Software Sales & Marketing Deal Structures?

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."

sales is VERY important

[TheSHAD0W]

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.

SCORE

[HalWasRight]

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

[kallisti777]

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

[MerlynEmrys67]

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.

hold your ground

[jsailor]

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.