The two types of reseller

resellersIn theory, the Internet allows customers to find products without the need for middlemen (unless you count Google). In reality, the age of full disintermediation has not yet arrived, and perhaps never will. Middlemen are still important. One of the more important types of middlemen for a software vendor is the reseller. However it is important to realise that there are two completely different types of reseller. One can be very useful to you as a software vendor, the other is generally a pain in the backside. They should be treated accordingly.

Value added resellers

A value added reseller buys your product and then resells it to their customers. Usually they will buy from you at a discount and resell to their customer at full price, pocketing the difference. Typically a reseller will expect between 25-50% discount depending on a range of factors including what services they provide (e.g. localisation and support), the price of the product  and volumes sold. Often the discounts are on a sliding scale, with the discount increasing with sales volume. This type of reseller can add value for you and the cusomer in various ways. They may:

  • have expertise in markets that you don’t
  • be able to reach markets that you can’t, due to barriers of language, culture or geography
  • localise your product and marketing materials
  • provide first level support.
  • sell your software as part of a package including other services, software and/or hardware.

However there are a few things you have to look out for:

  • You don’t want to end up competing directly against your own resellers in existing markets.
  • Resellers may undercut you on price.
  • Beware of offering any sort of exclusivity.
  • Customers may sign up as resellers just to get a discount for a single purchase.

You can try to avoid direct competition with resellers by only picking resellers in different markets. You may also be able to specify certain terms and conditions, for example that they can’t bid against you on certain phrases in Google Adwords. But, depending on the law where you live, you can’t tell a reseller what to charge the customer. For example, under UK law, this is considered  ‘price fixing’ and is illegal. So make sure you charge a reseller a percentage of your recommended price, not a percentage of their sale price, to make price cutting less attractive. For example, if your product retails for $50, charge the retailer X% of $50. Not X% of what they sell for. Otherwise they could undercut you by selling for $30, and still make a profit, or even give your software away for free.

Resellers will often ask for exclusivity. Exclusivity can provide extra motivation to the reseller (a reseller won’t want to put a lot of effort into marketing your software if you can pull the plug at any time for no reason), but what if the reseller loses interest in your product?  It happens. You could be left in a very bad position unless you can terminate the agreement. So you should agree some sort of minimum volume of sales for a reseller to retain exclusivity.

Offering a sliding scale discount with no discount for the first purchase will discourage customers from trying to take advantage of reseller discounts.

Value subtracted resellers

The other type of middleman that call themself a reseller are really just acting as outsourced purchasing for your customer. They buy your software on the customer’s behalf so that the poor darlings in the customer’s accounts department only get a single invoice for software sales per month, instead of one per vendor. They don’t add any value at all as far the vendor is concerned.  In fact they just make the vendor’s life more difficult by getting between the vendor and the real customer. I had one reseller of this type who, after some twenty emails exchanged, failed to workout how to buy my software from my website. How dim can you be that you can’t click a ‘buy now’ button and fill in a few details when that is what you do for a living? Hence I call them ‘value subtracted resellers’.

This type of reseller will often ask for a discount. Don’t give it to them. The real customer has probably already instructed them to buy your product, so a discount won’t help to close the sale. Also the reseller might pocket the discount instead of passing it on to the customer. If anything, charge them more.

5 thoughts on “The two types of reseller

  1. Chuck Brooks

    Our experience has been that VARs (Value Added Resellers) only make sense when they modify the functionality of the product, either by itself to satisfy their customer, or as an integration into a larger product or system. In practice this meant altering exposed code, or doing some major configuration work (e.g., mapping native output to, say, HL7). For everyone else, it’s the proverbial cash on the barrel head, located on our website. We do provide a way by which VARs can billboard or brand some of our products with their logo and such, but these are always within a volume earnout distribution agreement. They still have to get the registration licenses from our website, and to date (knock on wood!) no one has broken the registration codes.
    Chuck Brooks
    FutureWare SCG

  2. Niheel

    Resellers that support the product and offer consulting services for implementations and maintenance are an efficient way to bring down your own internal product support costs. Value added resellers also function well as marketing forces to promote your product. ISVs should look at VARS as strategic assets to have.

  3. Delia Ene

    Andy, I’m glad you brought this up.
    I’ve recently had an interview with IT Channel expert Ken Beam which we’ve published today on the Avangate website –

    In a different style than yours, but touches on similar points.

    The main conclusions I drew from the interview:
    – Channel sales is hard work (but CAN be rewarding if done right)
    – Too many go into Channel sales believing that they’re ready; but in fact they really are not (this is quote actually from the interview).
    – Resellers find new ways of making money as the market changes (Internet major change factor, just like you said)
    – Adapt tactics according to partner type & objectives
    – To succeed you need to (I quote again) take excellent care of your good partners and don’t hesitate to show problem partners the exit.

  4. Pingback: International Software Sales | How to Sell Software in Different Markets | Avangate Blog - Software Business Blog

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