A very simplistic approach to “OEM” negotiation

One of New Relic’s big advantages early on was the tight integration delivery of our product with our PaaS (Platform as a Service) partners.  We’d add our product to a customer’s app with a single button press through the partners’ platform.  Automatic account creation, license deliver, agent deployment, and Single Sign On integration rounded out the frictionless application of APM.  In seconds the customer had a New Relic working as part of the console they used to run their application.

The negotiation of these agreements wasn’t isn’t easy.  Many times the partner would ask for this level of tight integration with a SaaS product delivered in a way that removed the New Relic branding.  Yet they wouldn’t offer us money to do it (our standard integration described above is at no charge).

Getting both sides on the same page about how an OEM deal works is often a challenge.  I’ve found the following four quadrant chart invaluable to help set the stage for the negotiations with the partner and my own fellow executives.

Keep in mind, this is purposefully simplistic.  It’s designed to be a leaping off point for discussion in a negotiation where dollars vs. brand is a critical sticking point (it almost always is in OEM deals in my opinion).

Screenshot 11:24:13, 2:27 PM

The two axes are the trade-off.  The more money paid to the vendor, the less attribution (branding) can be expected.  So, if there is no brand visibility — white labeled — upper left of our chart — the vendor should expect to get a significant amount of money.  Why?

In this scenario, there is no brand awareness. In lieu of that, the vendor has achieved “maximum penetration” of the partner’s market with a minimum investment of time.

The opposite scenario is where New Relic made its living.  For New Relic, brand awareness was critical because there were ancillary benefits above and beyond penetration of a partner’s customer base.  In addition to strong usage of our product at our early partners, the word of mouth and credibility it created spread like wildfire, priming the pump for our direct marketing activities.  We gladly traded dollars for attribution.

A deal on our $$ vs Attribution chart will theoretically land on the diagonal representing the tradeoff between Revenue and Attribution.  New Relic usually negotiated for the lower right, and this often was the path of least resistance for the partner as well.

Keep in mind that usually you’ll monetize the market for the OEM much faster (instantly!) through a revenue focused OEM than you would selling into the same market with your direct sales team.  However, the ASP (Average Selling Price) per unit will likely be significantly lower than selling direct into that same market.  Ultimately it’s a tradeoff of Cost of  Sales vs Time.

For New Relic, our sales was so productive and efficient, it made sense to focus on Attribution — driving brand awareness — and convert free OEM customers to  paying customers at a significantly higher ASP.  Our freemium partner offer and well segmented product offering (driving upgrade activity) created broad usage and many leads for the sales team.  The revenue simply followed later as the sales team knocked down deal after deal.

 

 

 

 

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