I'd like to get some input on appropriate commission structures for a hardware vendor re-selling my company's add-on software that works with their products. I've read a bunch of the commissions questions on this site, and I understand why the answers are all over the map. I'll provide some detail in hopes that may narrow down the responses somewhat.
My startup is building analytics and data viz products for a specific (unnamed) field. In our field there are two primary hardware vendors, both of whom make lousy, PC-bound software. The vendors know their software is deficient but they want to stick to making hardware. Our software is an add-on tool for data analysis and does not replace the basic functions of operating their hardware.
We are in conversations with both companies, who tell us their customers are asking for software like ours. One of the companies is asking us to propose a commission structure (they insist we make the first offer), whereas the other company so far seems happy to refer customers our way. Many customers own both types of hardware, and our software works with both types of data files. This equipment costs about $100k a pop, and their customers tend to own anywhere from 2 to 40 of them. Through our customer discovery we have learned that customers will pay ~10% of the value of their hardware per year for our software.
We plan to offer a SaaS version of the our product, priced roughly as described above ($10k/yr/machine), as well as an on-site deploy (many customers are highly security conscious) which will cost ~5x more than SaaS. These numbers are obviously approximate and still being worked out.
We clearly want to work with the hardware vendors as it gives us an intro to and legitimacy with customers, and should dramatically reduce our sales expenses. We want to give the vendors incentive to work with us, and align incentives such that we have a mutual interest in having customers continue to license our software on an ongoing basis. We believe this is a big win for the hardware vendors as their products tend to last a long time, so they're eager for another revenue stream.
As a starting point, does 10% of first year revenues and 5% thereafter sound reasonable? 20/10? 20/5? Should it be different depending on type of sale (SaaS vs. on-site deploy)?
We're still working out our business model so I welcome further questions or suggestions as to how we should think about this.
Note: The vendor asking for us to propose a commission structure has ~25% market share, while the one making introductions freely making referrals has ~60%.
I'm trying to get my head around whether this is a lead-retrieval (as appears 2nd case) or bundled goods. The approach used is different as a signon + trailing commission works for the lead-retrieval whereas a split of pie (as in patent royalties stack) is for latter.
~10% of the value of their hardware for softwareThe other factor is that the relative relationship of hardware:software ratio, over time, the competitive hardware environment (hmmm 60 + 25 = 85% == majority == lazy-innovator) should allow you to capture more value. I know of other SaaS plays that offer a IaaS bundle, subscription PaaS as well as per transaction SaaS (aka try every business model til something works). I'd take a close look at exclusivity clauses ...
hardware vendors as it gives us an intro to and legitimacy with customersThe other aspect to consider is what is the real relationship between you and the hardware provider. Are they reselling/distributing your software or are you VAR on top of their hardware? (think relationship between MS & IBM and who had power in beginning and later). The intro/legitimacy sounds like you are the new kid on the block, perhaps with other competing software alternatives. Is it better to go direct and be hardware neutral (the other 15% might be high-growth, are people more likely to punt on $10k machines so bigger overall market?) Or is it so closed-shop (security conscious) that the hardware vendors are the effective gatekeepers? If they are gatekeepers then even if you low-ball them 10+5 they've got the power to hold you up.
There is a way to think about the relationship and negotiating power/position ... rather than limiting yourself to a fixed commission structure, try to work out what tiered incentive structure (per CPU, per seat, per transaction) would drive uptake. So you may offer X for signon of existing customer but 2X for new customer (effectively a rebate for their sales effort). Or have a shrinking trailing commission unless upgrade software (encourage hardware turnover). Many different affective decisions.