Axcient looks to recruit VAR partners with a model that will pay them more up front than they could make with a traditional hardware-software sale.

Cloud-based Recovery-as-a-Service provider Axcient is introducing a new program, SaaS:FLO, which will see it pay VAR partners upfront for its software-as-a-service offering. While this is unlikely to appeal to partners with an established managed service practice, who are accustomed to a sales model which pays money out over time, Axcient believes this up-front model will appeal to VARs whose business is built on upfront payments, and whose sales force is compensated accordingly.

“This compensation model is a first of its kind for SaaS, and it’s going to be extremely disruptive,” said Justin Moore, Axcient’s CEO.

“Axcient has been only a channel-only company from the beginning, but with service providers and MSPs as our partners,” Moore said. “The SaaS sales model did not incent resellers to sell it because VARs are set up for a cash flow basis, and want money up front. We will write them a check for almost two years’ worth of margin at the start, which will make it more attractive for them to sell than software.”

Moore said Axcient is offering SaaS:FLO because they want to broaden out their channel and take advantage of the VARs’ key position in the industry.

“We have tried to activate the VAR channel because they hold the keys to a part of the market – midmarket and enterprise – that we are interested in,” Moore said. “The problem was that it was a business model alignment issue. For me, the light bulb went on during a discussion with a VAR. Why would someone sell us for 10 per cent paid monthly over the term, when they could make a 10 per cent commission on all of it up front? Salespeople don’t even know if they will be around over the whole time to get their money. VARs weren’t prepared to take a cash hit and change their sales compensation model.”

Moore said no one has tried this model before because the cost to the SaaS provider is considerable.

“Writing a check for two years up front means we aren’t profitable on that customer for two years,” he said. “You need to have deep pockets or access to capital to afford this model. Traditional banks would not finance this model. We know because we asked them.”

Axcient’s funding for this is coming from a new funding round of $25 million, which is also being announced today. The investment is led by Industry Ventures, with Silver Lake partners providing key debt financing, and participation from existing investors Allegis Capital, Peninsula Ventures, Scale Venture Partners and Thomvest Ventures. In addition to the SaaS:FLO program, the money will also be used to double the R&D team and invest in sales and marketing.

“This is a big and bold bet, with the backing of very large investors which enabled us to do this,” Moore said.

Moore said that MSPs won’t be interested in the SaaS:FLO option, and will stick with the traditional SaaS payment.

“Service providers will stick with their model because they make more money in the long run,” he said. “It will take 18-24 months for the MSP to make as much money, but after that they make more money. VARs, however, work on a cash flow basis so having the money up front is important.”

To illustrate how the different models work, Moore gave an example for a 20 server environment. In the traditional VAR model, on a $60,000 hardware sale at a 15 per cent discount, the partner margin is $9000. In a first generation SaaS model, the customer would pay $3980 a month, so with the 15 per cent discount, the partner margin is $507 a month.

“It’s more money over the long run, but no cash up front,” Moore said.

With the Axcient second generation SaaS model, the $3980 a month customer cost minus the partner margin of $507m translates into a differential of $3383 a month, and the partner gets five months of this up front – $16,815. On renewal, they get another month up front — $3383. So they make considerably more than in a traditional sale.

The VAR also retains complete control over the customer.

“They manage the customer relationship,” Moore said. “We want them to do that. That’s the leverage we get out of them. We want them to do the renewal and will compensate them for that.”

38 VARs have already signed up, and Axcient started a soft launch of the program in January.

So is this the wave of the future for SaaS compensation? Moore acknowledged it depends in large part how well Axcient does with it.

“People will wait and see if we are successful doing this,” he said. “It is expensive, and you have to believe you will retain your customers for 5-7 years, that there is a high level of customer satisfaction. If you don’t have that confidence, this model is not affordable.”

Moore said a company really needs to have access to capital to afford this model.

“Once we prove this works, companies with big cash reserves are more likely to follow suit,” he said.