Modern VARs face a challenging dilemma.
Increasingly, they are seeing competitors move into the space that offer the sales and services that VARs provide but don’t ask companies to foot the bill. The value-add that once was the bread and butter of the industry is now table stakes for many modern OEM technology companies.
In many cases, the services that made up the profit for VARs is now offered to end-user businesses for free by companies like Square and Toast.
This makes a tough sell when companies are weighing their options between a $50,000 hardware and software implementation deal versus free hardware offered against a recurring monthly service fee.
It’s hard to compete with free.
So, what is the value-add that VARs bring to the table in this modern era?
Certainly, companies still need help defining and selecting the right technology for their business. That work is becoming more and more important for small companies as well as enterprise players.
But, if that’s your only value proposition, it can be a challenge for firms to choose to work with a VAR rather than contracting directly with a technology maker.
Companies like Square have taken a big bite from the VAR market by offering hardware and software directly to merchants and other businesses.
Through new online channels, it’s easier than ever for companies to procure new technology, cutting resellers from the equation and drawing into question the long term viability of the value-added business model.
But there is a path forward.
According to research from Salesforce, more than 80% of business purchasers want a consumer-level customer experience. About 70% of business customers have switched vendors to pursue a better customer experience. Meanwhile, that same research found that less than 30% of B2B customers say that suppliers provide an excellent customer experience.
Clearly there is a gap in the market and this presents a massive opportunity for technology providers to shift their value to focus on the customer experience in the most holistic sense.
Customer experience is the killer app for VARs.
But it’s not as simple as beefing up traditional customer service operations or extended support hours.
In order to truly capitalize on the emergence of customer experience in B2B technology sales, VARs will need to transform their business model.
So what does this customer experience-first model look like for VARs?
As technology advances and we enter into the age of product support and technology ecosystems, the customer experience -- and the ability for companies to provide expert-level, proactive, and holistic service -- is at the center of what it means to add value.
At the heart of customer experience is, of course, value.
The concept that VARs should know well, but is currently in a state of flux. If the services that VARs have traditionally performed no longer seem to be providing the same amount of value for customers, then what other value can they offer?
Luckily, there’s an opportunity here, too.
Most notably, the emergence of IoT and connected devices have generated fresh demand for business technology users who need assistance in managing, monitoring, and integrating a range of disparate tools that operate within an integrated technology ecosystem.
Estimates from Vxchange forecasts that some 20 billion devices will be connected to the Internet of Things by 2020. Of those, about 40% of those devices comprise the tools and technology that businesses rely on to keep the doors open and serve their customers.
But, what’s even more compelling, is that as more devices become connected and “smart”, those technologies also increasingly communicate and connect with one another.
If the printer talks to the computer, which talks to the point-of-sale system, then vendors need help making sure that those systems operate and integrate as they’re supposed to.
That’s a nearly-infinite number of integrations and connections that need to be maintained.
VARs have a unique opportunity to serve as the fabric that holds together all of the technology, provides service and support, and partners with businesses as an expert in every possible configuration and integration.
The emergence of off-the-shelf connected devices and software means that fewer firms need hand holding during the procurement process or expensive and time-consuming integrations that require expert technology partners.
Instead, what they need most, is an assurance that all of the newfangled technology they now rely on to run their business will work at all hours of the day and night. And, more importantly, that it will work together as advertised.
This is the new reality of value and one that successful VARs will capture in order to grow.
The shifting landscape in business technology requires a recalibration for VARs.
In particular, it means that the core proposition of value-added reseller needs to be retooled to address the new needs and the changing reality for business technology buyers.
Sales are less likely to materialize as lump-sum technology procurement contracts. Instead, there will be pressure for VARs to become value-added partners, entering into long-term service contracts with buyers who need ongoing support for the increasingly complex technology products and the integrations that serve to their business and their own customers.
This means two things:
In this new model, where buyers come to depend on VARs for ongoing service, pro-active support, and integration expertise, the initial contract is likely to represent just a fraction of the value of each customer over the lifetime of their relationship.
But, more importantly, this means that the KPI for the entire VARs industry must shift.
The success of the firm now rests on the ability for the technology seller to maintain the relationship with each buyer over an extended period--to recoup any sunk costs associated with signing that customer and bringing them online.
Depending on the contract structure and monthly service fees, it could take months or years for VARs to earn the same revenue that they would have generated from a single project-based contract under the old model.
But the upside is enormous.
Given that VARs are able to deliver an exceptional customer experience that creates value for their business buyers, the ongoing need for technology services and support represents an enormous recurring revenue stream that can quickly and easily outpace earnings under the current operating model.
It’s easy enough to lay out the financial and market realities that are pushing VARs toward an experience-based and recurring revenue model.
But reality is not quite so simple.
The broader change for VARs is that as their value proposition evolves, so must their business model.
Rather than focusing on projects and bulk payments, the VARs model is evolving to be one that’s driven by subscriptions and the economics of the business are determined not by the size and complexity of contracts, but the length and profitability of the engagement.
In a subscription model, customer experience reigns supreme.
Businesses live and die by their ability to not just attract and close new business, but retain customers and recoup the upfront costs of acquiring, activating, and onboarding those customers.
This also means that the KPIs and unit economics look more like a SaaS business than a technology company’s balance sheet.
Profitability for recurring revenue companies is dictated by 3 core metrics:
These numbers work together to define the financial success of the firm.
For VARs, the lifetime value of each customer engagement is a simple calculation. It’s the value of each monthly service fee multiplied by the length of the engagement.
This means that customer experience -- and associated satisfaction and retention -- are absolutely critical to making the math work. Any given customer could represent $50,000 in lifetime value for the firm over the course of a year -- or $500,000 over the course of 10 years.
Churn, or what percentage of customers cancel their contract on average each month, is a direct measurement of the firm’s ability to retain customers. Lower churn means longer contracts, which means a higher lifetime value.
Finally, the CAC for each new contract is the baseline cost that must be recouped in order for the engagement to become profitable. For VARs, this likely represents a pro-rated portion of the BDR or AE’s time and energy. It may also include costs associated with the technology itself, setup, or activation.
In most models, the CAC represents several months of future revenue from that client.
This means that VARs must pay close attention to how much each customer costs to acquire and activate. But they also must understand the link between customer experience, retention, and attrition.
Recurring revenue is driven almost entirely by long-term customer retention. No firm can maintain profitability if their customers cancel contracts before they’re able to recoup the CAC that comes with closing each new deal.
There’s a clear message here for VARs.
As the VAR industry landscape shifts, technology sellers must rethink their business. Recurring revenue will reign supreme as the emerging model for businesses that bristle at hefty upfront cash outlays and change their focus to long-term service, support, and value.
This change also points to the rise of the customer experience as the defining value for every value-added reseller in 2020.