I just sent this e-mail to Tom Miller, Joe Langner, Steve Cameron, Tim sullivan and Rob Larsh. I did not post it in any of the LinkedIn groups, because I couldn't find a way to attach the spreadsheet. If any of you knows how, please let me know. I'm too lazy to upload it to a download site.
All,
In order for you to better appreciate the concerns that the channel partners have with the new subscription plan margins, I have attached my analysis. The attached spreadsheet file has four worksheets, each representing a different cash flow and margin model for perpetual license sales vs. subscription sales.
In the first three models, it is assumed that the breakeven for Sage should be the same as the breakeven for the partners. If Sage really considers us to be ""partners"" then there's no reason for Sage to ask its channel to suffer a much greater hardship than Sage will suffer, in terms of cash flow. For instance, the first model identified as Case 1, indicates that with the subscription margins as Sage has set them (35-50/20), that the breakeven and the cash flow stream is lopsidedly in favor of Sage. Sage achieves breakeven in just 1.23 years, but the Platinum reseller reaches breakeven in 7.34 years. There will be little or no adoption of this pricing scheme by the channel, at those levels. Particularly not by your larger partners.
With the current margins, Sage has effectively accelerated its breakeven by taking a significant amount of margin away from the reseller. There is no other way to interpret this other than the partner channel is funding a substantial portion of Sage's transformation to subscription pricing. You can run the numbers for a Gold or Silver or Diamond partner simply by adjusting the percentages in cells G16 and G18.
So, what are the effective perpetual license margins, implicit in the new subscription plans? That analysis is shown as Case 2. Setting the breakevens to be identical, it can be seen that current partner margins on perpetual license sales would have to be set to 27 points on product sales with 25 points on M&S renewals, or 31 points on product sales if the M&S renewal margin is lowered to 20 points. Basically, the Sage subscription plans would be equivalent to lowering partners' effective margins on perpetual licenses to these values. The channel is reacting to the subscription pan margins as though Sage just took away 20 points of product margin and 5 points of renewal margin, which is actually what has happened.
So, what would the Sage subscription plan margins have to be, in order to spread the pain equally between Sage and its partners? That's shown as Case 3, and the answer is that in order to match the margins that a current Platinum partner is now receiving, the first year's margin on a subscription would have to be 50 points, with the subsequent year's margin at 37.5 points. I'm not optimistic enough to believe that we'll ever see subscription margins at those levels, so the last worksheet has been added.
The recommended case is shown in the fourth worksheet. In that scenario, the first year's maximum margin is 50 points, and subsequent year's margin is a maximum of 33 points. The would be the highest values in a performance-based tier structure that rewards partners for the performance metrics that Sage endorses. It is suggested that a more realistic and achievable goal be set for the attainment of 50 points of margin on the first year's subscription fees. Having to sell 17 new licenses in a half year is an unachievable goal for even the largest channel partners.
Let me know if you'd like to discuss this further.