 

Example:  As a result, a new class of channel partners – XaaS aggregators – has emerged.  These companies specialize in the marketing, sales, and after-sales integration of XaaS tools.  More specifically, for cloud-based SaaS offers, cloud marketplaces have emerged, with full capabilities for rapid services provisioning, recurring billing, managing sign-ons, and providing XaaS-specific terms and conditions.  

What’s Your Take?

XaaS presents you with an entirely different sales funnel, driven by the supremacy of renewals.  This creates challenges as you and existing channel partners work to build new skills.  But you also have the opportunity to sell directly to the end-user, which, as we will find out in the next article, enables collecting the critical information required for successful renewals.

What is your take?  What challenges have you faced in GTM transitions for XaaS?  What have been your successes and mis-steps for selling directly to end users?  Contact me; I’d love to hear from you!