If you’ve worked in B2B software for any amount of time, chances are you’ve crossed paths with the IT channel. The reseller channel is extremely important in B2B tech, both for end-users, many of whom buy 100% of their technology through a reseller, and for software companies, some of whom sell exclusively through the channel.
And, like almost everything else in technology, the channel is changing. Fast.
The IT Channel: Managed Service Providers vs. Value-Added Resellers
As consultants to our portfolio companies, many of whom sell partly or entirely through the channel, OpenView Labs has spent a lot of time speaking to resellers of all shapes and sizes to understand (among other things) the services they offer, why they offer them, and their value proposition to end-customers.
One thing we’ve found in our research is that the historical distinction between the two major classes of resellers, Managed Service Providers (MSPs) and Value-Added Resellers (VARs), has blurred with the advent of cloud and SaaS technology. In this blog, I’ll outline the difference — as we see it — between the two groups. This knowledge will allow you to (a) focus on the group that makes the most sense for your business model, and (b) approach them in a way that fits their way of doing things.
Ultimately, the goal is to build a symbiotic relationship, and that starts with understanding how they operate.
I’ll impart this knowledge by through a series of questions:
What is a managed service provider?
A managed service provider (or MSP) is a company that operates and maintains your technology for you for a period of time in exchange for a reoccurring fee.
They typically offer a range of services such as network maintenance, hardware repair, help-desk, email management, and anything else that requires a day-to-day administrator to keep running. They may need to purchase technology from a third-party provider, a cost which is bundled with their services and passed on to their end customer.
What is a value-added reseller?
A value-added reseller offers third party software and hardware to the end user at a markup, along with some combination of procurement consulting, configuration, and customization services.
They generate revenues through a combination of flat-rate fees per license, and billable hours, but their engagement is finite.
They sound pretty similar. What’s the difference?
The biggest single difference between VARs and MSPs is the term of their involvement with the end user. VARs generally operate on a transactional basis (per license or seat), or a short term contract of 6 months or so.
By contrast, MSPs operate on longer-term annual or multi-year contracts, and the tenure of their relationship is open-ended. They expect to stick around indefinitely.
In other words, VARs revolve around events, i.e. an implementation or migration, whereas MSPs provide services as a steady state.
Who do VARs and MSPs serve?
MSPs are often marketed to small businesses as their complete outsourced IT department. Some specialize in a specific industry, vendor, or software group, but most segment themselves geographically. There are some large MSPs, but most are relatively small — 20 employees or less.
VARs tend to serve larger organizations and are usually larger companies themselves. They’re also more specialized—usually by vendor or their customers’ industry.
How has the SaaS business model changed this landscape?
As many applications have migrated from a perpetual license model to SaaS, fewer and fewer are being sold in a single transactional. That means VARs have had to adapt to stay relevant for SaaS.
Some have done this by moving towards an MSP model and offering ongoing support for applications that they help implement. Others take a piece of the customer’s initial SaaS contract. Still others attempt to capture some of the customer’s lifetime value by receiving compensation on renewals as well. The exact model depends on the VAR, the software they’re selling, and their relative power at the negotiating table.
So should I sell my product through MSPs, VARs, or both?
The simple answer is that it depends on your software. Where can a service provider add the most value?
- If the product requires considerable up-front configuration or customization, you’re probably better suited for a VAR.
- If your product is a highly considered purchase with a long buying cycle — typical in core enterprise software — your customers are more likely to hire a VAR to help them purchase and implement it.
- SMBs don’t usually have extensive IT staffs, so if you’re targeting small businesses and your product requires any ongoing technical management, MSPs might be the better channel.
- If you have lots of end users and they’re non-technical, your customers may benefit from an ongoing support arrangement with an MSP.
- Installed applications with high availability requirements could benefit from 24/7 support provided by an MSP.
What value proposition will appeal to them?
MSPs and VARs have three common goals:
- Making their customers happy
- Generating revenues
- Keeping costs to a minimum
You’ll have to convince them your product will accomplish all three to establish a partnership.
Making their customers happy is fairly straightforward — you’ll have to sell them like you’d sell a customer. Resellers typically have close relationships with their customers, and are constantly polling them to learn about their unmet needs. If you can match your product to one of those end-customer needs, you’re likely to win yourself a partnership.
However, the deal still has to be economically viable for the reseller. MSPs are generally less transparent with their pricing, so they’ll have to be able to justify the cost of your product to their end customers. For VARs, it’s usually a more straightforward function of contract value. Additionally, a reseller will consider the services they can sell around your product.
Finally, choosing to be a reseller of your product is not free for the reseller.
The primary cost for an MSP is their technicians’ time. As your product’s de facto customer service department, the more seamlessly your product works for the end users, the cheaper it is for the MSP to maintain.
For VARs that cost is mostly the opportunity cost of selling another product. Every breath they spend selling your product is valuable time that they could be selling your competitors. If your competitor’s product is an easier sell or the economics are better, they’d prefer to keep it simple and recommend a single product.
Just like selling direct to end customers, selling through the IT channel requires an understanding of who they are, what they’re looking for in a partner, and how they make money. Before you approach a reseller, do your research about the specific services they offer and customers they serve.
What other questions do you have about engaging resellers? Have you had any successful experiences with them? Share your thoughts in the comments below.