To the reseller: Make the right changes today for a more profitable tomorrow
Reselling is your comfort zone—it’s what you know inside and out. But it’s not providing the returns it once did. Increasing competition in hardware and software means you’re relying on margins that get thinner every day to keep your business profitable. Gartner has predicted that 40% of VARs will go out of business if they do not adopt a recurring revenue model. It’s time to evolve to save your business.
Disclaimer: We’re not advocating that VARs become MSPs. Just that adding services to your existing business has been proven to be significantly beneficial.
Paul Dippell, CEO of Service Leadership, Inc. , refers to this approach as being ‘services-led,’ meaning that you can remain a predominantly product-centric business. However, you shift to approaching the marketplace and the sales process with the service offering at the forefront of the discussion.
Get in the services game
The longer you stall, the more behind you become and your competitors just get further ahead, creating a snowball effect. Recurring services are becoming the norm, and sooner or later, your customers are going to look elsewhere if you’re not ready to meet this demand.
While change may seem scary, a brighter, more profitable future waits for you on the other side.
What if the change that you’re avoiding is the one that gives you wings to fly?
If the caterpillar doesn’t give in to change, it would never become a butterfly—time to spread your wings.
A revenue boost today
Adding services is the only way to get the margins and increased revenue you need to survive. According to the Service Leadership Index, managed services margins are 3x product-centric margins. Can you imagine 3x the bottom-line profit you have today?
Offering services yield this level of profitability because it differentiates you from the competition. Moving you from a transactional relationship to a value-added service-based relationship which creates traction, pricing power, and stickiness.
If you’re just selling products, the customer has a wide range of resellers to choose from and will probably go with the lowest price offered. Adding a services component provides something additional that is of value and not easily found elsewhere. Your customers will think twice before switching to a reseller offering a lower product price but no additional services.
A higher valuation for your business tomorrow
This sort of thing is happening to owners all the time. You spend so much of your time hand-holding your business just to keep things operational, with the idea in the back of your mind that one day you’ll be ready to sell your business and retire. One day you seriously start thinking about an exit plan, only to find out that your business isn’t worth nearly as much as you thought it would be.
Paul Dippell gives us a great example of how adding services can affect your valuation:
If 10 years ago you decided not to switch from a VAR to an MSP but to incorporate services in your product-centric firm, your valuation would’ve gone from $1.5 million to $16 million with a compound annual growth of 23%. That’s a 2% faster growth at stock value than an MSP.
In another example, let’s consider a $200 million product-centric firm:
Offering 10% services as a product-centric firm using best-in-class strategies could end with an approximate stock value at $69.8 million
Offering 30% services as a product-centric firm using best-in-class strategies could end with an approximate stock value at $90.7 million
Don’t forget to adjust your process accordingly
Just as you wouldn’t suddenly start selling a new product without doing your research, you don’t want to start offering managed services without a strategy. Being prepared will pay off in the long run and increase your chances of success.
I’ve heard all sorts of horror stories from other VARs who dove into trying to provide managed services before they were ready. The result is always the same. They find out that processes, such as billing, are way harder than they realized and that they don’t have the proper tools, and then their customers are unhappy.
What’s worse is that they decide to back out of the services practice when they realize it isn’t working, but still have to honor the contracts they signed, making their already inefficient processes even more difficult to work with.
Implement a system that not only helps you build out consistent processes for your company that can be taught to others but also gives you more efficiency, so you can stop sinking time into day-to-day activities and focus on the big picture decisions that will help your business grow.
While offering services might sound like a quick fix to all your revenue problems, it’s not how much service you sell; it’s how well you sell product and service together as a bundled deal. You have to develop a services strategy and lead with the customers’ needs in mind along with the relevant services.