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If you’ve been around since the earlier days of the internet , a certain phrase may send shivers up your spine — “Roundtrip Revenue.” People went to jail at AOL for this, overstating revenue by as much as $1 billion that wasn’t really real. It was just matched against AOL purchases, making the revenues in essence nonexistent.
I was reminded of this the other day, just a smidge, when I got a marketing pitch from a SaaS company with a case study about one of their customers … who also happens to be a customer back.
These days, basically every SaaS company does the same thing. We are all buying from each other. Where it gets murkier is when one sale is tied to … buying their product back.
What I mean is tech companies tend to sell to other tech companies, especially in the beginning. And sometimes, there’s an ask back. The ask from the customer, the prospect, is to buy their product as well.
I generally said No when I was asked to buy a customer’s product back. First, I was worried that we often had multiple customers in the same vertical (e.g., we had Eloqua, Pardot, Marketo, Silverpop and more all as customers back in the day) and didn’t want to play favorites. Second, I wanted real sales. Having a customer pay just a few bucks for our product, not deploy … meant basically no renewal. Customers that buy but don’t deploy aren’t worth much if anything at all because they often don’t renew and certainly don’t create second-order revenue. And if a customer in a recurring revenue business doesn’t renew, it’s basically like you never had them as a customer at all. And third, I didn’t want to encourage any games and shenanigans in the sales team, and as a corollary of that, didn’t want to encourage “loss leader” deals where we made no net revenue AND had to pay a sales commission on top of that.
All good thoughts, and sort of right … but … when done right, roundtrip revenue in the early days can be a useful, if not epic, tool:
- First of all, especially if the CEOs or VPs of Marketing or whomever know each other … it makes for great joint marketing opportunities. You can each promote each other’s products and be a case study for each other. I know, it’s a bit insider-baseball. But a lot better than nothing.
- Second, if you can at least get deployed, it’s at least an opportunity to get in ahead of other competitors. Better you than them.
- Third, even if they are only partially buying because they want your product today, you can get unique access to these roundtrip customers. They’ll give you honest feedback, let you drive over and demo them stuff, and in general give you at least certain frank insights you just struggle to get from arms-length customers.
I’m not saying this should be a material amount of your revenue. But you’re not AOL, back in the day. It won’t matter in the long run if you buy a few of your customers’ products back. It will probably just end up a tiny percent of your revenues that aren’t truly 100% arms length. And disclose it to your investors, so they know, if it’s material. If it’s <= 10% in the early days — I say go for it. Pay the commission. Don’t overanalyze. And just make sure they deploy.
Something is better than nothing. And in SaaS, you want to build long-term relationships early in your 7-10 year journey. In whatever way you can in the early days.
[p.s. this is not accounting (or legal) advice! even if you can’t recognize some revenue, in the early days, the 1-2-3 benefits make it still worth it.]
note: an updated SaaStr Classic post
SEC roundtrip image from here. High Horse band logo from here.