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Software Sales & Marketing Deal Structures?

Cliff posted about 9 years ago | from the a-fair-cut dept.

Businesses 23

Entrepreneurs asks: "My business partner and I run a small but growing software company. For approximately the past two years, we have been collaborating with some outstanding overseas developers, have established a strong relationship with this group, and plan on continuing our collaboration with them in the future. As a means of jump-starting our business, we have entered into discussions with this same group regarding some would-be sales and marketing deals in which they would develop and support some products while we would be solely responsible for sales, marketing and would bear all costs associated with these activities. Both parties are in essentially in agreement as to the overarching roles that would be played, but we are as yet far apart in regards to our respective perception as to what represents a fair deal structure (% revenues) for the developer as opposed to the sales/marketing partner. What wisdom can Slashdot readers offer regarding the typical structure of software sales and marketing agreements?""Previous experience in the biotechnology industry (an industry that I argue shares several similarities to the software industry) tells me that sales/marketing partners typically get anywhere from 60 to 75% of topline revenues, with the remainder going to the development company. Our overseas partners are essentially arguing for the exact opposite, something to which we would never agree, as we believe it would represent an abandonment of our fiduciary responsibilities. Having never negotiated a deal such as this, we are somewhat at a loss as to what the industry standard terms are for situations such as this and have had a difficult time obtaining quality information that addresses our situation."

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Do someone a favor... (0)

Anonymous Coward | about 9 years ago | (#13610651)

Get together with This dingbat [slashdot.org] and teach him the basics of marketing. As apparently by your question you know more than he does. Us network admins here appreciate it, thanks!

sales is VERY important (2, Insightful)

TheSHAD0W (258774) | about 9 years ago | (#13610715)

The sales organization is VERY important to the marketing of a product, and can get quite cash intensive. For instance, several forms of insurance give 80% or better to the agency that sells the policies and only 20% to the actual insurer. While with some products a manufacturer can sell the product directly and reap these rewards itself, when a product needs someone to actually go out and sell it, that effort deserves a reward.

On the other hand, without the manufacturer (in your case, the software author), the product you're selling wouldn't even exist, and you need to give them enough income to make it worth their while to improve the product and give you new products to sell.

I would recommend some sort of performance-based arrangement, where your percentage goes up if you sell additional packages. This should satisfy both requirements.

Re:sales is VERY important (1)

FosterKanig (645454) | more than 8 years ago | (#13617741)

Yes, let's all offer advice to the person who is outsourcing jobs. Too cheap get a programmer in your own country, cocksucker?

Hoo boy (1)

itwerx (165526) | about 9 years ago | (#13610767)

It's all about negotiation and no matter how similar it might seem every deal is unique(!).

You can:
A - flip for who gets the larger percentage :)
B - meet in the middle
C - company officers meet, lay all the cards on the table (by which I mean expose operational costs) and let that form the basis

Whatever you do, assume that the product will take off and that you'll both grow to several hundred times current size. Be sure that the numbers will still work at that point as economies of scale will tweak things and you don't want either side thinking they got the short end of the stick five years down the road. (This may be part of why the other folks aren't happy with the percentages you're offering).
      You'll probably end up with a sliding scale formula.
      And if the numbers are too fuzzy to project far enough then make it a short-term contract(s).
      E.g. A six month contract at a percentage that both sides can live with for the time being and renegotiate at the end. Repeat as necessary...

SCORE (3, Insightful)

HalWasRight (857007) | about 9 years ago | (#13610835)

Ever heard of S.C.O.R.E [score.org] ?

This is just one of the resources available to entrepreneurs. You need to reach out to business people with experience, not just broadcast to the /. crowd. I strongly suggest you search out mentors in your local business community.

With the given data, all answers will be wrong (2, Insightful)

kallisti777 (46059) | about 9 years ago | (#13610882)

After mulling over this question for a while, I realized that it is absolutely impossible to figure out an appropriate split with the data at hand. My first concern is the software itself... are we talking $20 screen savers or multimillion dollar data mining tools here? The developers need the marketers, and vice versa, but who needs who the most is going to depend a lot on product, placement, and pricing.

My next interest would be in the costs to both parties. The developers certainly deserve a nice share beyond production costs, but if the products they create are trying to find a home in a mature, saturated market, then initial promotional costs could be huge. Without hard numbers, I can't even guess who's screwing who here - and I certainly couldn't predict who would profit most from the relationship in a year or two.

For now, put the negotiators on both sides to work on establishing real measures of production and marketing costs that all parties can agree upon... then split every dollar above that 50-50.

-Tim, 10 Minute MBA

Re:With the given data, all answers will be wrong (3, Insightful)

MerlynEmrys67 (583469) | about 9 years ago | (#13610990)

Sounds nice - but here is something interesting...

The software development house is taking all the risks. Frankly - any interesting development is going to take 1-2 years to go from idea into a fully coded and tested product. They will have to purchase capital, pay developers, QA, product management, etc.

When they are close to being "Done" the risk goes down that the whole shebang will go up into shambles (ie - you are pretty sure you will get a final product out the door and be able to sell it) you bring marketting on board to start priming the channel, creating contacts, paying advertising, etc.

Yes you need marketting to determine what to build, get some product requirements, do some user studies - but that is far from a full time job in the early stages of a true startup company.

Downloadable computer game data (1)

BortQ (468164) | about 9 years ago | (#13611148)

I have some experience with this kind of arrangement when dealing with downloadable computer games. It's normal for the distributor-marketer to take 50-70% of the money. This is a pretty big spread, and even then the figure is liable to undergo much flux. If the developers are willing to do their own sales and marketing, and are only looking for secondary distribution then the distributors will get less (down to a usual minimum of 30%). If the developers have a proven successful track record, then they may be able to wrangle out a higher percentage for themselves. Likewise, if the developers are unknowns then they may get stuck with the lowest end of the range (or lower...). If the marketing/sales team are the ones who create all the ideas, then they would normally just contract out the development/support for a work-for-hire salary/advances, and take 100% of profits (or maybe somewhat less if they add some profit sharing to the salary).

Consider a sliding scale (1)

Neil Blender (555885) | about 9 years ago | (#13611170)

One problem developers might have with sales and marketing receiving such a large portion of the revenue, is that sales and marketing can take the "meh, this is too hard" attitude and not put too much effort into the sales process. They get a sale here and there and get 65% of the profit while the developers had to work their asses off to make a sellable product. When the structure goes from 65% of all profit to 0% unless they sell X dollars worth, then you have some guarantee that if sales wants to make money, they will actively sell your product. Once they hit X dollars in sales, they get Y% of the revenue. Hit a higher goal and they get a higher percentage. I have no real direect experience in sales but know several people who worked in sales for companies like VWR and BioRad where structures like this exist. At times, the sales teams would come to within .5% of their bottom line quota and get absolutely no commission. It's a real motivator. I'm not saying you should be that hard assed about it, but it does work.

Re:Consider a sliding scale (1)

digitalvengeance (722523) | about 9 years ago | (#13611359)

The other side of this is that it can create a very hostile environment for the sales staff. One of my clients uses a system like this for their low-level sales staff. The problem is that the owners of the individual franchises start looking at the numbers and realize that they can just push the quotas up to the barely attainable level, and thereby get great sales without paying much to the marketing personnel.

Of course, this causes employee turnover to be high as new employees realize after a month or two that they'll never make the "big money" ownership insists is possible, but they are quite motivated for the few months they are employed with the organization.

And admittedly, a few individuals get lucky each week and actually make a decent salary, but I wrote/maintain their payroll system. I've never seen more then 3 or 4 people in a list of hundreds actually sell enough to qualify for the higher compensations plans. Of course, employees don't know what other employees earn..so many just assume that they aren't working hard enough and will be sure to "bonus" next week.

Re:Consider a sliding scale (1)

Neil Blender (555885) | about 9 years ago | (#13611451)

Well, you have to strike a balance and it sounds like the above parties are negotiating on fairly equal ground. However, if sales is getting the lion's share of the cut, I think it is fair to require some minimum level of performance.

One other thing, when you group sales and marketing in this kind of situation, you are really setting yourself up for failure. Marketing is a notorious money sink and if you subtract all the costs involved (dev+sales+marketing) from total revenue, frugal developers could get screwed from over-zealous marketing spending. Marketing and sales might be spending 90% of the revenue and taking home 65% of the profit.

Re:Consider a sliding scale (1)

Intron (870560) | more than 8 years ago | (#13614792)

Even "nice" companies do this. Sales personnel get a (low) base salary, but their commissions are subtracted. Once they have "paid off" their base, commissions start to get really juicy. It doesn't kill morale quite so much if you still get a check in July (a dog month).

The amount should be based on the relative contribution. If anybody could sell it, then don't expect to get a fat deal for the sales side. If its a few weeks to develop, don't expect to get a year's salary out of it for the developers. Tech companies usually budgets less than 20% of revenue toward R&D.

Thanks (0)

Anonymous Coward | about 9 years ago | (#13611488)

They will probably backstab you the first chance they get!

What type of work is this? (3, Informative)

natmsincome.com (528791) | about 9 years ago | (#13611640)

Hi,

My dad has a similar set-up. Basically the real question is were are the risks. Are you paying them from sales, contract or an hourly rate.

If it is just from sales then it is generally 50/50 (equal risk). If you don't get a sale then they don't get money and if you don't have a product you can't make money.

If they are getting an hourly rate or a contract payment then they should get less after all they are risking a lot less.

It also depends on your marketing strategy are you the only suppliers or do you have affiliates? If you have affiliates then you generally split the wholesale price and you keep the commission. The main reason being that if the programmer think it is unfair there is nothing that stops him/her from being an affiliate and getting the same commission if they think it is that easy (Exactly the same deal for you and them).

Just remember that you could get other developers and they could get other marketers but together it is better for both of you.

The main thing to keep in mind is that you are talking about risk not skill. You could be amazing or they could be amazing but the commission isn't based on that as it hasn't happened yet. I don't care if you're both pathetic or great at your jobs, if the product doesn't ship you both get nothing. If one group is risking less because they are getting paid something even if a product doesn't ship then they are risking less and should get paid less. That is why sales people can earn more because it is a lot easier for them to earn less.

If you aren't fair why should they put in effort to make it a good product and why should you bother trying to sell it?

hold your ground (2, Insightful)

jsailor (255868) | about 9 years ago | (#13612242)

I have a similar issue with an intern.
You have to ask some questions about your product and the total value of each component of the process. Who is responsible for:
- determining the market
- setting the price
- paying for sales and marketing expenses
- acquiring and negotiating with customers/clients
- determining the products feature set
- establishing what the product will do, who will buy it, how much they'll pay etc.

I can continue, but the sad reality for developers like your partners is that while their code is of value, they haven't created the "product" just the code to execute it. If you've done all the other work, then they deserve about 10-20%. If you've actually done the other work, you can take your development specs to another developer. If they came to you with a finished product and all you had to do was sell it, then things reverse, but the percentages are highly variable depending upon the product and your market. If you're selling to small niche that requires special relationships just to get customer attention you get 30-60%. If you're selling a "me too" product with broad appeal you become the commodity as they can replace you quite easily with another sales partner.

Some simple questions to frame this are:
If you walked away could they:
- replace you quickly
- continue to develop the product with features it's customer base wants
- acquire new clients and or expand reach within existing clients

I've had the opportunity to watch scenarios like this play out over the years. Companies that don't reward the sales channel properly fail. It's that simple. Developers usually have little concept of how hard that process actually is. It's somewhat of an ignorance-based arrogance.

Of course at the end of the day all negitations boil down to how much each party needs the other. My guess is that these guys would have no means for selling the product without you and that you could find another means for developing it.

After writing this, I'm beginning to realize that the 20% I offered my developer is actually too high. Simply put, he would have no product without me, just the untapped, unfocused ability to write code.

Straight Answers on Pricing (1)

salesgeek (263995) | about 9 years ago | (#13612408)

If you are marketing consumer software, the answers are very different than business software. Here are typical splits. You really need to get someone with in industry experince to help you on the deal or you will get screwed or nowhere.

Business SW
Developer 35-60%
Outsource Support Org 15-25% (you may not need)
Reseller/Distributor - 10-40%
MDF: 1-10% (ammount rebated for advertising costs)

Retail SW
Developer - 40-60%
Distributor - 5-30%
Retailer - 10-30%
MDF:1-5% (ammount rebated for advertising costs)

In the retail model, very typically the developer is paying support costs, so watch your margins. Again if your product is any good, you really need a software veteran on your team before you get ass-fscked.

Here's some advice for you: (0, Flamebait)

TheGrapeApe (833505) | about 9 years ago | (#13613057)

"My business partner and I run a small but growing software company." ... "They would develop and support some products while we would be solely responsible for sales, marketing"

It sounds to me like what you're _really_ running is a marketing company for offshored programming.

So I'm going to give you the kind of advice you might expect from posting in a place where the primary audience consists of "on-shore" programmers that have watched their quality of life get torpedoed by marketdroids patting themselves on the back for trading our jobs, standards of living, and our nation's economic backbone overseas:

Go jump off of a cliff.

You're essentially a reseller (0)

Anonymous Coward | about 9 years ago | (#13613258)

If they're building the product, and you're doing all the sales and marketing, then you're essentially acting as their reseller, or maybe a distributor.

Disty's usually get 40%, reseller's around 30% for software, though that varies depending on the product being sold and how strong your channel is.

All About Who Has What? (2, Informative)

ramsj900 (885385) | more than 8 years ago | (#13616316)

Having been in VC previously without some due diligence info it is impractical to advise you on what the %'s should be. With that said I would make some suggestions on who to best evaluate the situation so as to negotiating the best contract. I assume that neither company has any $$$ otherwise it would be more cut and dry. Company with the capital rules as long as they are putting up the money! If you think it is about putting up the money get outside financial advice on double reviewing the other companies books and audits. Unbelievable the amount of Bulls**t financials or crazy "un-audited" financials floating around. Next I would honestly evaluate how much the maximum gross and net revenue the contract could generate (avg or middle case, please!) and then discount at least 50% off that. With those numbers is it still something you want? If so, can either side easily go somewhere else and get what they want out of the deal. If not, then once again it becomes easy. Whomever needs the other guy the most loses. See, where I am going? If they have nothing with out your presence in the US or if the product has great potential, but is unproven then that is the reality of today. Too often deals are struck on the 'best-case-scenario' which is really 'IFcome' not "Income". Bottom line is negotiate from a position of strength and today's reality. Structure something short-term a average terms, but build in both the ability to bailout if things suck and the right to take much more and then some if things work out. Structure your deal so that if you exceed the expectations then you are rewarded greatly. It shows the confidence you have in your abilities and strengths. i can promise you that the Asians are much more fearful of losing you than you are of them. They only need a short time to figure out that the US is vastly different than they think it is and with a strong US partner they are lost. It is a fallacy that great products sell themselves just as it is that great management can turn around a crappy company. Ultimately you know what you have or need and that should guide you in your efforts. PS - Who exactly do you think you have a fiduciary resonsibility to? Are you a public company? Non-affiliated shareholders?

My situation is similar (1)

cerebralpc (705727) | more than 8 years ago | (#13618054)

I've just had a similar situation - so bare with me here as I give you the background.
I've just recently finished a project with a good friend of mine. He was brought up on a farm but I met him when we studied engineering together.
2 years ago he left his job and started up his own technology company selling RFID soltuons to farmers. In Australia all cattle moving from one property to another HAVE to be registered on a national database.
He won a few projects and needed a coder to come in and deliver them - since he didn't have the time - and really isn't that great a coder.
Over about 4 months I crashed through the projects he had lined up and he was paying me $50 hour - all was good.

Now comes the CRUNCH!
He was out at a client site and was talking with them about how the current software on the market didn't fit there needs....so on the spur of the moment he said - I'll build you that software for the same price - and I'll fix the issues.
My friend made a business call - a business decision. It took 3 weeks to design/code/test the project but he only got paid for 1 week.
He took the RISK that later on he could sell the product - he ALSO placed himself in the market as a guy who services his clients needs.
I turned over the whole code base and I didn't expect any on-going commission from sales.
Having met quite a few farmers one thing I did reliease is - I COULD NEVER sell to Farmers. I wasn't brought up on the farm.

Sounds like publishing (1)

Bozovision (107228) | more than 8 years ago | (#13618331)

The deal that you are describing is a publishing deal. And the answer is: it depends.

Publishing works something like this -

Scenario 1.
Someone comes to the publisher with an idea. If they have proven ability at understanding and delivering a product, then they get a better royalty deal than if they walk off the street.

Scenario 2.
The publisher understands the market that they operate in, and commissions some software. The royalty depends on the ability of the publisher to specify the work; there's more skill in producing a good product when you have only a rough outline than when you have a well-thought out spec.

Regardless of the scenario: Publishing deals typically provide some money up front to the developers (on signing the contract and often in tranches as they hit milestones). (Make a plan for milestones not hit in the contract.) This money is called the advance. It's payment of royalties before they have been earned. This money supports the developer while they build the product. If the product is already built, then there's less risk to the publisher and royalties will typically be higher than if not.

When the publisher takes delivery of the product, there will often be significant work still to make it into a saleable item. It might need a manual, box, CD or DVD, first level helpdesk support, web site and more. The more the developer provides, the more the royalty rates; there's less risk to the publisher.

Finally there's a product that's ready to roll. The publisher advertises it, has reps selling it, may find resellers, and so on. Royalties are typically paid on net income attributable to the product. And here's the key bit - rates vary anywhere from 5% to 17.5%. Typically not on a flat rate. So most often the deal would be structured as 7.5% on the first x thousand net, 10% on the next, etc. Only superstar developers hit the 17.5% rate, and that would be on large sales, probably on a product that arrived near-complete. It's hard for you to make money at this rate. You withhold royalty payments until the advance has been paid off.

To handle all of this you need a detailed, explicit contract covering what rights you both have and what recourses are available to both. On of the key skills of publishers is to be able to write and negotiate these contracts.

As a publisher it also pays to model the investment. The scenario you want is a product where the royalty payments to the developer cover the cost of development of future versions. You want a virtuous cycle - sales success paying for further development. You do not want to structure a deal so that the developers cannot afford to build version 2, 3 and so on. (Obviously this has to be part of the contract - often as an option.) You also want the cycle to be at sensible points - a product renewal cycle of 5 years is not good enough for most markets. So it's really important to accurately forecast and hit the targets, so that the model works. Of course this never happens, so you should have a clear picture of how far you will go in supporting a product that isn't hitting targets.

They're a job shop, right? (1)

ciscoguy01 (635963) | more than 8 years ago | (#13623506)

They're a job shop, right? The do development projects for companies in the US. They need you to give them work, that's what they DO.

If you are the US company and you have the customers, you are the one dictating the terms. They need you, or they would just be another offshore job shop working for $2.45 an hour, which is great pay in the third world.

If they had the ability to sell into the US market without you they wouldn't need you at all. They can't make any money at all unless they sell into the US market.

Why do you need to "partner" with them at all?
If they are just doing job shop work forget partner deals.
Just tell them what you are willing to pay and if they agree you are in business. If they don't agree you can either pay more or find someone else in Bangalore to do the work.

Are you considering developing a product?
If you want them to develop a product that you will then sell, and you want them to do it on the come, that is what they are paying for their piece of the action.

The questions then would be:
1. Who owns the product, the work output. Where is the source code? What if you have a falling out?
2. Who gets what percentage of the money, which was your original question.
3. Who takes the risk? If you are going to sell their product that they own you are dependent on their performance. Your customers will pay for their purchases here in US dollars. If there is a problem they will want US dollars in compensation, either in a refund or in a lawsuit judgement.

If you sent most of the money to India how could you pay the damages? Everything costs 20x as much here in the US compared to there, including damages.
Risk is 20x as much here.
Everything costs less in the third world.
If it didn't you would have no reason to offshore development, now would you?

I think that answers your question. You have most of the risk. If you don't get a good portion of the money there is just no point. You would just use someone else, unless there's something about these guys that makes them irreplaceable. I doubt it.

Who are these outstanding overseas developers? (1)

wessman (204205) | more than 8 years ago | (#13651350)

I would love to get my company to work with these outstanding overseas developers. Who are they and where from?
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