How to become a top value-added reseller (VAR) in 2021

Posted:
06/14/2021
| By:
Bob Gentzler

In the hypercompetitive, quickly changing world of modern tech, value-added resellers (VARs) must take a proactive approach to staying informed about industry trends and best practices in order to keep clients and continue growing. Pricing wars, the rise of freemium software, and competition from direct sales vendors are just a few of the challenges that VARs currently face.

How can savvy value-added resellers adapt and thrive in the current business landscape? 

Keep reading for fresh ideas, frameworks, and tactics you can use to become a top VAR in 2021 and beyond. 

Own your VAR niche

Many of the most prosperous resellers in the IT industry have found success by focusing on a niche (aka a vertical). By starting with specialization and then branching out (rather than going from a general approach to a specialty), your company can develop a strong reputation of excellence for the things that you do best. That will make it easier for you to win new business whenever you decide to add on new services and/or expand to adjacent areas. 

Your niche might be defined by:

  • client location
  • company size 
  • market segment
  • price range
  • other factors

As long as you can find a way to closely match your team’s skills and capabilities with the specific needs of a group of clients, you’ll be set up for success. You might even identify an emerging threat or opportunity in the SMB IT space and commit to being a ground-floor solution for a fast-growing class of potential clients. 

Embrace monthly recurring revenue (MRR) 

Whether you’re focused on increasing profits or achieving long-term business growth, adding a stream of monthly recurring revenue (MRR) is a dependable way to reduce the risks of relying on upfront sales to keep cash flow running

Selling your services on a monthly recurring basis vs. using one-time fees enables you to:

  • Build a more reliable and predictable revenue source. 
  • Define your ideal customer by focusing on long-term relationships. 
  • Sell additional products and services to your customers by upselling or cross-selling. 
  • Accurately determine the value of your business via more stable metrics.

If you’re thinking about spinning off or selling your VAR business, MRR can help, too. A company built on recurring revenue is more attractive to potential buyers. According to top M&A adviser Linda Rose, solution providers that reach 50 percent recurring revenue are more attractive to buyers.

If your company has yet to embrace recurring revenue, start by identifying clients that already pay for your services, but not on a monthly contract. To get them to commit, MSPs can offer incentives such as a discount if they enter an annual agreement instead of making intermittent purchases. Many SaaS businesses use this model to great effect, but there’s no reason it can’t work for VARs.

If MRR sounds right for your VAR, we’ve put together a guide to MRR  with more tips on ramping up your recurring revenue streams.

Get rid of inefficiencies 

Getting rid of inefficiencies may feel like basic advice, but managers are often shocked to learn what inefficient processes or time-wasting activities are lurking under the surface of a seemingly well-run operation. 

Research from IDC has shown that inefficiencies can cost companies between 20 and 30% of their revenue every year, and many of these costs go unnoticed.

Because your technicians’ efficiency is linked to your company’s profitability, focus first on optimizing and automating the processes that directly affect their work. Find ways to outsource or automate repetitive or routine tasks (e.g. patching, network scans, agent deployment) so that your employees can spend their time only on high-value activities that generate the most revenue. A professional services automation (PSA) solution can be a valuable tool in doing this. 

This same mindset should be applied to other departments as well.

For example, if your sales team is spending time updating spreadsheets for things like activity tracking, forecasting, and pipeline management, that’s an inefficient use of resources that can quickly become expensive. Additionally, using a sales and marketing CRM solution to streamline those processes will save time and likely increase conversions. This will allow your team to focus on what they do best—bringing in new business. 

Monitor your profitability KPIs 

There are thousand and thousands of metrics that your MSP business could be tracking as a value-added reseller. But in order to maintain profitability and promote growth, you should remain laser-focused on a carefully chosen set of key performance indicators (KPIs) that are most related to your bottom line. 

Here are a few KPIs that VARs often find useful:

Margin by service offering

VARs need to understand which services result in the highest margins, and which are loss leaders. A KPI to determine this is margin by service offering. This KPI reveals how much profit your business makes on each service, which empowers you to make strategic decisions about which services to provide, where to expand, and where to scale back.

Here’s how to determine margin by service offering:

( [Revenue – Cost of Service] / Revenue ) x 100 = Service Margin Percentage 

Effective rate by customer

We all know that certain customers eat up more hours than others—and the squeaky wheel often gets the grease. To properly allocate resources and maximize revenue, VARs need to understand which customers are profitable vs. which are draining resources. This is called the  effective rate by customer.

To calculate this KPI:

(Total Customer’s Services Revenue / Total Hours Dedicated) = Customer Effective Rate 

Margin by product offering

Similarly to margin by service offering, margin by product offering reveals which products are the most and least profitable. This KPI can help value-added resellers optimize their product strategy. 

Get your margin by product offering numbers with this math:

  • ( [Revenue – Cost of product] / Revenue) x 100 = Product Margin Percentage

There are numerous KPIs that VARs may want to track. Head over here for more information and formulas that will help you calculate your most important KPIs in 2021.

Evolve into a managed services provider (MSP) 

As pricing becomes increasingly competitive in the already low-margin environment of value-added reselling, many VARs are looking for ways to boost their bottom line. Enter the managed service provider (MSP). MSPs deliver ongoing, proactive monitoring and management of customers’ IT environments, resulting in a number of stable MRR streams that can support your company for years to come. 

When you look at the numbers (especially for more traditional VARs), making the switch to become an MSP just makes sense: A reseller with a mix of 90 percent hardware and 10 percent services is often looking at a 6 percent profit margin, potentially even lower. In comparison, it’s very reasonable for an MSP to expect a 15 percent profit margin. 

Another benefit of the MSP business model comes with the working relationships that MSPs are able to foster with clients due to the long-term nature of their engagements. Whereas a typical VAR model is structured for single interactions, MSPs have the unique opportunity to become a trusted IT advisor in the eyes of their clients. With more trust comes more customer loyalty and, ultimately, retention. 

Carve your own path toward VAR success

While some may have a glass-half-empty outlook on the value-added reselling space in 2021, the reality is that there are more options than ever to refine your strategy and grow profits. Adding on recurring revenue streams, taking back lost time through automation, and evolving your business model are just a few of the ways you can outplay the competition and stand out from the pack. 

Are you ready to choose your own adventure to reach your full potential? 

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