VAR vs MSP: Which is the right direction for your business?
Many value-added resellers (VARs) are now finding themselves on the precipice of change. Increasing competition, everything in IT as a Service, the growing prevalence of freemium software, and a quickened rate of technological innovation are signals of a changing landscape for VARs.
One response many VARs have taken to increase profits and business stability is pivoting to the managed service provider (MSP) model. This decision offers greater stability due to MSPs’ recurring revenue services. Ongoing monitoring and full, hands-on management of customers’ IT environments give the MSP business model this advantage.
Let’s explore the potential benefits of transitioning to the MSP business model and offer further perspective for VARs making this decision.
The benefits of VAR and MSP business models
While a VAR provides products that customers can often find elsewhere, adding managed services to your offering can help increase your value proposition to your customers.
With more sales and marketing experience than other technical organizations, VARs are often well-positioned to succeed on a recurring revenue business model. Understanding the importance of efficient processes and proactive communication helps VARs transition to the MSP model.
When compared to the VAR business model, the 6 key benefits of an MSP include:
- Enhanced sales and customer satisfaction
- Increased profit margins
- Predictable revenue streams
- Greater value to customers
- More financial stability
- Expanded product offerings
Taking advantage of these benefits will require that current VARs looking to make the transition are diligent in their planning and proactive sales. Organizations in this position can set themselves up for success before making the full switch, and may never fully switch.
Revenue models of VARs vs. MSPs
Both VARs and MSPs stay in business by helping their clients find, customize and maintain their software. The key difference between these two models is their approach to doing so.
The VAR model focuses on the discovery and onboarding process of new hardware and software. VAR companies receive discounts on SaaS products, and provide recommendations and customization options and management to their clients. Some VARs also establish maintenance agreements, giving them the benefit of monthly recurring revenue (MRR.)
The recurring revenue is the biggest differentiator between the financial positions of VARs and MSPs. While VARs typically work on a project-by-project basis, the MSP model secures greater financial stability by building lasting contractual relationships with their clients.
MSPs are able to do this by acting as the SaaS frontline over the long term for their clients. By managing the use and security of their clients’ software, hardware and operations, they become vital to their partners’ success. Since most MSPs mostly work on a subscription basis, they are able to benefit from the aforementioned predictable, stable income streams.
This is the main appeal for many VAR companies who are exploring the transition to the MSP model.
How a VAR can begin the transition to an MSP business model
It’s advisable to seek out interest from current clients in a monthly recurring revenue (MRR) agreement before making the switch to the MSP model.
Every business decision is a matter of weighing costs and benefits, and transitioning to an MSP model will require upfront investments. Transitioning from the transactional VAR model to an ongoing agreement under the MSP model will require new soft skills from your team, as building customer relationships and delivering recurring services consistently will be key.
Choosing the right MSP tools and services to support this new initiative can ease the transition. Seek out partnerships that can provide professional guidance with a variable cost model as you stabilize your new business, and rely on the expertise these teams can offer in order to scale up. You do not have to pay for everything up front to get your MSP business started!
Getting started under the MSP business model
There are a few simple things you can invest your time and resources in to fortify your chances for success under this new structure. For anyone just getting started as an MSP, a solid understanding of the profit, loss, and overhead investments required are essential to realistic planning.
Proactively seek out training opportunities for yourself and your team. Create a baseline of current MSP KPIs for your business, so that you can better contextualize the change you see as the business model matures.
Additionally, standardizing processes and pricing models right from the beginning will offer greater efficiency down the line. Get a solid understanding of what your MSP specializes in, so that you can succeed by doing what you truly do best.
While the VAR business model strives to provide project-based solutions to customers, the MSP model is all about building ongoing relationships with the benefit of MRR. Organizations interested in making the transition to the MSP model can partner with ConnectWise to establish reliable, manageable software, leverage the expert services and standards from the start.