In my last post, I offered up an industry prediction that there could well be one million ISVs by 2027. Greater competition fuels innovation, but it also forces ISVs to take a strategic approach to the distribution of their cloud solutions.
Should they go direct to consumer, select a Tier 1 distribution route with a reseller in the middle, or pick a Tier 2 model with both a distributor and a reseller between the ISV and the consumer? Call it the go-to-market dilemma: sell direct, sell through resellers or use a distribution channel. Is there a single best method? What works and why?
Smaller ISVs tend to start with the direct-to-customer approach, hiring, training and empowering an internal sales channel. A direct route to market often makes sense for young ISVs for a few reasons: It can be hard to convince a reseller to carry a new offering, the ISV may feel their own passion and expertise are vital to the sales process, and by selling directly the ISV doesn’t need to share profits with an intermediary. However, ISVs using a direct sales approach must invest heavily in sales and marketing, plus internal hiring and training—resources that could be put to more strategic use.
Additionally, smaller ISVs already spend a larger percentage of their revenue on sales and marketing activities than do larger ISVs, making funds unavailable for extending research and development activities or for increasing customer satisfaction and retention. That puts smaller ISVs at a distinct disadvantage since companies that spend more on R&D grow more quickly than their counterparts not making this investment. Increasingly, we’re seeing smaller ISVs forego a direct sales model and make the move to a Tier 1 or Tier 2 distribution channel as they recognize the strategic advantage it can provide.
“Dropbox can’t hire a million sellers on its own, but what we can do is line up our product in the channel through Ingram Micro. In our case, they’re finding thousands of resellers for us, and if each reseller employs 10, 20 or more representatives, who in turn can go out and talk to hundreds of SMBs, it’s a classic scalable model.”
— Thomas Hansen, Former Chief Revenue Officer, Dropbox
Larger and more established ISVs often use all three distribution channels. Dropbox is a prime example. Previously focused only on direct sales, Dropbox sought a distribution channel in 2015 that could provide an extensive global reach, placing its solution in the hands of resellers it wasn’t able to easily tap through direct sales. [Spoiler alert: Dropbox selected Ingram Micro as its distribution partner, and since 2015, Ingram has more than doubled the number of resellers in Dropbox’s network. And that reseller network has boosted the company’s annual recurring revenue by a triple-digit percentage.]
Power in partnerships
There are roughly 200 million SMB companies worldwide, and even the largest ISVs cannot reach every single one on their own. This is where indirect distribution partners show their strength, and ISVs are benefitting. The percentage of SaaS companies selling through the channel has increased from less than 5% in 2007 to 55% in 2018. What’s more, Microsoft just announced that 95% of their cloud revenue comes through partners.
An indirect distribution approach enables ISVs to lower sales, marketing and distribution costs, so they can focus more of their resources on R&D. Cloud distribution partners often provide vendors with marketing and branding resources in addition to ongoing sales enablement support and advice.
Cloud marketplaces established and hosted by indirect partners increase an ISV’s access to qualified prospects, helping them achieve a wider geographic reach and successfully penetrate new markets. When combined with an accelerated sales cycle driven by the network effect, distribution channels make it possible for ISVs to accelerate profits rapidly at a lower overall cost than going it alone.
Making the choice
The best go-to-market strategy depends on many factors, and ultimately each ISV will need to consider how they can continue to innovate while improving their revenue streams. For many ISVs, the decision will involve a Tier 1 and/or a Tier 2 distribution model.
In our final post in this series, we’ll consider what ISVs should look for in a distribution partner and some potential roadblocks in this often-fragmented market space.
You’ll hear more about the future of ISVs at Cloud Summit X in San Diego from March 11-13, 2019. To register for the event, visit https://www.ingrammicrocloud.com/cloudsummit/.