I want to spend a little time on some learnings about Strategic Partners in SaaS.  First, let me be clear — to make it in SaaS, you’re probably going to need to achieve Strategic Partners of some sort to achieve real success.  Because it takes a Village.  And because your partners will likely, through integrations in particular, make your product better and strong.  And because all together, as a group, your partners probably will have a material impact on your revenue.

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But if you’re just getting going, or even if you are just past First Traction, and you are hoping / assuming some Magic Partner is going to lift your business dramatically and generate/create a ton of new business for you on its/their own — it’s tough.  That’s pretty unlikely.

Because of the Law of Attach Rates.

This is a lesson I first learned early on in the days of Adobe Sign / EchoSign.  I met with the VP of Marketing of a medium/large SaaS company, with 100,000+ VSB customers, that then went on to be acquired for nine figures.  At this point, this prospective partner company had already been going for 5 or 6 years, and the team was a bit tired, and the VP of Marketing probably a bit jaded, and she just cut to the chase.

“Look,” she said.  “We could integrate you into our product, and a year or two ago we might have.  It’s probably a B+/A- integration.  Our users would like it, appreciate it, but we’d do just fine without it.  So it’s not really worth our time”.

Bummer, I thought.

“Here’s the thing,” she went on.  “Neither of us can really make any money off it.  The best attach rates of one product to another are maybe 2% in my experience.  So since this is a B+/A- affinity, let’s say 1% best case.  So maybe of our 100k customers, we’d eventually — after time — get 1,000 paying customers.  Even if we split the money 50/50 … that’s only $100k each a  year.  That doesn’t even pay for one engineer.”

Yikes.

And she was right.  One small or medium partner can’t move the needle.  And now let’s do the math for a Large Potential Partner.  Let’s take the biggest SaaS company of them all – Salesforce.

Let’s do the math on Salesforce:

  • Salesforce is running at about a $20 billion ARR.  (Wow!)
  • Salesforce has about 150,000 distinct customers.
  • OK let’s assume you get 1% of those customers somehow — that’s 1,500 customers.  Which is terrific.
  • Except that will probably take 2-3 years to get to that penetration.
  • If your ACV is say $4,000 x 1,500 customers = $6,000,000 in ACV.

Now $6m in ACV is a great business after 2-3 years, don’t get me wrong.  But if that’s it — then alone, it’s not enough to build something big.  And it will take years, and a ton of work, and most importantly, a really great attach, to build that up.

And believe it or not, this attach rate really is a close-to-best-case scenario.  The truth is, of the 10,000+ applications on the Salesforce AppExchange, my guess is less than 1 percent even have > 1000 Salesforce customers.  I’m pretty confident of that, based on how you used to be able to force rank AppExchange apps on # of installs.  We see this also now on the Shopify platform as well.

So if most of us can’t really make it on Salesforce and Shopify alone — can you make it anywhere?

Screen Shot 2013-01-13 at 6.39.25 PMWell, you can.  First, I’ve taken a few shortcuts.  Your ACV may be much higher on a partner platform in certain cases which makes the platform give you a boost (for reasons we’ll discuss in the next post) — though in general the higher the ACV, the fewer the # of customers.  Second, imagine you had several of these partners … then it starts to get more interesting.  Third, sometimes, rarely, there’s a Super Attach.  Where you fill a big hole in a partner’s platform.  But even then, the attach rate might be 2%-3%.  Fourth, if the denominator is truly epic, sometimes even a relatively small attach rate can still work wonders.  See what happened when Adobe Sign integration launched in Adobe Reader and you can see in the image to the right/just above — the new user acquisition rate literally tripled overnight.  But that’s an outlier — Reader is on 1 billion devices, and Adobe Sign is the only web service fully integrated into it.  And finally, most importantly, there are a lot of Indirect benefits from Strategic Partners.  You can grow a lot of revenue out of a Strategic Partner’s platform, even if directly they don’t generate an epic number of leads for you.  We’ll talk about all of these in the next post on the topic.

>> But the simple point is — in SaaS, rare outliers aside — one seemingly great strategic partner simply cannot, alone, Move the Needle.  At least not for more than a handful of vendors.  It’s nothing personal.  It’s just The Law of Attach Rates.

And finally, remember that even the handful of partners with high attach rate on the Big Platforms mostly had to earn the customers themselves.  Generally, only a relatively small percent of the “joint” customers come from the platform itself.

This doesn’t mean don’t do the integration, and don’t list on the platforms.  Do that.  It’s tablestakes today.  And if you have even a little traction on a platform, invest on the people side.  Hire someone, and later a team, to manage those relationships.  They matter.  It’s just, they usually aren’t magic on their own.

Understand this Law, how it works, and how it applies to your product, and you’ll know how to think about the direct revenue side of strategic partnerships.

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