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A company selling your software and giving a cut

If anybody has had experience giving their software product to a larger company to sell in return for sales and maybe a 'product management' type permanent role, what percentage did you get, and what were the cirumstances?  Say the product would be fairly central to their business, gave them an edge, and was pretty flexible so it would give them opportunities outside their current sector. 

Any other thoughts on this area?

DontWantToBeStiffed
Friday, August 29, 2003

If you are talking about a typical reseller, they usually negotiate for a 40% discount.  That means, if you are selling your app/util/component/library gizmo for $100, your reseller will want to sell it for you and pay you $60 for each unit sold. Outfits like ComponentSource and Programmer's Paradise typically work this way.  If you are smart and have a product in demand, you can do _way_ better than the 40% discount.  Also note that outfits like ComponentSource and Programmer's Paradise will charge you various _significant_ fees to carry your product in their catalog, whether it be purely online or printed and mailed.

If you use someone like DigiBuy and sell directly from your web site you'll pay around a 13% or so "commission" or reseller discount.  If you ditch those guys and get your own merchant account, you'll pay around 3%, but you are wide open to the online fraud angle, which is non-trivial, even for sophisticated developer's tools.  More than 2% chargebacks to your merchant account and you walk the plank.

Anyone here using ComponentSource as a reseller?  Just curious ....

Any other type of deal is pretty much whatever you can negotiate, with the above typical arrangements as a guideline.

Mitch & Murray (from downtown)
Friday, August 29, 2003

Thanks for the reply M&M.

I was talking about where a company with a sales force and an already established set of services, sold your product as part of their services, as it improved their services.

It would be the sort of software that sales guys would come to your company and powerpoint you, typically sold for $30k - $200k.  They would handle all aspects of the business, leads, sales, using the product, negotiation, but they want you to carry on developing and improving the product.

So on the one hand there could be quite a few sales and I wouldn't have to do anything, on the other hand it's a good path to generate cash for them off my work.  How much would people typically expect?  1%?  2%? 5%? 10%?  Don't know whether I've given enough information.

DontWantToBeStiffed
Saturday, August 30, 2003

It depends on how much extra work is involved for the sales people, how the price of your product compares with the other stuff they're selling, and how much they're likely to sell.

If your product is just a small add-on to a bigger system that they would be pitching for anyway, a commission between 10 and 30 percent would be OK. If your product makes their system more attractive to their customers, then the lower commission would be appropriate.

If they go to customers specifically to present your product, commissions between 30 and 60 percent might be fair.

Also take account of whether this money would be just small change for them, or whether their income depends on it. Are they likely to sell one system a year, or five each day?

.
Saturday, August 30, 2003

++++I was talking about where a company with a sales force and an already established set of services, sold your product as part of their services, as it improved their services.

It would be the sort of software that sales guys would come to your company and powerpoint you, typically sold for $30k - $200k.  They would handle all aspects of the business, leads, sales, using the product, negotiation, but they want you to carry on developing and improving the product.+++

This is typically called an :affiliate label relationship" and royalties range between 10% to 20%, on average.

I have a section in The Product Marketing Handbook for Software which describes this relationship and some typical parameters.  The 4th edition will have some more information on this class of relationship and what you can expect from it.  I assume, from your description, that they also handle all marketing costs?  Advertising, DM, packaging (if appropriate), etc?

rick

rickchapmam
Saturday, August 30, 2003

Rick and '.' thanks very much for your comments, they are pretty valuable to me.

The company to begin with would primarily be selling their business services (not software) and my product would be part of their services, with the aim to leave it there.  Later on it will be sold just without its accompanying software, possibly through relationships with other companies.  It's not part of a bigger system.  To begin with they would be likely to sell 1 or so a month for 6-12 months, moving up to (1-20) copies a month.  They would handle all marketing, advertising, networking, sales, etc although I would be instrumental to begin with in organising how the product would be supported and how people would be trained to use it as an employee of theirs.

I've been given an initial offer of < 4% and I'm trying to work out whether really I'm not getting a good deal here - the product sales would have to run into millions before I made a significant amount, however maybe this is par for the course?  I'm also like a typical techie not particularly a winner at negotiating, so I don't know whether they'd start playing hardball and what previously has been a pretty good relationship moving up to the deal.

Any more additional advice very gratefully received.

Rick Chapman, do you have more information on this product marketing handbook, any links?

DontWantToBeStiffed
Saturday, August 30, 2003

You should start by calculating how much it would cost them to create an identical product themselves from scratch, including hiring the appropriate domain expert at $180 an hour (or whatever). Also a rule of thumb is to use a real cost of 2x - 3x the direct hourly labor cost (e.g. of programmers) which covers benefits, overhead and management.

Then divide that cost by how much revenue you expect them to make off of it, and that will be the percentage above which they'll say it's cheaper for them to just make it themselves.  Then go lower enough to make it a bargain for them.

And show them your calculations, especially if it's something like 25 percent and they're still talking 3 percent. There's no way they could explain something that low if you have the numbers right there.

Also you can add things like their X percent or $100K a year (say), whichever's greater; tie their ownership to your employment (at a nice salary)  and if you are let go ownership reverts back to you; or you work as a consultant and their X percent royalty is fine but you do all further modifications at a minimum of $150 an hour; etc.

But read a good book or two on negotiating and closing deals if you haven't really done it in the past, because it's not just proposing and counterproposing numbers, there's the whole human side that drives it (rationally or irrationally) that you need to be aware of.

Programmer Bob
Saturday, August 30, 2003

+++Rick Chapman, do you have more information on this product marketing handbook, any links? +++

www.aegis-resources.com

4% is way below industry norms and I'm unclear how you can make money from such a deal.

rick

rickchapmam
Saturday, August 30, 2003

Programmer Bob, Rick Chapman - thank you very much for your helpful comments.  I've been looking at the offer and thinking hmm, ok so on 1 million $ sales, I get >$30k before tax, which really doesn't seem fair for the effort employed on both sides, and doesn't really do it for me.

PB: I obviously need to really go over plausible figures with a fine-tooth comb and see what's really fair and what isn't.  You are right that if I have a few plausible scenarios of how things would work out the commensurate reward, benchmarked against what it would cost them to spec, develop and test, it would definitely help my position.

Rick Chapman: thanks for the link, I've had a look, I should probably buy the book though it appears (on initial examination anyway) to be largely based upon marketing software from inside a company rather than from one individual to an organisation though there's bound to many parallels.

I'm also reassured by your saying that 4% is well below industry norms.  If I can find a few sources giving such industry norms my position would be a lot more defensible, don't suppose you have any to hand?  (Sorry I keep asking you for links! =).  You are right - if I take into account my current financial position the deal doesn't work out to be greatly profitable unless the company makes it *huge*.  I worked out that if the company grew to have relatively huge references (comparable to a few multinationals), then I still wouldn't be in the money, and if it had product sales equivalent to intuit's turbotax (a completely unrelated product to a different market btw, but something that nobody can say isn't popular), then I can't even buy the house I would want, it doesn't seem right.

Thanks again for your helpful comments.

DontWantToBeStiffed
Saturday, August 30, 2003

references = revenue, apologies.

DontWantToBeStiffed
Saturday, August 30, 2003

4% means they want a 96% reseller discount.  That is absolutely ridiculous.

Mitch & Murray (from downtown)
Saturday, August 30, 2003

+++to be largely based upon marketing software from inside a company rather than from one individual to an organisation though there's bound to many parallels.+++

You said you wanted info and the book has it.  I would recommend waiting till the 4th edition to purchase, however.

All software marketing takes place "inside" a company regardless of the company size.  The decision to outsource your marketing IS a marketing and sales decision, and the reality is you will always have interests/issues with the outsource as to how your product is marketed/sold.

I maintain a directory of resources for software companies at www.softwaremarketsolution.com; it will help you locate further information on this topic.

Best of luck!

rick

rickchapmam
Sunday, August 31, 2003

Some first principles.

Is this an exclusive marketing deal?

If you have current users then you will have to safeguard their interests as well as your own.

You will be the final stop for all support and development, that is a basic cost that you need to recover.

You are unable to control the price at which they sell your product so you don't negotiate on the basis of some % of their sale price, you sell at the price you want to sell at.  What markup they put on it is their issue.

Calculate the very minimum that you would accept per copy, roll in all costs, development, support, administrative, accounting, your remuneration, any one else you pay for any service, hardware, software required.

Once you have that number, double it.  That is your target revenue.

In the contract you should also have terms and conditions for when they don't achieve their stated target so that you can raise the price retrospectively to recover the loss.  You are not partners in their business, especially if they say you are.

You will also need terms and conditions governing their behaviour in the market and maintaining the good name of your brand.  You need to minimise the possibility of firesales.

Always remember that you are selling to them, they are not selling for you, but for themselves, your product is a vehicle for them to increase their revenue either directly by selling it or indirectly by making their own services more valuable to any customer.  They are not doing you a favour.

Oh, and I almost forgot, it should be part of the contract that they disclose full details of each licenced customer of theirs to you, they can have balancing terms that stop you selling or marketing directly to them (for so long as the contract is in place).  It is extremely important though to have that information. 

Consequently, you need to have right of audit over their reported sales.

Needless to say you need a business manager/agent and/or lawyer that's experienced in this area.

Simon Lucy
Monday, September 01, 2003

Rick, M&M, thanks again for comments that I find useful.

Simon, also thank you.  The deal would be I would transfer ownership to them, become a salaried employee (not huge but not bad), and then get a percentage of sales.  There are no current users. 

I love your quote: 'You are not partners in their business, especially if they say you are'. 

I'm assuming they are lowering the percentage because of being a salaried employee.  They are laying down on paper how I will have full visibility of sales and what happens in the even of them transferring ownership of the product to somewhere else (the same %...), it just seems a grim deal.

I agree with your advice that I need a business manager/agent/lawyer with experience in this area, you are right. 

What are your comments in light of the transference of ownership?  It's possible that I need to get the guns out, but I do want to check against others that I'm not deluding myself first.

Thanks again everybody.

DontWantToBeStiffed
Monday, September 01, 2003

Ok, this is a different kind of deal, essentially you're selling them the world for a royalty.

To know whether this is a good or bad deal you need to do some basic calculations.

The possible revenue for the life of the product, a reasonable life would be three years.

The amount of time you've spent developing it, the gross cost to you right now.

The value of your salary, plus the 4%.  The proportion of this to the revenue value of the product.  Now you can discount their costs in sales and marketing the product.  The future development costs are likely your salary, so your profit is only the 4% royalty on top, plus you will be then at their direction as to what and how you develop the product further.

Remember, them paying you a salary is compensation for current development, not past development.

On the whole in this kind of deal I would expect a lump sum for the sale, some of which might be in shares, and if its going to be a significant part of their sales then an executive seat on the board and a very good salary, much better than you could get just by letting them market the software and you remain independant.

Its also important to realise that just because they made you this offer it doesn't mean its the only possibility.  They want the software and they want you.  The opportunity is to leverage that into your best position and you do that by making a counter offer.

What that counter offer is depends on what you want at the end of the process.

The bottom line is, do you want to work for them?
Or do you want to run a business, even if it is with just one product and one outlet (bearing in mind you can always diversify later)?

Email me if you want to take it offline.

Simon Lucy
Monday, September 01, 2003

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