Enterprise OEM software licensing is a multibillion-dollar segment of the software industry.
This article was written for technology professionals who would like to learn more about OEM deal strategies and structures. It includes factual information, personal experience, and interviews from successful professionals on both the buy-side and the sell-side of enterprise OEM software licensing to ensure a broad mix of experience and ideas.
Before diving in further, let’s discuss what OEM stands for and what the definition of enterprise OEM software is.
Understanding enterprise OEM software
Enterprise original equipment manufacturer (OEM) software is when one software company (the licensor) licenses its software to another software company (the licensee). The licensee embeds the third-party software into its application to improve it by adding new functionality or features, or enhancing existing functionality or features.
Here are a couple of examples:
- Business intelligence application licenses specialized visualization libraries
- CRM application licenses a natural language search technology
- ERP system licenses graph database technology
- A supply chain management system licenses a BI application
The new joint solution is improved by having the OEM technology embedded into its application, providing increased value to the end customer. The licensor enjoys a new revenue stream. The licensee reaps the benefit of specialization and expertise by the licensor. The end-customer is the beneficiary of a new and improved solution – everybody wins.
The key defining factor is that the OEM software is embedded into an existing application or platform, and it sells as part of that application. It is not sold as a standalone application. The OEM software is sold through an “OEM channel.”
If the software is being sold as a standalone through a third party, that would be considered a reseller agreement, not an OEM license. Resell arrangements are usually made with channel partners, consultants, and solution providers. These companies resell the solution and bundle services around the solution to add value to the customer. They make their money on the margin from the software’s resell and their services to the end-customer.
For example, Accenture sells a CRM system with a multimillion dollar engagement that provides customization, training, and implementation to its end-customer.
Enterprise software companies rarely resell agreements because they are focused on selling their software. This conflict does not exist when they license OEM software. On the contrary, the licensee will have a better product to sell with the OEM partner’s added value. The OEM software is either invisible to the end-user or is branded inside the joint solution.
Enterprise OEM software models are prevalent within the industry and are leveraged by large and small companies. Here are a few examples with links to provide some more context:
- ARRIA NLG
Licensing OEM software
OEM licenses are significantly larger deal sizes than direct to end-user contracts because the licensee is usually pushing out the software to their entire customer base or a large portion of their customer base. One OEM contract can give thousands or tens of thousands of end-users access to the licensor’s software.
OEM deals affect many divisions within the licensee’s company. Depending on the software, implementation, and go-to-market (GTM) strategy, considerable costs and internal resources could be needed for a successful deployment. Therefore, a company’s decision to license third-party software and incorporate it into their application/platform is complex and requires buy-in from many groups. Product management, engineering, customer success, sales, and marketing groups will weigh in on the decision-making process.
The decision to move forward is considered strategic because OEM partnerships can have a wide-ranging impact across an organization. The final decision-maker is usually at the C-suite level for small to midsize companies, and at the GM or business unit owner level at larger companies.
OEM deal structure
There are a multitude of variables involved when putting together an OEM contract. All the deal structure parameters will have a direct impact on value and cost, hence price. Therefore, it is essential to define the parameters of the deal structure in advance of price negotiation. If the parties can’t decide on specific parameters, they should agree upon assumptions upfront to keep the discussions on point relative to the deal structure.
A critical parameter that will affect the pricing and the go-to-market (GTM) strategy is the licensee’s decision to provide the embedded OEM software as a default to all their customers or as an option for their customers to choose.
Ship by default: Shipping by default is usually the best way for partners to work together because there is less friction for both the sales team and the end-customers. No decisions need to be made; the OEM software becomes part of the application by default.
Depending on the OEM technology, different end-customers of the licensee may perceive the value from the combined solution differently. Some might see the added functionality as a “must-have,” while others may see it as a “nice to have.” These factors need to be considered so the licensor can provide a scalable pricing model that makes economic sense for the licensee to ship by default. The challenge is to develop a pricing model that blends the different value perceptions across all customers. Another level to consider when shipping by default is whether to provide the new functionality for the entire existing installed base or just for new end-customers.
When shipping by default, the licensee makes a much larger commitment and purchases the technology for its entire customer base. Hence the licensee will be looking for aggressive volume discounts.
Ship by option: There are two reasons why a ship by default model may not work. The licensee may not be willing to incur the cost of such a broad license. Or the combined solution may only be needed by specific types of end-customers. In this scenario, the licensee can provide the additional feature to their end-customer as an option at an additional cost.
Ship by option can create friction in the sales cycle and limits the distribution, but it can be the preferred strategy in some instances. When shipping by option, the licensee is making a much smaller commitment and will not receive the same types of volume discounts compared with ships by default.
Co-Marketing: When the licensee is shipping as an option, the licensor has a vested interest in promoting the added value it provides to the licensee’s customers. Co-marketing initiatives between the partners are common, and the licensor may provide the licensee with Marketing Development Funds (MDF) to promote the combined solution.
White Label Vs. Branded: White labeling is when the licensee embeds the OEM software into its application without identifying the OEM software within its application. Branded is when the OEM software has some brand visibility on the licensee’s GUI, in the documentation, on co-marketing materials, or in a combination thereof.
Branded software benefits the licensor because it gives them visibility across the licensee’s entire customer base. For a small licensee working with a much larger company, this can be a game-changing form of advertising.
A branded strategy can also benefit the licensor if the OEM is well known and brings credibility with its logo. In this case, it may be in the licensee’s best interest to promote the fact that it has brand X is inside its platform and powering a key functionality.
However, many times the licensee does not want to expose the fact that it uses third-party commercial software in its offering. Sometimes, the licensee may not want to expose the fact due to concerns that its customers might try to buy from the OEM directly. However, the predominant reason is that the licensee views the relationship as a competitive advantage, and they do not want their competitors to know what software they have licensed.
In the scenario where the licensee sees the OEM relationship as a strong competitive advantage, they may request a form of exclusivity in the contract. The licensee will request a degree of exclusivity for a particular duration for a specific list of companies. If an agreement is reached, the licensor will commit not to sell to the companies on the list for a defined period.
Exclusivity could be appealing to the licensor if the licensee increases the license payments enough to account for the licensor’s potential opportunity cost. The exact list of companies and the duration of exclusivity are the two levers that will be used to determine the price paid for the exclusivity.
An OEM relationship can be licensor hosted, licensee hosted, or end-customer hosted (on-premise). A combination of both deployment models can be used depending on the licensee’s customer mix.
For data security reasons, the licensee may have to host the software or enable their customer to host the software on their infrastructure. This requirement often arises when selling into specific verticals, such as finance, pharmaceutical, or government. In addition to security, the licensee may need to host the software due to integration and performance requirements to reduce latency between its application and the OEM’s solution.
If the licensor can meet the licensee’s security, integration, and performance requirements, the licensee will usually prefer to have the licensor host. The administrative and development operations (DevOps) will be the licensor’s responsibility, saving the licensee valuable IT resources. The licensee will pay a premium for a licensor hosted model due to the costs incurred for the actual hosting.
A hybrid approach can also be arranged where the OEM licensee hosts, but the licensor takes on the DevOps responsibility for upgrades and maintenance. This approach works well when the licensee is required to host but prefers to outsource the DevOps. These are yet another set of variables that will influence value and cost levers, thereby directly affecting the price negotiation.
The OEM licensor will sometimes need to do custom development work to meet a licensee’s exact requirements and needs.
e.g., (a) enhance the ease of integration, (b) increase performance, (c) make a modification or enhancement to meet the needs of the licensee’s unique application.
The more customization, the more resources will be needed on the licensor’s end from a development, maintenance, and support perspective. And the higher the value to the licensee, the price will increase with the more customization needed. Non-recurring engineering (NRE) costs can be built into the pricing structure or billed out separately as a one-time fee. The decision on how to structure these costs will be driven by both parties’ financial and accounting considerations.
A good general practice is to make sure the pricing model chosen avoids creating any friction to the licensee’s existing sales process. Some examples of friction are as follows.
- The licenses sales on a per-seat basis with unlimited usage, but the licensor pricing model is based on usage.
- The licensee occasionally does large deals where their end-customers expect significant discounts, but the licensors volume discount schedule is capped at a much lower volume level.
- The OEM’s pricing model should work well with the licensee’s pricing model. And within the chosen model, some release valves should be incorporated to provide flexibility for unique selling scenarios on the licensee’s side.
Here is an overview of commonly used pricing models. Multiple models can be used simultaneously in a single deal when the licensee has different solutions and end-customer needs. Blending these into hybrid models is also common.
Royalty Models: Royalty models based on a percentage of revenue is the most straightforward model to construct. In this case, the licensee pays the licensor a set percentage of the joint solution license revenue received from the customer. The percentage will be negotiated on a case-by-case basis; on average, it usually falls somewhere in the 1%-10% depending on the value added to the combined solution and the anticipated sales volume. The applied royalty percentage may be on the licensee’s entire end-customer solution or a defined component of the end-customer solution. The percentage is usually only applied to the license fee the end-customer pays with services and support feeds outside the royalty scope.
Per Customer: A predefined per end-customer price is simple in nature, but it can be challenging to agree between the parties. The pre-defined per customer price is often based upon tiered categories that provide different discount levels for different types of end-customers.
A tier can be based upon different criteria such as the size of the deal, size of the end-customer company, seats deployed, features deployed, etc. In essence, this is a royalty deal because the parties determine some percentage of value for each tier during the negotiation and then document it as a price instead of a percentage. And the per-customer pricing usually incorporates volume discounts based upon scale.
Negotiating this model often takes longer than a straight royalty deal because so many different variables need to be considered. The calculations by each party are not as transparent compared with doing a straight royalty deal. One drawback to consider when doing per customer pricing is it may not always scale to the value being received by the end customer.
Usage: In this model, a predetermined metric is agreed upon based upon end-customer use. Factors such as the size of the customer, number of seats, and revenue are not considered. A very large end-customer might pay a lot less than a smaller end-customer if its usage is low. Some standard usage metrics are data volume processed, number of API calls, or per seat, how many end-users have access. As a rule, the usage metric should be harmonious with the licensee’s pricing model.
Flat Fee Term: The flat fee or “all you can eat license” for a specified term is less common. However, it can be an advantageous option when the licensor is a smaller company licensing its software to a larger company, such as a startup licensing to a large multinational.
The larger company does not have to deal with the administrative overhead of tracking and reporting, and larger companies will often pay a premium for reduced overhead. The larger company may also appreciate the accounting flexibility of the flat fee model. The cost can come under its cost of goods sold “COGS” and enable finance to be creative in distributing the expenses from an accounting perspective. Another advantage is that upfront payments usually entail larger discounts. For big companies where cash flow is not an issue, paying upfront for more considerable discounts makes good business sense.
For the smaller company, the benefit is that the larger upfront payment improves cash flow and can contribute to improved investor optics if the company is fundraising. It is also a form of insurance; there is a guaranteed upfront payment instead of a non-guaranteed variable payment. However, the drawback is that smaller companies can potentially leave money on the table over the long term compared with a variable model based on success.
For such a deal to be fairly negotiated, the licensee must be entirely transparent with its historical and projected revenues. This way, both parties can negotiate fairly and agree upon pricing that makes sense for both parties.
Perpetual: A perpetual OEM license is more uncommon these days where investors and executives are putting a higher priority on ARR. Still, it is an option to consider, especially if the deal is between a large company willing to pay significant upfront license fees to a smaller company, and the smaller company needs to improve cash flow.
A perpetual license can have accounting benefits to the licensor. A company can have the option to amortize the asset’s cost over a few years (usually three to five). This way, the expense of the software does not affect their product margins.
The licensee gets the benefit of a large upfront payment and can realize an annual revenue stream from the software’s support, typically in the 15%-20% of the license fees.
Actual pricing is dependent on the deal structure and the pricing model. Therefore, it is highly recommended that before the parties start negotiation on the pricing, the details of the deal framework should be decided on in advance. If all the details cannot be decided on in advance, then agreed upon assumptions should be made for all the deal structure variables by both parties. Having pricing negotiation based upon a well-defined deal framework will be much more productive than discussing pricing while deal structure variables are changing.
Optimum Deal Structure: If parties design the optimum deal structure upfront, not only will it make the price negotiation process more productive, it will facilitate an open discussion around defining the best partnership for both parties, without the posturing around price.
To design the optimum deal structure for both parties, start by putting the pricing discussion aside and ask the question; what is the best way to structure the relationship to maximize value for both parties? Once you have defined this best scenario, preferably in writing, the parties can then have a productive negotiation around pricing within the optimum deal structure framework.
If agreement around pricing cannot be reached within the defined optimum deal structure – the parties can then make adjustments to the deal structure to come to an agreement on pricing.
e.g., If the pricing is too high for the licensee, the licensor can propose ways to reduce price and increase value, such as having branding as part of the agreement instead of white-labeling.
Minimums: Most OEM agreements will require the licensee to make an annual minimum commitment. Minimums ensure that the licensee is committed to applying the needed resources to ensure sufficient sale-through to make the relationship appealing for the licensor. The annual minimum is either paid upfront each year or over quarterly payments. The minimum is then drawn down over time according to the agreed-upon pricing metrics and deal structure. Once the minimum is fully drawn down, the licensor will then commence payments to the licensee based upon the pricing metrics agreed upon in the contract. Upfront minimums are usually calculated in the 25-50% range of the projected payments to the licensor for each term.
Reporting: Consistent and transparent periodic reporting is critical for a successful relationship. The licensee needs to track usage, customers, end-customer deal sizes, etc. so the periodic payments can be invoiced. It is essential to have the reporting responsibilities clearly defined upfront in the contract with an agreed-upon process in place to avoid any reporting disputes. The licensor will request “audit rights” in the agreement in case there is a dispute on the reports. Perfect transparency is necessary to ensure trust between the two parties, trust being the cornerstone of any partnership.
Assessing the OEM Channel
Selling through an OEM channel provides scale because the OEM is leveraging the licensee’s entire customer base. In exchange for this scale, the OEM will provide significant discounts off its list pricing. The OEM is gaining scale, more customers – and giving up higher profit margins that could be obtained by going direct to customers. The critical questions in the got to market (GTM) analysis are:
Will the OEM channel cannibalize some of my customers? And if yes, to what extent? Will the increased revenue realized through scale outweigh the loss of higher margins from going direct?
Competitive Overlap: When you sell through an OEM channel, you will need to assess the competitive overlap and potential revenue loss due to competitive overlap. The number of your customers that are using your software will grow. However, you will inevitably have significantly lower profit margins for each sub-license since volume discounts will be required to sell through the OEM channel.
Protecting Margins: Your prospective OEM partners need to be researched in each vertical market to determine the extent of the competitive overlaps. The revenue gained at scale from the OEM channel will need to be higher than the lost opportunities of going direct to the end-customer.
Revenue gained from increased scale > Loss of revenue from decreased profit margins.
The time frame used when analyzing this equation is critical to making the best business decision.
e.g., A company may give speed to market a higher value versus higher profit margins over a longer time frame. Or on the flip side, a company may want to pass on near term OEM opportunities for a longer-term strategy.
Vertical Market Protection: If your company is very strong in a particular vertical, and you are concerned that there will be too much competitive overlap, one solution is to limit the markets your OEM partner can sell to.
e.g., If your company is strong in finance, you can work with your OEM partner to protect that market by not allowing the partner to sell into that market or ensure that pricing is set up in such a way to protect your margins in that market. Or, in reverse, if your OEM partner is well entrenched in a specialized market where your company has limited success, you can restrict that OEM partner to that one specific vertical.
Benefits of selling via an OEM channel
The risk of competitive overlap and cannibalization can be addressed through a well-thought out strategy and putting the appropriate protections in place. Once these risks are taken out of the equation – or you have assessed that the risks are worth the upside – there are many benefits when selling through an OEM channel.
Access to new markets and verticals
OEM channels can often enable a company to access new companies, markets, verticals where they have only had limited success. For example, federal government markets often take many years to develop.
You need government relationships, security clearances, GSA published pricing and access to specific programs. Instead of starting from scratch, you can partner with companies with a successful history in the space and are already selling solutions into the Federal market, shaving years off your GTM strategy.
The same strategy can be applied for other specialized verticals such as finance and pharma that require significant resources, time, and vertical market expertise to enter.
OEM channels can enable companies to expand their user base exponentially. Appropriately executed an OEM channel can give a company outstanding credibility and massive market exposure in a short time frame.
The goal is to avoid a white-label deal and get some type of branding built into the combined solution, usually your company’s logo appearing somewhere in the user interface. The value gained from credibility and market exposure alone could be worth doing a deal at any price, especially for startups or smaller companies with limited visibility.
Expanded customer base
Developing OEM channels will expand a customer base quickly, thereby seeding the market for new sales opportunities. An expanded customer base can create direct or indirect upsell opportunities for supplemental. If your technology is being distributed through an OEM channel with limited functionality, your salespeople can reach out directly to the end-customers and offer supplemental technology.
For instance, a company that provides natural language query NLQ functionality through OEM channels could then offer the end-customers an added feature of voice-activated NLQ. This could be an upsell across your OEM partner’s entire user base, either directly or indirectly, depending on your GTM strategy.
Even if you don’t have a supplemental offering, the fact that the end-customers are already an indirect customer puts your company in a favorable position to sell them a new solution.
Another example might be a company that sells AI technology to identify fraud in internal accounting systems could then offer the end-customers the ability to extend those capabilities outside their internal account systems to other parts of their business.
When a smaller company is licensing OEM software of high value to a larger company, the smaller company can often become an acquisition target. The chances of such offers can be increased by structuring a deal that provides limits to the larger company that can be overcome through acquisition. This could be limiting the distribution to a specific set of customers or providing limited access to customization and integration capabilities.
The OEM contract creates a working relationship between the companies on many different levels, and the technology is validated and valued by the larger company. This creates a fertile environment for the larger company to think about the potential gains of acquiring the OEM.
Some of the benefits are as follows:
- Competitive differentiator by keeping the OEM software out of the hands of competitors
- Ability to further develop the OEM software to meet new needs and requirements
- Talent and expertise acquisition of the OEM to create a new Center of Excellence (COE)
- Have tighter control over the OEM software, making it easier to support and do custom deployments
- Eliminate royalty payments and obtain higher margins on their overall solution
Implementing an OEM go-to-market (GTM) strategy
Once your company has assessed the market potential, validated demand, and has decided to move forward with developing OEM channels, here are some ideas and strategies to consider.
Target market identification
OEM sales require an extremely targeted strategy. You need to determine precisely (1) what named companies you are targeting and (2) what unique and compelling value proposition you will present to each one. Your value proposition should first and foremost lead from a business standpoint, supported by the technology that will enable the business outcome.
Here are some initial questions that should be thought through when developing your go-to-market strategy:
- Which software verticals will gain the most value from your software?
- What value gap are you going to fill or enhance with your technology in those verticals?
- How are you going to these companies to increase their revenue and market share?
- Which companies will realize the most significant benefits of filling this gap in their solution?
- What personas within your target customers will be most receptive to your value proposition?
- What joint GTM strategy options are you going to lead with?
- Why should they buy vs. build?
Here is an example GTM analysis that answers the above questions:
Your company sells an end-to-end BI platform that has four distinct categories of functionality:
- Data connectors to enable access
- Data normalization for preparation
- Data analytics to support analysis
- Data visualization for presentation and interpretation
Based on your market analysis, you determine that many software applications have primitive data visualization and can benefit by licensing your visualization capabilities. You decouple your data visualization technology and productize it as a solution optimized for easy integration that can be sold through an OEM channel.
- Process data analytics (PDA) companies are identified as promising targets because they have large revenue streams and lack sophisticated data visualization capabilities.
- Ten PDA companies that make up 75% of the market and are highly competitive are prioritized as the top targets.
- The value proposition is that your data visualization will provide a high-value competitive differentiator, and by licensing your technology, they will win more deals and increase revenue.
- The GMs and product managers are the people at the PDA companies that will benefit the most by embedding your data visualization into their solution; hence you will target those personas.
- Your solution can get them to market with superior data visualization within three months. The quicker they get to market, the faster they will see an increase in won deals.
The above GTM analysis will be done for each promising vertical you identify – the low-hanging fruit. The results of your GTM analysis will then guide your marketing and sales strategy for each vertical.
Dedicated sales team
Your OEM target list will go through an extreme qualification process since many variables need to be in place to identify key OEM targets. The total amount of potential OEM customers will be significantly smaller than your potential end-customers’ total amount.
Therefore, OEM sales teams are usually smaller and more specialized than sales teams focused on end-customers. Sales Professionals who focus on OEM have the needed experience and skills to put together complex deals at the executive level.
The ability to manage teams, both internally and externally, is essential. Although the volume of sales is smaller, the deals themselves are significantly larger. A successful OEM channel can account for a large percentage of a company’s revenue.
In building an OEM channel, there can be internal competition between your direct sales force and your OEM sales force because end-customers can also be potential OEM customers. It is paramount to create alignment between direct sales and your OEM sales force and foster teamwork.
The goal is to leverage your direct sales team’s relationships with the prospective OEM client and the expertise your OEM sales force has in structuring and closing OEM deals. One organizational method is to have OEM overlays work with the direct sales force and diffuse conflict by expanding the commission for opportunities that involve two sales professionals – thereby promoting teamwork.
Normally, a 10% commission is paid on deals. With a 2X compensation structure, both the direct and OEM reps get a 10% commission. With a 1.5X structure, each sales representative gets paid 7.5% – or one gets paid 5%, and the other gets paid 10%. There are many ways to structure OEM overlays and incentivize cooperation between sales teams. The key is to have all sales professionals aligned to achieve the same goal without any internal friction.
OEM sales cycle
Sales cycles for an OEM are usually long; six to 12 months is not atypical. Understanding some of the reasons why these sales cycles are long will help you deploy tactics to help accelerate the sales cycle.
Compared with direct to end-customer deals, OEM contracts:
- Have larger financial commitments by the licensee, meaning the decision process can be slow
- Are dependent upon product release schedules for implementation and start dates
- Require core development resources from the licensee, which is always in short supply
- Touch a lot more divisions, so it takes time to get them all aligned and create consensus
- Often need the approval from multiple C-level executives
- Are more complicated from a legal perspective, and the contracting process can get bogged down
All the above can be addressed through a well-thought out strategy, deploying the right tactics at the right time, and working on multiple threads in parallel.
Here are some quick tips for accelerating deal cycles:
- Start with a target product release date and work backward to create urgency.
- Require a development contract to be in place before any development starts to initiate legal.
- Commit your company’s engineering resources to expedite integration efforts.
- Build relationships with all the involved people and divisions early on in the process so you can move things along in parallel as opposed to sequentially.
- Start as high as possible in the organization, so the people you are working with have a clear directive from above.
- Do not wait for introductions; reach out, multi-thread, and engage with as many people as possible.
- Start commencing legal and INFOSEC reviews ASAP.
As you are working with your target OEM partner, intermediate steps may sometimes be needed to create trust, illustrate demand, and build value if your partner is not ready to make a commitment. The goal is to deploy these tactics in parallel as you work towards a larger OEM deal. Of course you want to avoid any intermediary steps that may delay a sales cycle.
However, intermediate business arrangement strategies should be considered as a backup plan if a straight to OEM deal is simply not an option.
Direct customer relationship
Having joint customers with your target OEM is a great way to show demand for your solution and create credibility. This proves the value you provide to your OEM’s customer and serves as a platform for discussions. The more joint customers you have, the easier the OEM sell will be. If you do not have joint customers, the next best thing is to have customers who fit your potential OEM partner’s customer profiles.
If the OEM target customer sees the value of combining your technology within their solution but is not ready to make an upfront financial commitment – an intermediate step could be to partner and co-sell with the company. Such a relationship may require some integration work on both sides, a step in the right direction.
In this scenario, the software license is directly between you and their end-customers and is not on your partner’s contract. This could create some friction in the sales cycle for both the sales representative and the end-customer, but it is a way to get some joint wins under your belt and foster relationships with your OEM target customer.
For example, a text analytics company has the technology to identify patterns in text to flag potential security risks. A communications platform company has seen some demand from its customers for this functionality but is not ready to invest in bringing this functionality to its customer base.
In this situation, the text analytics company could co-sell with the communication platform and license its technology directly to its end-customers. Once there are a couple of successful deployments or greater end-customer demand is proven, the co-sell relationship can move to a more strategic OEM relationship.
This is a deeper relationship with your OEM target customer than a co-selling. Now your partner’s salespeople are actively selling your solution, and the end-user is licensing your software on your partner’s paper. This creates a lot less friction with both the partner’s sales team and the end-customers. Compared with co-selling, you will be able to get your solution in front of many more end-customers, resulting in more sales and more joint value proof points.
These intermediary steps can be successful business relationships in their own right. Still, they can also be leveraged to create the needed relationships, credibility, and customer wins to enable a broader and more strategic OEM deal.
OEM sales strategy
The value of an OEM deal is sold simultaneously on two levels, business and technical. Purely technical requirements can drive the need for an OEM technology, but the business case is usually the key driver. For a deal to move forward, the potential OEM partner needs to see demand for your technology by its end-customers and have a clear picture of how embedding your technology will increase their revenue, competitive advantage, and ability to win new customers.
To enable smooth and efficient OEM sales processes, you should have the OEM specific support systems in place and anticipate the potential concerns of your OEM target customers.
Technical support for an OEM is quite different from support for a direct customer. It is more challenging because you are supporting your partner so they can support their customers; you are a step away from the end-user. Separate and OEM centric documentation, software development kits (SDK), and support systems need to be in place to make it as easy as possible for your partner to deploy and support their end-customers.
OEM partners need the ability to customize and deploy in different environments. Robust SDKs and flexible APIs are critical for successful evaluations and proof of concepts (POC).
There can be potential channel conflict between your sales team and the OEM partner’s sales team. If you anticipate that the OEM partner will have concerns about channel conflict, you should have a plan to alleviate these concerns by your OEM partner, so your potential OEM partner knows you have a plan to make them successful.
One of the first questions by your prospect will be; What is the cost? This is a difficult question to answer in the first conversation because there are so many unknown variables that will directly affect cost. The standard response is always; it depends. But this answer can cause distrust early on in the sales cycle because your counterpart will think you are not transparent.
Therefore, it’s a good idea to have an answer at the ready that does not put you at a disadvantage for future discussions. A potential response can be to provide your end-user pricing and explain that you will adapt your pricing to work with your partner’s pricing model and offer the appropriate discounts based upon scale.
OEM marketing materials
It is essential to have high-quality, OEM specific marketing materials to compliment your end-user marketing materials. This creates credibility that your company is focused on OEM and set up to support OEM channels from both a technical and business perspective.
Selling to multiple divisions
Enterprise software sales direct to end-users can be challenging because many buyer personas need to come together to make decisions.
OEM software sales is even more complex, with even more buyer personas coming from very different perspectives that all have unique and specific concerns and needs. All these players will need to come together to facilitate a successful outcome. The need to adapt your value proposition to these different personas in parallel is a crucial skill required in putting together OEM deals. Well-honed empathy and listening skills enable successful sales professionals to truly understand what will motivate each persona to support a successful outcome.
Managing the OEM partner through a step-by-step sales plan is needed to orchestrate successful outcomes. The multiple teams on the partner side need to meet at the right times and need to be prepped in advance with clear next steps action items, to keep deals moving forward most efficiently.
The most important decision-makers will be focused on ROI and how your technology will positively affect P&L. They need bottom line quantifiable numbers.
They will be focused on engineering resource optimization and creating a joint solution that will be well received by their customers, peers, and executive team.
Will be concerned with all the technical aspects around integration and performance. They are looking for technical elegance, flexibility, avoiding risk, and maintaining full control of their technology stack.
Sales Leaders: They have a laser focus on how to increase value to their customers, beat the competition, and close more business in the fastest time possible. Sales leaders will support and aggressively lobby internally for a partnership they can leverage to win more deals.
Customer Success: The team that is in constant touch with its customers will be focused on reliability, ease of support, and how to keep their end-customers happy. Often compensated on renewals and upsells, new functionality that supports these goals will be well received.
Marketing: Always looking for new value angles on how to position their products in the market. Marketing is in a constant war to differentiate from the competition and come up with creative ways to expand market awareness. Although not in a key decision-making role, marketing is often forward-looking and can play a role in moving the deal forward.
Business Development: This can sometimes be a tricky team to deal with, depending on how they are compensated. You need to understand how their success is measured to ensure that the BD team goals are realized.
e.g., Suppose business development is compensated on sales influenced by partners. In that case, it may not be in their best interest to move the partnership to an OEM deal because the partnership structure changes.
Procurement: This team needs to win in the negotiation, squeeze you on price, and feel that they got the best deal possible. Always have your concessions thought through well in advance and teed up, so you are ready to provide the concessions they need to move the agreement to legal.
Legal: Their key focus is to alleviate risk, and the fact that their company is shipping and relying on your software will make them extra cautious. An OEM specific contract is needed to address the unique needs of an OEM agreement. Always a good idea to have a few “red herrings,” clauses in the contract that you are OK with modifying, sprinkled in the contract even if you know they will usually be a point of concern by legal.
Criteria for success
Specific conditions need to be in place for successful OEM outcomes. It is worth doing a review because the process of creating these conditions will need to be addressed in your OEM sales playbook.
- Market demand: Demand for the joint solution by the OEM partner’s customers need to be proven and tangible. Without proven end-customer demand, the OEM will not make a financial commitment.
- Positive ROI: Quantifiable ROI for the investment will need to be estimated and agreed upon by both parties. This will be a cornerstone of the pricing negotiation.
- Product management alignment: The product management leaders must champion a vision for the joint solution. They will be the key to get the needed engineering resources allocated to the initiative.
- Sales alignment: The support of sales leaders is essential since they will validate the estimated sales projections and guide the determination of how much “add value” the OEM technology will provide to their sales process.
- Technical alignment: All the business conditions may be in place, but without the needed engineering resources and cooperation, a deal will never happen. Creating trust and technical credibility with engineering is paramount.
- Cultural alignment: This is an unquantifiable and nuanced but an essential aspect to nurture. Every company has certain types of culture, and having compatible cultures contributes to a partnership’s success.
- Executive alignment: OEM deals need executive sponsorship and approval. Make sure to use executive bridging between your companies and develop your executive sponsors as early on in the sales cycle as possible.
These partnerships are involved, so trust and transparency between partners is paramount. Creating all the conditions leading to successful outcomes is a real team effort by the selling company. The strategy needs to be proactively managed, well-coordinated and skillfully executed to achieve success. A well-designed OEM partnership can provide significant upside for both the licensor and the licensee.