Move up to recurring revenue: How VARs can increase profit margins

Making a good living as a product-centric value-added reseller (VAR) can be hard. According to Gartner, now is the time for value-added resellers (VARs) to add managed services to move up to recurring revenue, create a more predictable growth path, and get a more competitive advantage. In fact, according to Gartner, as many as 40% could be squeezed out of business by the razor-thin margins they’re forced to compete for. 

The good news: adding a managed services practice to your business offers a way out and up from this challenge and a positive move towards more revenue, a more predictable growth path, and more competitive advantages.  

I invite you to seriously consider adding managed services to your business. Here’s what you need to know to get started: 

Move up to more: The benefits of monthly recurring revenue 

Offering managed services involves ongoing, proactive monitoring and management of customers’ IT environments, resulting in several stable monthly recurring revenue (MRR) streams that can support their companies for years to come.  

When you look at the numbers (especially for more traditional VARs), making this move adds up to big rewards. A reseller with a mix of 90% hardware and 10% services often sees only a 6% profit margin, potentially even lower. In comparison, it’s reasonable for a managed services provider (MSP) to expect a 15% profit margin.  

Another benefit of an MSP business model is the opportunity to foster stronger working relationships with clients due to the long-term nature of their engagements. A product-centric VAR model is structured for single transactions, but 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. 

And the great news?  

There’s never been a better time to make this move and connect with bigger, better opportunities because the sector is projected to grow its value to $354 billion by 2026. 

4 reasons for VARs to consider adding managed services 

Let’s take a closer look at what’s attracting more and more people like you into this space: 

1. Customers need managed services support

From the shock of the pandemic to an ongoing IT skills shortage and the growth of hybrid IT,  enterprise customers are challenged by multiple pressures, which means their appetite for external support is likely to get bigger. This fact is reflected in the figures, with 60% of organisations confirming that their challenges are becoming more demanding, leading them to seek help. Plus, 70% say that they see MSPs as the source of that help. Encouragingly, enterprises already working in this way report a 43% IT budget savings, proving the value (Markets and Markets). 

2. Tech stacks are becoming increasingly complex

Over recent months we’ve all lived through the excitement surrounding generative AI. Yet AI and machine learning are only one of many technologies that have increased within the enterprise tech stack during the last decade. Automated, cloud-native data analytics and blockchain technologies are all becoming more ingrained into corporate culture, adding great opportunity but increasing complexity for enterprises. By offering a managed service, you can simplify that complexity by simultaneously supplying the latest technologies and taking away the burden of managing them. And MSPs are thriving off it! As just one example, 7 out of 10 resellers working in this way have benefited directly from recent trends in cloud computing (CompTIA). 

3. You’ll become a natural authority on innovation

By the nature of their business, most MSPs continually evaluate the latest and most innovative tech. In fact, a recent Channel Program poll found 57% of these resellers said they are constantly re-evaluating the tech in their stack, and 81% said they re-evaluate every six months or less. That’s a tremendous competitive advantage, and you can capitalise on it by positioning yourself with customers as an authority on innovation that delivers the best time- and money-saving. You’ve done the work, so they don’t have to! 

4. You become a natural brand champion for vendors

Vendors also recognise (and reward) the value your technical expertise delivers when you provide a managed service. As you review and recommend their solutions, you can become an ambassador for their brands, and that opens up the potential for another business boost! 

Your move to managed services! 

Of course, there will be VARs reading this that have particularly strong sales cultures and high- performing teams, continuing to be competitive and successful even when faced with tightening margins. But even for these outliers, I would say it’s worthwhile to at least consider a move into managed services as an additional, recurring source of revenues and a gateway to stronger customer relationships. After all, things change in business, and it’s always great to have options! 

And for those VARs feeling the squeeze from those tighter margins, looking at moving into managed services can provide a positive and profitable way forward. 

Wherever you currently find yourself in that range of possibilities, it’s your move. 

You don’t have to make a radical break with your current business. You can make a natural move towards adding more for your customers in the shape of managed services, and you certainly don’t need to make that move alone.  

Download our free eBook, “VAR’s Guide to Recurring Revenue,” or get in touch to discuss a transformative and collaborative partnership with ConnectWise.