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Strategic Alliances & OEM Agreements
When creating a product to fill the market needs, you have the option to build, buy (buy the product (like when Sony bought Vegas from Sonic Foundry), buy the company (Microsoft bought the company, Great Plains Software), or OEM the product (Dell OEM’s motherboards, video cards, Windows, etc. to create their product)), and/or form an alliance to fill a gap, or promote to the same target. Sometimes you need to do all three to have a “complete” product. For example, to build an advanced settop hardware system, you may buy the manufacturing rights to several chips, OEM the OS and network cards, and form an alliance to add additional features (on-line games), to help penetrate key accounts, and jointly promote the overall market category.
They key is to use whichever approach meets your budgetary, financial and strategic goals to most successfully deliver to the customer the complete product.
OEM stands for Original Equipment Manufacturer, although the usage sounds a little unusual when used in a sentence. You can “OEM your product” to other vendors (ATI sells Dell video cards for use in their PC’s), or you can OEM product from others (OEM a popular video codec to render Mpeg2 videos in your editing software).
Typically, OEM products are highly discounted within an OEM arrangement because of the potential high volume. For example, at a software company we OEM’ed our $99 3D software to Apple for $2.00 per machine. It doesn’t sound like much, but Apple purchased over one million copies per year. This amounted to two million dollars of profit (aside from the $1.00 for the CD-ROM and postage to deliver it (we also had no support costs, since the burden fell the Apple as part of the agreement and low cost). Assuming the company ran at a 40% pre-tax margin, the two million in profit would be equivalent to five million in sales.
Of course, there is always the debate over how much you would make in the same market if you were to sell them $99 copies. This is why some OEM products are either previous versions, or missing some key features–the vendors are hoping to further increase sales by upgrading their OEM accounts.
For additional OEM information I would highly recommend you visit Stromian Technologies’ OEM Licensing Site. This site contains the Stromian’s OEM Software Licensing Guide which explains the ins and outs of software OEM licensing deals. In addition, it also contains the Open Source Software Licensing Page which contains information about how to establish an open source agreement (i.e., Linux, etc.). The author also offers OEM consulting.
Watch the Chanimal video, “How to Create Killer Alliances & Dominate Your Market,” a webinar presentation. Learn the acid test for every alliance, the four legs you must have, when to setup an alliance, how to pick the best partners, how to prospect, what to cover in your meetings, how to multiple your sales force and channel partners, expectations and much more. 55 Minutes.
Great work! I am recommending to all of my counterparts. Thanks for sharing and I look forward to seeing information on future workshops from you! Great job!
Great content here. You bring many years of experience to the table.
After being 10+years in Alliances and Channels it’s the first time I have come across such a consice and well structured package.
I am always amazed to see how few companies use and maximize strategic alliances. I liken it to a tree (your product) in the middle of the plains. If a wind comes along (the customer becomes disillusions with your product), you must rely on your own roots to stay upright. On the other hand, if you plant your product into the account, and then help other interdependent trees around you, it is much harder to rip you out–since your roots are integrated within the other complimentary product.
Click here for a link to the job description of an alliance manager that also includes an alliance program start-up plan of action.
Chanimal Alliance Kit
I have probably five web pages of new content, but you can get it (until I get around to putting it on the web) if you download a copy of the Chanimal Alliance Kit (contains the PowerPoint, sample agreements, an alliance worksheet, sample meeting agendas–tons of stuff). Get it free if you register, or you can pay for it at the Chanimal Store. This is one of the most powerful Kits created–and folks have paid $299 just to attend the webinar session at SoftwareCEO where I first presented this! It may also be on YouTube.
One of the purposes for alliances is to help all parties make more money together. One approach to build alliances on the fly is to create affiliate program. This is a simple way to say that, “Yes, I pay for leads.” As someone sends you leads, and gets paid for their contribution, you have an automatic alliance. Some companies are “above” paying for referrals. These are the same companies that start to loose market share to those that do pay for referrals–since they are not leveraging potential alliances.
The master of the affiliate program is Amazon. Chanimal and tens of thousands of other sites link their recommended resources (books, tapes, videos, etc.) to Amazon. Amazon does the rest. Their site contains additional information, reviews, and even recommends similar products in the same category. I have alliances with several vendors who create products that I personally use and recommend (such as Marketing Plan Pro, WebTrends, PR Blaster, etc.).
The main difficulty with an affiliate program is administration and providing feedback to the lead providers (with e-mails and tracking). There are several types of affiliate programs and software that automates this process:
- Custom development. Some companies, like Palo Alto (makers of Marketing Plan Pro), have their own custom developed affiliate software. Unless your needs are highly specialized, I don’t recommend it now (perhaps in the earlier days). Especially since you can modify some of the CGI based affiliate programs to handle your special needs.
- Shopping cart based. Some shopping carts contain affiliate capabilities built-in. In this case, you way wish to try it first if you already own it–since you already paid for it.
- Network, commission based (such as Commission Junction). These networks are pre-built and optimized asp applications. However, some have an expensive setup fee ($2,500 plus), and most “own” the names (you do not own your affiliates–they do. You sign up “their” affiliates to recommend your product). For this reason alone, I do not prefer these type of affiliate programs. However, they have a massive network that can sign up on their own (you decide if you want automatic or manual admission).
- ASP hosted, monthly flat fee. These services host the affiliate software remotely, like the network affiliate programs. However, you own the names. They do charge a monthly fee, which can be expensive (up to $10k/month and more)–but may prove less than commission based once you have sufficient affiliates and sales/lead volume. Many of these also have a strong network to help jumpstart your efforts. One ASP product that has received good reviews to automate your efforts is My Affiliate Program.
- Software License, one time fee. There are several companies that offer CGI based software you can put on your own server. You own the names, plus you only pay for the cost of the software (and upgrades, if desired). This happens to be my preference when first starting an affiliate program, and when you are able to do your own recruiting. The editor’s choice application (via Wilson Web’s reports) is Ultimate Affiliate Software by groundbreak.com. I have set this up with three companies so far and it was very simple and straightforward–especially since it has a version that works with MySQL (which is included in most ISP hosting plans). You can also customize the interface. Plus, it is only $199.
Recommendation. I recommend using the Ultimate Affiliate Software on your site to capture all the leads you recruit. If you need a network, you can sign up for a network application and let it generate its own customers through its network–while you still link those you find to your own system – with Ultimate (why give up a commission percentage when you did the work). You can also entice the best affiliates away from the commission network to your own with higher margins–so you own the names of those that perform best.
Register to download the Chanimal Affiliate Kit. This contains complete templates, instructions, a PowerPoint, agreements–everything needed to setup your affiliate program from scratch. Or your can purchase it within the Chanimal Store.