is the acronym for Original Equipment Manufacturer. An O.E.M.
agreement is a way for a manufacturer to integrate a component
from another manufacturer into his equipment, and to sell
the complete equipment under his own brand. This concept was
originally used in the hardware industry (for example, for
monitor screens, network interface cards, etc.). It soon gained
a larger acceptance and is now also used for software components.
It essentially consists in re-branding a software product
from a vendor (we will call him vendor A) to be sold by another
vendor (we will call him vendor B) under his own brand—as
if vendor B developed the software. Most of the time, vendor
B will integrate the O.E.M. software into a larger set of
products—but this is not always the case. Usually, vendor
B offers products or solutions that complement vendor A's
product. Vendor B pays royalties to vendor A—either a percentage
of sales, or a fixed price per unit sold, with a minimum monthly
or quarterly amount.
So what are the advantages of an O.E.M. agreement, and why
would you want to choose this way of selling your software?
The O.E.M. model is a lot stronger than a classical distribution
agreement. Some vendors don't want to be seen as distributors
and this model gives them the opportunity to sell your software
under their brand. It usually requires a stronger commitment
from your partner, as there are some significant costs associated
with the re-branding (graphical interface changes, documentation
reformatting, marketing materials, etc.), and most O.E.M.
agreements include a minimum royalties amount, which motivates
your partner to sell the product. An O.E.M. agreement usually
means that your partner will ramp up his sales more quickly
and thus will generate more revenue for you than in a traditional
There is a major downside to the O.E.M. approach, however.
Since your product is not sold under your brand name, you
are not building brand awareness. This may be fine if you
decide you want to stick with the O.E.M. model exclusively,
and do not expect to sell your product directly. But if you
choose the O.E.M. model as a quick way to penetrate a market,
be aware that it can bring you an important revenue stream
quickly, but it won't help you when you start to build your
direct sales force.
Usually, the discount offered on software with an O.E.M. agreement
is higher than the one with a distribution agreement and can
reach 60 to 70% off the regular list price.