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In the Software-as-a-Service (SaaS) market, the cost of acquiring a customer, or the Customer Acquisition Cost (CAC) metric is critical. If the CAC is too high, and the percentage of conversion to paid customers too low, it can result in a disastrous business model that can result in sustained losses, low valuation, and potentially bad exits for venture capitalists (VCs) and other investors.
Unfortunately, in the Infrastructure market, CAC is not even discussed. At Neuralytix, we believe that this is bad, very bad! We have regularly observed “channel friendly” vendors who have routinely overspent on CAC. Typically, a vendor, in an attempt to appeal to the channel, uses its own sales and sales engineering resources to find, cultivate, and often, even close the deal, and then hands the fulfilment of the deal to the channel. The channel receives a handsome discount (typically around 30%) for the fulfilment. However, the final deployment and implementation is often performed by the vendor.
The result is that the vendor has given away 30% worth of revenue, the reseller channel has benefited from this 30%, but has done very little other than to take an essentially “free” purchase order, and make money from it.
That said, this method is fine for vendors who are starting out, and need to seed opportunities so that the channel will be interested. But far too often, the vendors are still acting in the same manner (often with the same channel partner), for the third, fourth, fifth deals (and often even beyond that).
In the end, the vendor is essentially losing 30% of revenue on every sale. The cost of this 30% should be to cultivate a self-sustaining channel that is going out hunting for new opportunities, developing those opportunities, and occasionally pulling in the vendor for extra support. But time and time again, Neuralytix sees vendors who are giving away the 30% of revenue, and doing all the work, and handing over the deal to the channel at the last mile.
This practice must change. Vendors must start developing and training the channel from the first deal. They should expect the channel to be self-sufficient by the third deal and beyond. They should create channel programs that not only provide margin for selling the solution, but also additional margin for finding and developing new opportunities.
Neuralytix recommends a lower margin for fulfilment or straight resale. We also recommend signing up fewer channel partners and/or reducing the number of channel partners to those who are willing to put in the effort to find new deals.
Alternatively, Neuralytix recommends that vendors look to the value-added distributors (VADs) such as Avnet or Arrow. This way, the vendors can focus on training the trainer, and let the VADs recruit, train, and develop the reseller partners. The small additional cost in revenue is well worth the effort.
How can a vendor calculate its CAC? Look at the average time (measured in cold calling, sales calls, engineering design, etc.) it takes to find, develop, and close a deal. Multiply that by the cost of your salesperson and sales engineer(s). That is your base CAC.
Then compare your base CAC to the time necessary to support some of your partners. For those partners that are heavily reliant on you, the vendor, what is the partner CAC? Are you saving money when engaging a partner? Now take the difference between the base CAC and the partner CAC. Is it a big differential? If not, then you’re not using your partners effectively.
Now, add the partner CAC and the revenue you are giving away as margin for the partner (e.g. the 30% referenced herein). This is the burdened partner CAC. If your base CAC is lower than the burdened CAC, then it may be costing you more to engage a partner than doing the deal directly.
More often than not, partner CAC and burdened partner CAC have to be looked at in aggregate. But overall, your partners should be reducing your CAC, not increasing it.
What is your CAC?
Talk to Neuralytix about different ways in which you can lower CAC and leverage your partners better.