* The Business of Software

A former community discussing the business of software, from the smallest shareware operation to Microsoft. A part of Joel on Software.

We're closed, folks!


» Business of Software FAQ
» The Business of Software Conference (held every fall, usually in Boston)
» Forum guidelines (Please read before posting!)


Andy Brice
Successful Software

Doug Nebeker ("Doug")

Jonathan Matthews
Creator of DeepTrawl, CloudTrawl, and LeapDoc

Nicholas Hebb
BreezeTree Software

Bob Walsh
host, Startup Success Podcast author of The Web Startup Success Guide and Micro-ISV: From Vision To Reality

Patrick McKenzie
Bingo Card Creator

Sacking distributor for conflict of interest


A company who has been distributing our product as an add-on for their accounting product for more than 15 years (lets call them BigCorp) announced suddenly that they are adding features to replace some of ours.  They say it will take 2 years. I said WTF initially but said fair enough, that was the risk we took (even though they repeatedly gave assurances to us and other resellers that we were their solution in that area). 

They then made an offer to merge with us. This would have been good for them, had we agreed because they kept telling their other resellers how close our relationship was so not to worry.  The reality was that we added a great deal of value to their offering. In many cases our product got new sales for them.

Anyway the merger offer was a joke. They were effectively trying to offer us jobs for a small amount of equity. I told them to get lost as I would rather take my product elsewhere than be part of their dysfunctional machine. 

Anyway, in the meantime, We have added a new cloud based product range which does some great stuff and also integrates with their main product. But because they have indicated their intentions, I have said that I no longer want them distributing the product (and taking 20%) in the process. This means no access to the new product.

We have said we are emailing the resellers and end users and telling them that if they want access to the new product then they need to place orders direct with us.  We have previewed the product at trade shows and the users and dealers really want it.

Well the fallout has been huge and BigCorp are saying that an announcement like this will damage both of us.  We have started contacting a few resellers to run things past them and they seem pretty cool with it. But then one of them contacted BigCorp asking what was going on?  Were we breaking up?  BigCorp CEO sends me a nasty email wanting me to keep the status quo.

Sorry for the long post, but my question is:

Am I playing this right? I want to sack BigCorp as distributor. We stop paying them 20%. We also make it clear to their users and dealers that they are screwing us but we need to look after our interests.

Actually there are many nuances to this story but I am trying to keep it brief. Happy to add details as required. And thanks in advance.

BTW, This is the same company from my previous post:

Richard J Send private email
Sunday, October 12, 2014
You are playing it right. This is a very hard game for a shy tech guy sort of person to play, but you understand what is going on and you're doing what gives you the best chance at this point. Your partner has shown their long term plan is to take you out of the picture and colonize your market. This is bad for you. Having tipped their hand, you now have to treat them as a competitor and play hard ball. The least you can do is pull their ability to make money off your product directly and reduce their access to  your tech knowledge that they are poaching to build their own clone. This may or may not work, but it's a lot better than doing nothing.
Scott Send private email
Sunday, October 12, 2014
I would also make sure to get those friendly contacts as soon as possible, because I guarantee this guy has your customers on the phone right now and is trying to undermine you.

Also, you need to ramp up new releases with amazing features, and be sure to make very clear to the market, through press releases, white papers, etc, how far ahead of their clone your superior market leading product is.
Scott Send private email
Sunday, October 12, 2014
I'm not sure I understand this?

Previously this company was going to buy your software, including the source code, adding it's functions to their main product, and you were going to maintain your part of it for 6 months.

Now you're upset because they are doing exactly what they said they were going to do?

Did you not complete the previous sale they offered you? Why not?

I have to agree with them that sending emails accusing them of screwing you is damaging to both of you. End users really don't care where their software comes from, who coded it, or anything of that nature; they just want it to work as a tool for them. Telling your customers that you and the other company they have bought from are fighting between yourselves does nothing but place your product under the heading of "maybe not such a good idea for the long term"

Most software products or websites, if you can sell them at all, go for around 6 months to 24 months earnings, with 12 months the default. You previously said they offered you 4 years earnings? If that offer is still on the table grab it with both hands and have a happier life.

I'm still unclear how you intend to fire them as a distributor when they no longer need your product and have their own version? Why would anyone buy yours now?

Reluctantlyregistered Send private email
Monday, October 13, 2014
@scott, Thanks for your input. Glad to hear someone thinks we are doing the right thing.

In the meantime, the nasty emails continue.  The CEO has said that he does not want to give us back our margin as it is "significant" and he thinks that they deserve to keep it because they contributed to generating it.  If they give it up they want some compensation for it (it is monthly subscription where they bill and collect).

We have contacted our lawyer to see what they think.  My opinion is that at the time we agreed to give 20% because they were going to promote us as their exclusive solution. They even gave public assurances to us and their other resellers that we were it. That is, some resellers complained about having to install a 3rd party product and BigCorp said "get over it, that's the way it is".

In the meantime, we think we have a safe market and them one day BigCorp says "we are doing our own thing".  I think that is rounds to end the deal. 

The other complication is that the 20% margin is based on monthly subscription. If we wanted to force them out, we would need to go direct to the end-users and get them signing up with us.  The good news is the software times out, so we could simply let it expire and only reactivate if they signed up with us.  I don;t see the user complaining because we could give them a 5% discount or some free software / support.
Richard J Send private email
Monday, October 13, 2014
@AC It's complicated. We have more than 1 product. BigCorp wanted product "B" (which we did sell) but not product A (our original product because they are going to do their own thing and take our business eventually).  In the meantime we built new product C (but yet to start selling it).

We've known BigCorp for a long time.  We bought their product to use internally. It sucked in a lot of places, so we built add-ons to improve it and fill gaps.  We decided to resell their product and with our add-ons became known to their other resellers.  BigCorp referred resellers to us and we sold the add-ons and gave the reseller a margin.  These add-ons are product "A" which is our original and flagship product.

We always expected that BigCorp would eventually fill the gaps and product "A" would have a short shelf-life. In truth it was written as a stop gap and simply used to get sales of BigCorp's product and consulting and programming revenue for us.  But then BigCorp approached us to distribute the product. The understanding was we would not take our product to another market (ie. just integrate with them) and that they would promote us as their exclusive solution.

Product "A" kept getting better and better. We added features that made BigCorp's product look good.  One of these features was so good that BigCorp wanted it integrated under the hood of their product and branded using their name.  This is product "B" and the subject of the previous thread.  We knew that product "B"would cannibalise product "A" to some extent but we were happy with BigCorp's assurances that we would get more volume.

And that did happen. Sales got bigger an bigger. We were happy. Then BigCorp announce to us that they are adding their own features to replace product "A". But lets merge and everything will be happy.  The merge proposition was a joke and they bullied us by saying that not only would they cannibalise product "A" by adding their own features, that they would also write their own product "B". We threatened legal action on "B" because we entered into the arrangement given certain assurances.  They acquiesced and the sale went through.

Prior to the sale of "B", I said that we would need to change our agreement for "A" given that they were going to cannibalise that as well (by the way I offered to sell them "A" but they rejected it).

Sorry for long post @AC.  In the meantime product "C" is generating lots of excitement amongst resellers and end-users. we don't have an agreement with BigCorp on this.
Richard J Send private email
Monday, October 13, 2014
@AC, I also forgot to clarify that we did not send them a nasty email to begin with.  They sent us a nasty email.  We asked that we terminate the distribution agreement for product "A" 6 months ago.  This was prior to the sale of product "B" and many months after the failed merger and s whopping 16 months after they first told us their plans to add features which would impact our product "A".  So I would say we have been patient and exhausted all avenues.

But they kept delaying and delaying in addressing the distribution agreement.  At some point (while negotiating product "B" sale) they even agreed verbally to let us keeping our 20% (possibly because they thought they would convince us that there would be other opportunities) but since retracted after the sale of "B" (but several people were at the meeting).

But we are just about to release product "C" so this is our chance to finally force their hand.  We want to tell resellers to place orders directly with us if they want "C".  So I sent BigCorp an email saying we are about to tell resellers to place orders directly with us for "C" and "A" (as we are bundling).  I heard nothing for 2 weeks. I resent the email saying we are sending out the email to resellers the next day so unless I hear from them I will need to act.

And that was when they finally responded and got angry.  Yes, I agree that this could harm us both, but as @scott says what choice have we got?  Do we wait until they have their replacement done?
Richard J Send private email
Monday, October 13, 2014
Thanks for the clarification.

OK, on the whole I'd say you are indeed playing it right - but I still question the need to tell customers you're being screwed by BigCorp?

OK, let me give you a silly example. I use  a'Save to 2 places' add-on for Microsoft Word. It's a real life-saver.

Suppose I got an email from the people who make that, saying that Microsoft have screwed them, so if I want the newer, shiny version I should buy their new word processor, instead of Microsoft Word?

Even if I DO believe that Microsoft welched on a deal with this little company, how does that make me want to buy their product? Especially if they just told me that Microsoft are going to include that function in the newer, shinier version of Word?

In contrast, suppose I got a happy, celebratory email saying the little company was branching out in the word processing field, in fact they're launching their own word processor! Wow!

From the death cries of some little short-lived player being crushed by BigCorp, to some dynamic, growing company full of promise - see the difference?

Put simply, there's no upside to bad-mouthing BigCorp, it just drives home how small you are. Instead approach it as BigCorp were the launching pad below you... See how high you are now?

Hope that helps,

Reluctantlyregistered Send private email
Tuesday, October 14, 2014
@AC, thanks for that.  It is good to hear that others think we are doing the right thing.  I really liked your story about the word processor add-on.

OK everyone, how does this approach sound...

STEP 1: We allow BigCorp to continue billing existing end-users for product "A" (as always) but they start passing 100% back to us (instead of 80%) as usual for a period of 6 months or so.  We continue to pay our resellers 30% as usual but keep 70% (instead of 50%).  The result is that we get our 20% back, users are oblivious and there is a happy and united front during this "hidden" transition period.

STEP 2: We announce product "C" is available as a new shiny and separate thing (even though it works seamlessly and requires product "A").  Because it is new we can price it how we want and control the billing right from the start.

STEP 3: (The tricky part) In conjunction with BigCorp we move billing over to us in the most natural way possible.  For example, if start bundling "A" and "C" then it is natural for customer to move over to us.

STEP 4: We keep improving product "A" adding as many premium features as possible.

STEP 5: Eventually, BigCorp announce their new features but reassure customers that relationship with us is still healthy and product "A" is still the preferred premium solution (they don't want customers to move to a competitor either)

To be honest, I think that our product will still have a place in Bigcorp market (premium), but we will definitely go backwards. 

I have to also look for other markets which is frankly quite daunting and draining.

As always I really appreciate your advice.
Richard J Send private email
Tuesday, October 14, 2014

This topic is archived. No further replies will be accepted.

Other recent topics Other recent topics
Powered by FogBugz