Microsoft is a master at selling software through a partner channel. Unlike IBM they don’t have a large services division to push their product. So instead, Microsoft sells most of their software through partner ISVs (Independent Software Vendors).

Let me first explain what a Microsoft partner is. When you buy a PC, you never pay for the computer and Windows separately. Instead, you pay for the computer and then Dell (the partner) pays Microsoft for the operating system. The price of Windows is basically factored into the cost of the PC.

ISV partners are no different. They will basically develop an application using Microsoft technology and sell it as a single solution. Let’s say the partner decides to build a CRM that requires SQL Server and Windows Server. The partner packages this up into a complete solution and when they sell their CRM, Microsoft takes a cut for SQL and Windows Server. Essentially the partner is just a reseller of Microsoft products. This model has worked for many years when software was installed on premise.

However, the rules are different if you are a Microsoft partner who delivers software as a hosted (SaaS) solution. Today I attended a session for entrepreneurs who want to become a Microsoft partner. If you are thinking about using Microsoft technology to host your SaaS product, this is what you need to know.

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Jamie Wakean, from Microsoft Canada explains that you can’t just buy one license, create a web application and start charging for thousands of users. With an on premise application, each customer would have had to pay for a copy of the Microsoft product embedded in your solution. However with hosted software, your customer isn’t buying the Microsoft product even though they are using it. And essentially what happens is that you’ll end up charging millions of users to use your software even though you only have 1 license of Windows Server. For SaaS companies there is actually a Service Provider License Agreement. This means you will have pay Microsoft for each user that you host.

This is perhaps the most common misunderstanding for SaaS providers. Many think that a single user license allows unlimited use of the product. What ends up happening is that the partner does not include the Microsoft user fee in their price. So their subscription price is exceptionally low. Then the license police come knocking on the door and tells them, “You’re actually supposed to pay us $X for each user”. The partner replies, “Well we don’t even charge that much for each user”. You can imagine the kind of problems this causes.

SaaS vendors should make sure they don’t fall into this dilemma. Check that you are following the licensing agreement. There is even an anonymous user license for vendors who can’t accurately count the number of users they have (example: Ad-based Services).

For more details have a look at: http://partner.microsoft.com