by Bruce Hadley, SoftwareCEO

 

Software developer and publisher Deerfield.com is pulling in $343,000 in revenue per employee, even though the Gaylord, Mich., company's sales have been flat since the recession sank the IT industry two years ago.

Even in the software big leagues, $343,000 per employee is phenomenal: Microsoft does $531,000 and Adobe does $421,000, but those are the exceptions. The average for mid-size to large public software companies is $160,258, according to the January 2003 Benchmark 50 report from Softletter.

For smaller ISVs like Deerfield, median revenue per employee barely breaks into six digits. When we last surveyed for this metric, in 1999, we got 75 responses from private software companies averaging $3 million in sales; among those entrepreneurs, revenue per employee was just $102,840.

So, how does little Deerfield manage to extract from each of its 35 employees revenue that's two to three times the industry norm?

CEO Mike Deerfield has four answers:

Revenue booster #1: Move your business to an electronic model.
"We only publish electronic software," Deerfield says. "Customers can purchase direct from us, and we have international distributors. We have none of the challenges of shipping software internationally — we pay no customs, no shipping costs."

The reliance on the Internet extends to communications, Deerfield says: "Some of our major relationships were forged using Internet technology. A good example is the WinGate software we publish: We found the guy who wrote it in New Zealand, and through e-mail and NetMeeting, we forged a whole relationship. We don't spend much on travel."

Founded in 1995, Deerfield.com grew at a 40% per year clip through 2000, reaching $15 million that year. Even though this year's projected sales are now scaled back to about $12 million, Deerfield says it would be worse with a conventional model: "The efficiency of the model has allowed us to survive, in many respects."

The same electronic focus extends to sales and marketing, Deerfield says. "We built our business on good SEO techniques, really good targeted e-mail campaigns with tracking, and a variety of link exchanges," he says. "We put all our effort into networking in that realm, as opposed to print ads and trade shows."

Much of the marketing campaign work is guerilla or grass roots: Deerfield.com uses listservs and Usenet to seek out individuals who have problems that could be solved with Deerfield.com software; account reps then work on them one-on-one to solve the problem and, hopefully, sell them software.

Revenue booster #2: Use resellers to extend your reach.
"We work with international partners who provide localization, an office, and staff," Deerfield says. "We have no offices outside the U.S.

"We don't feel like we're well-positioned to serve the European branch of a company like Hewlett-Packard. Time zones, language, local presence -- there are just too many obstacles there, and it's outside our core competency. We'd really rather work through a partner."

Despite this seemingly humble focus, Deerfield.com has done remarkably well in developing its reseller network: 50% of the company's current $12 million in revenue comes from these indirect, or channel sales partners.

Still, that $6 million in revenue could have been at least twice as big had Deerfield.com not shared it with resellers. Why not do it yourself, we asked? Why not set up your own offices, and keep all the money? "There's' a lot of risk with that," Deerfield says. "We see it as over-complicating our business, and increasing our risk in areas outside our expertise.

"If you want to trade in Europe, it really benefits you to trade with people who have long experience there. We're operating out of a small community in rural Michigan; it's not as attainable a goal for us to establish local offices overseas as it might be for a big Silicon Valley or Chicago firm."

To find its resellers, Deerfield.com relies heavily on the Internet. "We research them on the Internet," Deerfield says. "Most have come to us first, but we found some proactively. For example, when a reseller in Australia went out of business, we had to find another one, so we searched on Google. We contacted resellers that had worked for the former distributor, we found our candidate, and we had a signed agreement within 45 days."

Revenue booster #3: Let performance determine reseller discount rates.
At the distributor level, Deerfield.com discounts typically range from 40% to 60%; for resellers, the range is from 25% to 40%.

Initial payout ranges are negotiated on a case-by-case basis, Deerfield says. It can go as high as 90% if the distributor is doing business with very large multi-location organizations and has long-term contracts with them. E.g., the distributor "owns" H-P as a customer and is feeding thousand of copies to them over a two or three-year period.

But, let's be clear about this: No Deerfield.com reseller has a guaranteed discount rate; each works within the ranges cited above.

Rather than go with a flat fixed rate, Deerfield.com sets a new discount rate every six months. "It's an automatic evaluation process," Deerfield says. "The system rewards partners who order more from us. Every 180 days, your rate is set for past orders and the order you're now considering placing."

For example, let's say you haven't had much activity for the past 180 days, so your reseller discount rate has dropped to 25%. But, you now hold in your hand a huge order for Deerfield.com products. While that order alone wouldn't give you a better rate, that order plus your past 180 days' activity will.

Revenue booster #4: Set up a multi-level channel.
In the company's channel hierarchy, some resellers deal directly with Deerfield.com; this group contributes 30% of the company's total sales.

Other resellers are "owned" by a distributor. A distributor is outside the U.S., and provides regional value add — most typically localization, marketing, and support. Plus, the distributors are supporting a reseller network of their own. Together, this group kicks in 20% of Deerfield.com's revenue.

Distributors have tighter performance expectations, Deerfield says. Some have exclusivity for their geographic regions; a reseller never does.

"In almost every case, our distributors were originally resellers," says Deerfield. "They have demonstrated an ability to perform in their market. We have to get comfortable with them, and they have to get comfortable with us and our products. We actually have now an extension of distributors called Franchise Affiliates."

Which leads to...

Revenue booster #5: Set up reseller mirror sites.
"The new Franchise Affiliates — we have three, in Australia, Canada, and Benelux — Benelux actually trade as Deerfield.com," Deerfield says. "They put up a site that mirrors our site."

Thus, from an end-user perspective, it's a seamless transaction. "Most software companies have reseller locator link on their Web sites," Deerfield says. "You click on a map, and it takes you to a reseller, but when you click on the reseller's site and there's nothing there about the software company — it's a big disconnect.

"We decided to eliminate that disconnect. People buying electronic software expect to be able to buy online. When they click through to a Franchise Affiliate, they see a site that's very tightly integrated with our site."

There's a second reason for setting up separate sites, Deerfield says: In certain markets, the reseller may already be selling different software that's similar to yours, yet aimed at different markets. The mirror sites set up allow Deerfield.com to have an exclusive relationship with the Franchise Affiliate, without the competing presence of other companies' products.

The third reason these mirror sites have worked well: They build brand recognition for Deerfield.com. "You want to reinforce your brand every opportunity you get — especially if you're a smaller company selling to a larger company," Deerfield says.

Revenue booster #6: Manage channels at the highest level.
Most software reseller channels fall apart — or languish into nothingness — for lack of attention. At Deerfield.com the three C-level executives — CEO Deerfield plus his COO and CTO — manage the channel directly.

"Plus, our partners interact with half a dozen people here on a daily basis," Deerfield says. "You cannot over-communicate. We do schedule an annual conference where we all get together — it's usually in the U.S., though last year we did it in Europe — but the Internet is the primary mode of communication. It's not uncommon to have three to four e-mails a day from each of those people."

Given the size of Deerfield.com's channel, that's a large pile of e-mail: In addition to its three Franchise Affiliates, the company has nine distributors, 900 active resellers who buy directly from Deerfield.com, and another couple thousand resellers who get titles from distributors.

Revenue booster #7: Find products that fill market holes.
Without existing demand for your products, it's pretty hard — maybe impossible — to build a successful reseller channel. Still, Deerfield thinks products are more than half the battle.

"There's no question that great products will bring partners to you," he says, "but, of course, if they're great products, you'll already have customers and demand. I think 60% of the battle is the product itself, 40% is everything else. If you have a great product, you will succeed at some level."

Early entry played a big role in his company's success, Deerfield says: "When we started, we were very early entrants; WinGate was the very first proxy server, and now there are hundreds of them. Not only does it have to be great, it has to be timely.

"A lot of things have been done, and the current economy of technology hasn't been kind for the past couple of years. You have to take the BASF approach: 'We don't make things, we make them better.'

"Nowadays, we're not seeing a lot of new applications, we're seeing existing apps done much better — capitalizing on weakness of current and coming out with something that's better. In software, it's a lot easier to produce a really nice new product than it is to retrofit an older product to meet today's standards."

Where does he think the opportunities are? "There's definitely still some opportunity in groupware and collaboration, as well as security, antivirus, and anti-spam," Deerfield says.

"We're also becoming more interested in vertical titles. We've been strong in the infrastructure space, but our new apps are geared toward managing the leads and customer service requests that come in, and there are certain industries that are more interested in those than others. So, we will be more aggressive in approaching some developers in those areas."

Revenue booster #8: Let others develop titles for you.
Deerfield.com sells 14 different software titles, ranging in price from $50 to $5,000. Three of those were developed in-house.

Deerfield.com actively seeks out developers with great products in need of a sales channel, then negotiates OEM deals for distribution.

As with resellers, the price paid to developers ("authors," in Deerfield.com parlance) follows a range. "We developed a model we call CMVP, for 'constant margin variable pricing,'" Deerfield says.

"The challenge is this: A new author says, 'Make me a rock star.' Well, we know we're going to have give some away — to press, partners, etc. — and we know we're going to be talking to some end-users about volume discounts.

"Therefore, we need flexibility in the royalties; we don't want to have to call the author for permission every few days because one of our resellers needs to cut a better deal for a big sale."

In its OEM deals, Deerfield.com agrees with the software author on a percentage of revenue generated by the author's title. Then, both parties agree to a floor and ceiling for the selling price. For example, Deerfield said that one of his titles that lists for $300 has a floor of $80 and a ceiling of $350; anything outside that range must be discussed with the author in advance.

Why set a ceiling? "You can hurt yourself by overpricing a product," Deerfield says. "We could say, 'We're getting 40 support calls for every copy we sell, so let's raise the price' — but maybe the product needs to be fixed. The ceiling is a safeguard to prevent something ridiculous from happening."

Deerfield says that his CMVP model gives everyone the incentive to sell for their highest possible margin. "It 's a good model for everyone at the proper incentive," he says. "If we had to charge a fixed price, we'd potentially overcharge people because we have to make our margin."

Revenue booster #9: Don't demand exclusives.
Many of Deerfield.com's authors continue to sell on their own. "Over the past few years we've moved more to an OEM model, and away from an exclusive publishing model," Deerfield says.

"In the early days, we had exclusive worldwide publishing rights. We were the author's only vendor, and we offered products under the author's name. In the last couple of years we've moved to OEM agreements and the Deerfield brand."

Why the switch? "When you contract for technology, contracts eventually end," Deerfield says. "If the contract is not renewed, there's a loss of continuity for the title — which means all the work we've done in brand building for that title is lost. We wanted to ensure continuity for our products and our customers.

"Second, there are always problems in exclusive relationships. If there is money involved, the potential exists for both parties to think expectations are not being met. By offering them the freedom to trade under different channels, it relieves the anxiety that partners sometimes feel.

"I wouldn't say we'd never ask for an exclusive, but it isn't as important to us as it was. It's not going to stop us from moving forward with the product if the author has other channels or is trading under another brand."

Revenue booster #10: Find the price that works.
"Price is not an indication of value; it's more an indication of what the channels we use are willing to pay," Deerfield says. "We have years of knowing what the online threshold is for whipping out the credit card and buying software. We just know that if we price above $250, the volume really starts to drop off, and it becomes a completely different sales model."

Spending for the higher-priced products is down, Deerfield says, as people scrounge for value. His answer: stratify the product line.

"For all our titles, there's a low-cost version and an enterprise version," Deerfield says. "Our channel partners are interested in the high-end license, and our direct customers are interested in our low-cost licenses.

"If I'm shopping for the high end, I'm going to seek someone out to hold my hand — and channel partners have those relationships in place. The channel will be more likely to sell a 12-pack bundle, rather than a standalone.

"In the '90s, people threw money at you and you only had to be good at catching it; now you have to look closely at every lead, at every sale, and ask yourself why did we get that? We've spent a lot of time with customers asking them why they bought from us, analyzing where we need to go next."