Back in Sept I did a post looking at SaaS profitability and some of the issues that seem to exist around the "pure-play" SaaS business model. I won't go back through the analysis but I realize, looking back that I focused a lot of the problem with the cost of scaleable infrastructure and neglected to discuss another issue that I believe plays into the "numbers" that I showed. Simply, most SaaS vendors sell direct today (I discussed some partner issues in this post in July). Their sales and marketing cost, especially considering that up until last year, involved a great deal of evangelizing the benefits of the model and convincing reluctant customers to give it a try, are high. The other bit of information that has surfaced though is that renewals of the subscription, often thought to be a simple matter, also involved expensive sales and marketing, much like an initial close. In some part, this might be due to the industries own marketing messaging around SaaS, easy to implement, easy to use, fast to deploy might also equal easy to switch? Direct sell, in a market that is being developed and with a product that doesn't necessarily fit into the sweet spot of traditional VAR's, was a reasonable choice. But what happens when SaaS is mainstream and vendors try to extend their reach, especially in the small and mid-markets? Conventional software wisdom would lead us to think that SaaS vendors have to look for alternate distribution models. And if SaaS is now mainstream, which I do believe, then the partner model is critical.
Last week I had a briefing from a SaaS vendor that opened my eyes to the channel question even more. It seems that Intacct, a SaaS financial management and accounting applications provider, with over 2,500 SMB customers, is sold through a combination of direct and a channel partner network. Their current VAR ecosystem counts over 100+ partners and they are aggressively growing that number and accounted for 50% of their new business last year (and growing). What's more, these VAR's are set up in a traditional "dealer" channel partner model and receive revenue for the deal for the life of the relationship + services. Intact also claims a >95% project success rate (I haven't validated that yet, I'm just repeating what was presented). Although private, Intacct is reporting that they are seeing increased activity through the end of 2008 and into 2009.
I think this shows a couple of important things, there are SaaS companies that are embracing a more traditional channel distribution model to reach the SMB customers, we will have the opportunity to see if the model can be validated over the next couple of years and see if this indirect model can positively impact the over profit model of a SaaS company. If nothing else, Intacct is a company to watch.
