Are OEM Partnerships worth it?
If you’re an early stage startup SaaS business thinking about entering into an OEM agreement then I have some thoughts from personal experience that I hope you’ll find interesting and give you some food for thought. It goes back a few years when the SaaS business I was involved with was still very much in a start-up mode and everything we did was all about growth. One day I was in a management meeting and we were discussing the fact that we had been approached by another SaaS vendor operating in a different market who was interested in using part of our product and adding it to their own portfolio under an OEM arrangement. It sounded like an opportunity to good to turn down, but read on because not everything turned out rosy.
What is an OEM?
An Original Equipment Manufacturer (OEM) partnership involves a collaboration where a company integrates another company's product into its own offerings, often rebranding or customizing it to align with its brand and functionalities. For a Software-as-a-Service (SaaS) vendor, entering into an OEM agreement means licensing their software to be embedded within another company's solutions. This strategy allows the SaaS vendor to expand its market reach by leveraging the partner's established distribution channels and customer base.
The Story
Now being a startup we were still very much resource constrained, however we had established ourselves with a product that was good and had proven that we could sell direct to large enterprise customers with a strategy that was gaining traction.
One day, I was in a management meeting, and the discussion turned to an interesting approach from a local vendor. They had their own product in a completely unrelated field but were interested in using part of our product. The reason? Many of their competitors already had the feature our product provided, and they wanted to add it to their own portfolio as their own.
The proposal essentially was that we would white label our product, by removing all our branding, provide some training to their sales teams and we’d collaborate on some joint marketing collateral. Our would be partner would run all the prospecting, manage all the onboarding and the customer success. We’d then take a cut of the licences that they sold. To us at the time it sounded like a win - win and we thought that for very little effort we would have access to a whole new market and be able to extend our reach with our partner’s sales and marketing resources.
As it turned out however, it took a lot longer and a lot more effort on our part to get things going. The white labelling process of removing a few of our company logos took more time than we anticipated and we realised that we hadn’t thought of everything when we did our initial analysis. It was a similar story for our sales and marketing teams as we underestimated the manhours and the actual time it would take to get this channel up and running. All the while our fledgling direct sales business was taking a back seat, and it felt like we had taken a step back as we were doing things that we hadn’t done before in a new market and we were having to find our way without the benefit of prior experience.
Despite all that, we did eventually get this partnership working and the sales started to trickle in. Once there was a steady stream of new business flowing we reverted back to business as usual and focussed our attention back on the direct sales channel. Now we had two sales channels: one direct and the other indirect through this one partner.
Both channels grew and in a short period of time we realised that we had hundreds of customers through our indirect channel, but what was strange was that for the overwhelming majority we had no idea who they were. Other than the very occasional support query that would come through we really had very little contact and really that should have been a red flag.
Everything was looking great for the next several years until one day we were told that our partner was going to be acquired by a much larger organisation and the bad news was that their strategic vision for our partner did not required the part of our product that we were licensing to them. We realised that the writing was on the wall, but no matter we thought, because by now after several years we had a large established customer base and even if new sales dried up it wouldn’t be a problem because it would a long time for that customer base to churn away.
Boy were we in for a shock. Now churn through our indirect channel was always slightly higher than the direct channel, but what we saw was the the churn began to increase slowly at first and then gather momentum and very quickly just took off like a rocket. These customers were leaving in droves, but because we had no relationship with them we had no idea why and no power to intervene. Not a good situation to be in and sure enough after a very short period of time, 18 months or so, that entire customer base had evaporated.
It wasn’t a pleasant experience and had our direct sales channel not been performing so well then the consequences could have been serious, but fortunately it wasn’t and we were able to absorb the sudden attrition of all those customers. The point being here is that a partner can gain you new customers very quickly, but they can also lose you a lot of customers very quickly and that’s a risk that we didn’t properly consider.
Lessons Learned
It’s easy to look back with perfect 20:20 hindsight and say that we should have done this or that. For me I think there are some key things that I will carry with me into the future:
Stuff happens beyond your control and it’s not always pleasant. Should we have though about what would happen if our partner went out of business or got acquired? - of course we should, but we didn’t really properly consider the consequences. Part of that was just down to experience and the fact that we hadn’t been through this type of arrangement before.
I firmly believe that when the business is small and there is a working business strategy with one channel then sticking to that strategy will be the most fruitful in the long term. The problem is that deviating away to try something new takes away precious resources from that one strategy. If the business is set up to sell direct then do just that sell direct, acquire as many customers as you possibly can and make them as successful as you can. Alternatively if the business has been set up to operate a partner model, then onboard as many partners as you can and focus all your energy into making those partner’s successful. To pursue two channels will, I think, always be to the detriment to one or maybe both.
Get closer to the customer. It was very disconcerting being in a position where we had no real contact with our indirect channel customers. We had no idea what value they were getting out of our product, what they found useful, what they didn’t find useful, what the onboarding process was like or even what the sales process was like. As a product guy, getting good quality customer feedback is essential as it helps shape the roadmap with developments that will improve the product and its usage.
Conclusion
My main takeaway is this: if you’ve designed your business to operate with an OEM model then make your business the best it can be as an OEM provider. If your business is resourced to sell direct, then be the best business selling direct. Stick to one strategy and resist the temptation to deviate from that unless you’re prepared to go all in on the understanding that you’re starting from scratch.
