Why Your Vendors’ Sales Model Matters to You

If you are our typical reader, you are involved with virtualization technology and products in a meaningful way. This most often means that you either work with the technology hands on, or manage a team of people that do – either at an enterprise that is a user of virtualization technology, or at a VAR or systems integrator that implements the technology for customers. If this is your profile, you may be asking – why should I care about how vendors sell products – after all salespeople are some of my least favorite people?

You should care a lot because there are massive changes afoot in how technology products like virtualization platforms and the surrounding management solutions are sold, and how a company sells you are product will often tell you a lot about how they will be to deal with after you have become a customer. In other words, how a vendor treats you before you become a customer, will often tell you a whole lot about how they will treat you after you become a customer. Another reason to care is that if you are a customer looking for an innovative solution because you are on the leading edge of virtualization or cloud computing and you want to implement some things early in order to get a jump on your competition there are models that help with this and models that do not.

To explain why you might want to care, lets go through four common sales models in use today and explain how their differences matter to you.

The Enterprise Direct Model

In this model the salesperson is deployed in your city or in a nearby major city and deals with you and your company in person. The salesperson is responsible for establishing a relationship with you, your team and your management, and is responsible for listening to your needs and even consulting a bit with you on the best way to solve your problem. Only once there is an agreed upon problem that needs to be solved does the conversation turn to how the vendor’s products might be a fit for your problem.

This model is characterized by the following attributes:

  • It only works for expensive products that are bought in increments above $500,000 per deal
  • It is very expensive for the vendor to sustain this direct sales force since these people earn a lot of money, generate a lot of expenses (mainly travel) and require expensive support in the form of field systems engineers.
  • It works well for customers who want their input to be reflected in the development priorities of the vendor. A good relationship with a good enterprise account manager is a two-way street where that account manager listens to your needs, brings those needs back to the product team at the vendor, and brings you back the resulting enhanced products.
  • It works really well for large customers who buy large amounts of products in large deal sizes on a fairly frequent basis. It is easy to get this kind of attention from a vendor if you are going to spend $500,000 to $1m or more a year with a vendor. It is hard for the vendor to give you this kind of attention if that revenue flow is not in place.
  • It therefore does not work well at all for smaller accounts who just do not spend that kind of money with anyone.

The Inside Sales Model

This model is a variant of the Enterprise Direct Model except that the salespeople all work at the vendors’ headquarters and deal with you over the phone. So you are unlikely to meet your salesperson in your office, but you stand a pretty good chance of getting to know your salesperson and their supporting systems engineer over the phone.

This model is characterized by the following attributes:

  • It works for a fairly wide range of purchase sizes. Most vendors who employ this model have products whose initial transaction sizes are between $20,000 and $100,000. The ultimate deal sizes can be much larger once the product gets established and gets rolled out in your environment.
  • You can pretty much count on having a relationship with your sales rep and the supporting systems engineer, although this is a very important question to determine when dealing with a vendor who deals with you over the phone. The presence of a relationship with the salesperson is one of the key things that distinguishes this model from the Freemium model discussed below.
  • This model can work for innovative solutions if the product is one that is easily deployed by you and your staff without outside assistance.

The VAR/SI Channel Model

In this model, the salesperson works with the resellers, VAR’s, and systems integrators from which you buy both products and services that integrate these products with each other. So your primary interface to this vendor might well be just the salesperson who works for your VAR. If you are a large account you may see both the vendor sales rep and the VAR sales rep in a meeting at your site together. If you are a mid-sized enterprise you many only ever see the sales rep from the VAR.

This model is characterized by the following attributes:

  • If the vendor’s product requires services to implement or to integrate into your environment then you will likely find that products from vendors that use this model are being embedded into the projects that you buy from the VAR. So the VAR is selling you a solution to your problem, which consists of a bundle of vendor products and the VAR’s services.
  • This model is less expensive for the vendor to implement and maintain, since the vendor gets to leverage the sales reps that works for the VARs. Therefore this model works well for products that are less expensive than the $500K mark, but that are still expensive enough so that you want to deal with a person in your office when you buy them (although that person works for the VAR, not the vendor themselves).
  • If you are an early adopter who is looking for competitive advantage by implementing things ahead of your peers in your industry, this model is not as efficient as the enterprise direct model, as there is a person in between you and the vendor through which product requirements need to flow. This is not necessarily a problem in all cases as some of the VARs that are in geographies that have lots of early adopter customers (like financial services in New York and New Jersey) are quite skilled at making sure that the information flows back and forth. But it is not a model that the most sophisticated vendors and early adopter customers use for leading edge and expensive technology acquisitions.
  • Vendors with really new and innovative solutions will take longer to get their products to market through this model, as it takes time to spin up and educate the VAR channel on the product and its enhancements as they come out.
  • This model works well for large as well as mid-size enterprises.

The Freemium Model

What’s a Freemium you say? It is a combination of “free” and “premium”. This model is based upon there being two versions of the product. One is downloadable and free and is limited in some respect (in terms of functionality or to a limited number of servers, etc.). The premium version is the full product, to which the vendor wants you to upgrade once you realize that the free one does what you want it to do, and you have outgrown the free version.

The Freemium model was pioneered by SolarWinds who has effectively used this model to build quite an impressive revenue base (a run rate of significantly over $100M a year), and customer base (over 95,000 customers worldwide). SolarWinds also went public in May 2009 during a time of great overall economic difficulty and not a time when hardly any other technology companies were able to go public which has made this model seem attractive to many technology companies and their investors.

The Freemium model is characterized by the following attributes:

  • There will be no salesperson in your office talking to you about these products. Marketing is done over the Internet, and selling is done over the phone.
  • This model works really well for products where the initial transaction is less than $20,000 and subsequent transactions do not get much over $100K (there are exceptions)
  • You can pretty much forget about having a relationship with the vendor. Your sales rep may not even be employed by the company the next time you call since many companies employing this model have fairly high turnover for their telephone reps (it is a burn out job).
  • This model works best for products that are not innovative, do not need a great deal of explanation, and that solve an obvious and well understood problem. In other words, this is a great way to sell commodity solutions to well understood problems, but not a great way to buy or sell anything innovative.
  • The effectiveness of this model is also contingent upon ability of the free product to prove that it actually solves the customer’s problem so that the paid for product addresses the same problem. It usually fails when the free product solves problem A and the paid for product solves a different and more complex problem B.

So One More Time – Why Should I Care?

Fundamentally as a buyer and user of technology in the virtualization and cloud computing markets, much of which is very new and very innovative you need to pay attention to what kind of relationship you are going to have with the vendor of your key technologies and products. You will pay more for products that have on-site enterprise sales and systems engineering in support of them and you can establish a bi-directional early adopter relationship with these vendors if you need to. If the product fulfills a tactical need, a much less expensive sales approach may be entirely appropriate.

It is also important for you as the buyer of the technology to understand the impact that SolarWinds is having upon the industry. There have not been a lot of technology startups that have gone public in the last few years. Startups are usually funded by venture capitalists who only get a return on their investment if the company gets bought by a larger company, or it the company goes public, The fact that SolarWinds went public with the Feemium sales model is causing a lot of venture capitalists (who sit on the Board of Directors of the companies they invest in) to aggressively push their companies to adopt this model. There are even a few venture investors that insist that their portfolio companies use this model as a condition of the investment.

This “herd effect” around the Freemium model is therefore having a dangerous effect upon how new technologies are being brought to market, and it is this dangerous effect that is the reason why you really should care about this. The dangerous effect is that companies that have new and innovative technologies that need to be brought to market to early adopter customers through direct sales forces that can closely manage the relationship between the customer and the vendor, are being “forced” to use a sales model that is in some cases inappropriate for the product at hand. This mis-match between innovative technologies and the Feemium sales model may doom some vendors who would have otherwise succeeded to failure since they will fail to get the early customer traction needed to fuel their success.

You as the enterprise customer should care about this because it means that you may find innovative technology in the marketplace in the hands of companies who cannot deal with you in a proper partnership and consultative manner. Or even worse, you may find that you “bought into” a company or a product from the one outside salesperson that the company employs but the company is really moving to a Freemium model which is designed to leave you with no one to talk to at the company. We in the industry should care about this because it may mean that fewer new innovative customers will succeed at bringing their solutions to market because their venture investors have imposed in inappropriate sales model upon the company.

In summary, the Freemium sales model is a business model innovation best suited to inexpensive products that are very easily understood (and therefore not very new or very different) and that solve an obvious problem in a manner that is more convenient for the customer to acquire and implement. There are not many new virtualization and cloud technology companies who set out to produce undifferentiated products which suggests that a general application of the Freemium model to startups in our ecosystem is ill advised. Enterprise customers should pay great attention to products that are being marketing in this manner to ensure that they do not end up growing the use of something that was purchased in a departmental and tactical manner into a use case that the vendor’s sales model cannot support. For example something that you may have bought as a “utility” on a Freemium basis could grow like a weed and suddenly end up being deployed in your entire environment with no one ever having thought about the issues raised here.