The software reseller model is broken

Ryan Neu, Jun 29, 2020

 

 

Over the last decade, companies across virtually all sectors have witnessed an explosion of choices in the enterprise software market.

Today, there are over 300,000 software companies in the world. The rise of cloud computing and the low barrier to entry resulted in the launch of software services in every niche imaginable. There's so much SaaS that there are now even 25 different products to help you manage SaaS. SaaS to manage SaaS? Now that’s meta. 

With such a panoply of software products to choose from, some buyers may seek out Amazon-like marketplaces that allow them to peruse a product catalog in the same way they would when buying office supplies. And indeed, software reseller markets do exist. For instance, CDW, a company with over 9,000 employees, sells hundreds of software products from companies ranging from Adobe to Zoom. 

But the software reseller model is deeply flawed and designed in such a way that’s completely backwards from how businesses should purchase SaaS and other software products. It limits a buyer’s choices, drives up prices, and makes it difficult for actual stakeholders to play a role in the buying process.  

The awkward emergence of the software reseller market

Part of the reason software resellers have such backward business models is because they emerged as an awkward outgrowth of the hardware reseller market. Back in the 70s and 80s, when most IT products consisted of hardware, several companies sprouted up to make it easier to shop for those types of products. In fact, that’s how CDW started out in 1984. Just as you would go to an office supply seller to buy all your paper and staplers, you’d consult a company like CDW for purchases of keyboards, computers, routers, and other tech goods. Over the past 40 years it’s become the de facto way to buy technology.

But as software became an increasingly large component of IT spending, many already-existing hardware resellers saw an opportunity to expand their services. So they approached some of the largest software companies and secured partnerships that would allow them to sell products and extract a commission on every sale. Now, you can purchase software through the same account rep you use to buy your keyboards and routers.

Software resellers have limited supply

Software resellers lack infinite supply. Why is this a problem? For one, it severely limits your choice in products. There are tens of thousands of software offerings currently available, with more popping up everyday. Any software reseller will only have partnerships with a tiny percentage of them, meaning there’s a high likelihood that your software reseller won't be able to sell you the product you need, or worse, they'll nudge you toward a service that isn’t the best fit.  

The more you spend, the more they make.

A second critical problem is that the reseller is taking a margin on every sale. For example, if you buy a software product for $50,000, there's a good chance that the reseller is making $5k to $15k off of that purchase. That is money out of your pocket. Not only does this often lead to overpayment, but there’s also a misalignment in incentives; the more you pay, the larger the commission. The reseller makes more money as you spend more money -- how is that good for the customer?

Software resellers sell to IT, not the end user

The third problem is that the software resellers sell to the wrong people within your organization. Who’s responsible for all of a company’s hardware purchases? The IT department. So naturally it’s the IT department that has all the relationships with the resellers. But the highly specialized nature of SaaS has placed the purchasing decisions into the hands of individual departments, since they’re most attuned to their own needs. 

This means the software reseller is not selling to the end user of the actual product, which leads to confusion and wasted time. The reseller is talking to the IT department about engineering products, which requires the IT department to serve as an awkward mediator between the seller and the software users. Why not connect the engineering department to the actual vendors that created the products it plans to use?

The solution? Save money and time by avoiding software resellers

First, it’s important to acknowledge that a few software companies choose to exclusively sell their products through software resellers, so in those circumstances it’s understandable to work with a reseller -- in fact, you don't have a choice. But for all other products, I believe it’s simply malpractice to use a reseller. Instead, your team should go directly to the source: the software company itself.

Why? Well, this way you get more choice, since you’re not limited by the size of a reseller’s signed partnerships. This means you can buy smaller, more niche services that may not have enough scale to attract the reseller market. You can also negotiate better rates since you’re directly dealing with a vendor that won’t need to pay out the high margins required by a reseller. Most of these companies are eager for your business and will have greater flexibility to offer discounts and other perks to sign you on as a customer.

Finally, individual vendors will have more knowledge of the competitive landscape. A software company can explain to you what features it provides and how its products measure up to its competitors, and it can do this to a degree of specificity that would be hard for a reseller sales rep to match. Plus, you'll remove an unnecessary conflict of interest. 

Few things are more harmful to a business than supplying its employees with the wrong tools they need to do their jobs. Avoiding software resellers results in better software purchases at a much lower price. It's a no-brainer.