A bit about the software business

Published on March 10, 2010

A bit about the software business

    I was prompted to write this post by the existing confusion with terms related to the business of selling software licenses. Very often, the conversation about the business of selling software sooner or later comes down to a dispute or simply misunderstanding around a term or concept.

    It is especially difficult to talk with pure "techies" who professionally write programs, create sites, administer hardware and software, but confuse distributors with resellers.

    Therefore, I will try to describe how you make money selling licenses, what business roles exist in this process. I will also touch upon the issue of margin, its approximate distribution and some other things. I will try to describe the most common cases that are not tied to a particular company.

    Selling software licenses
    A typical license delivery scheme looks like this:

    Vendor -> Distributor -> Reseller

    Vendor is a software manufacturer, or rather, who owns the software rights (examples of vendors are Adobe, Microsoft, Autodesk). The vendor enters into a contract with the distributor that regulates the transfer of rights to licenses and permits distribution (i.e., reselling licenses to resellers with the aim of reselling them to end users).
    The reseller concludes a sublicensing agreement with the distributor, which allows the license to be sold only to the final consumer (this is usually the case, rarely does any vendor allow sub-distribution, this is fraught with loss of control over the channel and the appearance of dumping companies). If we consider the final cost, then the approximate monetary shares look like 70% -20% -10% (vendor - distributor-reseller).
    Naturally, this is the “average for the hospital,” since the %% distribution depends on many factors - if the product is sold “like hotcakes,” the distributor and reseller have less%, and if you need serious efforts, or if the product or vendor is new and they need to interest distributors and resellers, then 50%, and even more can go to a reseller. Again, if the reseller is “big” (that is, it sells a lot, but does not have many offices), or if there are very few resellers (they sell a unique product), then the distribution share is redistributed. Sometimes, in the case of exclusive items, the reseller is a distributor and receives a large percentage.

    Why do we need a distributor?
    Most people immediately have a question, why do we need a distributor (especially often this question arises among resellers, transforming into “how to become a distributor?”). In Russian conditions, distributors solve issues of payments abroad and customs clearance of licenses, as well as everything related to the logistics of the product (if the product is delivered in boxes, it is almost impossible to import the product, I do not have specially trained people who know how to do this).

    Russian manufacturers are also actively working with distributors, since each distributor, in fact, is the key to several thousand local resellers who are accustomed to its logistics, reporting forms, payment rhythm, etc ...

    By definition, there can’t be too many distributors - the conclusion of a distribution agreement is a serious effort both from a legal and organizational point of view - both the distributor and the vendor must identify responsible people who will organize the workflow, place orders, and resolve difficult situations.

    In the same way, a distributor cannot support (let's say, equally well support) many vendors, both large and small. Everything somehow rests on specific people who should at least understand the manufacturer's price list. These people need to pay salaries and bear other expenses.

    Why do I need a reseller?
    If the distributors themselves are so wonderful, why don't they sell the licenses themselves directly to end users? Would you take all the margin for yourself? In fact, this is a difficult question, the short answer to which is that the distribution business is a business on the back. No one is enriched by selling licenses for NNNN thousand dollars - the distributor's task is to constantly maintain the sales channel at a certain level. Of course, if the deal size significantly exceeds the average in the channel, the distributor will be delighted, but not for long.

    If the distributor wants to sell licenses directly (there are such cases), then he is faced with the problem of cannibalizing the channel. On the one hand, it looks like a clever trick to give a discount at the expense of its large margin and get a client, but there are no fools among resellers - no one will continue to work with such a distributor, and any supplier company usually keeps at least 3 distributors (there is even the common rude thing: “1 - will become insolent, 2 - will be moved, and 3 will just keep balance”), then the reseller always has a choice where to go. And he will not be silent about his departure, which will affect the overall profitability of the channel.

    In addition, resellers usually know their customer. It’s only in your dreams that it’s enough to put a product on the site, pay in Yandex.Direct and Google AdSens and wait for the orders to fall. In fact, you need to constantly communicate with customers. There are 2 key points in working with clients - the cost and time of attracting a client. For different products, these values ​​are different, but quite significant. And the larger the transaction size, the more the reseller “rubbed into trust”, holds meetings and “works by the liver”.

    Very often, in order to get a customer, many resellers conduct a transaction with zero profitability or even at a loss, in order to later profit from sales to this customer.

    If the reseller is a system integrator who needs licenses for a specific project, then trying to “go round” it is very stupid, you just lose the deal. But there is a separate discussion about system integrators and is beyond the scope of this discussion.

    Further, resellers can be, say, supermarket chains. Although they do not have any knowledge of software, they can reach an audience that you can’t reach in any other way (and for this they “squeeze” manufacturers up to 60-80%).

    Buying licenses from the point of view of the buyer

    Now that we have a little touch on distributors and resellers, we need to consider how the licenses look from the point of view of the end customer. There are 2 main points here:
    1. Software licenses are acquired either immediately or under various enterprise agreements - in installments by several payments (usually for 3 years with annual payments). Usually the amount of payment is quite large.
    2. Acquired licenses are credited to the balance sheet of the enterprise and increase its capitalization (if properly executed). This is very important for joint-stock companies, whose managers usually seek to increase precisely capitalization (and the value of shares), and not profit. Of course, it all depends on the particular enterprise and the goals set, but it is important to remember this - perhaps managers at the time of sale are fighting for several million capitalization, and not for saving money.

    It is said that acquired licenses fall into capital costs (Capital Expenses = CAPEX).

    Selling licenses from a reseller’s perspective

    For a reseller, selling a license looks like a discrete process consisting of individual transactions. For example, for a small reseller: Please note that from the 1st month the seller receives an amount of several thousand dollars (he began selling software from his friends and acquaintances), which immediately gets into his pocket. In fact, the seller almost immediately quickly reaches a good level of sales if he finds several decent customers and starts selling “in them”. Many resellers live with only a few more or less large customers and selling them software - enough for a living. Conclusion

    дата кол-во клиентов в месяц Доход, сумма (тыс $)
    Jan-2010 20 4
    Feb-2010 30 5
    Mar-2010 35 7
    April-2010 28 5
    May-2010 30 6
    June-2010 40 11





    The topic, as you might imagine, is huge, it cannot be covered in one post, well, I tried to at least cover the main terms. I did not touch at all how distributors and resellers cope with the arrival of clouds and the principle of Pay-as-you-Go - buyers want to pay a little and instead of large one-time capital costs to bear small operational (Operational Expenses).

    I’ll try to talk about it another time.