How Partners Can Buck the Shrinking Margin TrendBy Howard M. Cohen | Print
COMMENTARY: As product margins continue to fall, the best strategy is to focus on services. You don't have to deliver them yourself, but they should be of good quality.
One of the things channel vendor reps do in their first meetings with new resellers is regale them with how great their product margins are. They know, and resellers know, and the vendor rep knows the reseller knows that the margin is only great when selling at list price, but the competition has already discounted every product heavily. It’s just one of those games we all feel the need to keep playing with each other.
Many resellers have long struggled to cope with how to fund product purchases until their customers pay for them. Many have ruined their credit trying.
One product procurement strategy that successful channel partners have employed has been to form partnerships with other resellers, usually considerably large ones with impeccable credit and extensive resources, to provide product to their customers when needed.
Some enjoy a commission on these transactions, but many do not. The reason is that they sell what they do.
The services they provide are their life’s blood and the source of the bulk of their profits. Most sell a combination of up-front services in the form of installation and implementation projects, followed by continuing support service programs that yield monthly recurring revenue, often for years.
These channel players have become well-known for what they do. Many specialize in particular services, frequently for particular vertical markets. By doing this, they often can insulate themselves from competition and command higher fees. They remain product-agnostic for the most part, so customers don’t see them as trying to promote a particular product that may not be the best possible solution.
They earn their customers’ trust.
What If a Partner Doesn't Do Any Services?
Please let us know how you’re surviving on product revenue alone.
On the other hand, let me offer a true story about a small channel partner that really only sold products. The company managed finances so well that it absolutely never used credit, so there was no pain there. However, the business had stopped growing as competitors started drifting in offering full end-to-end service.
How could the company compete? It became a very capable information technology general contractor (ITGC). Having family in the real estate business, company leaders knew that general contractors seldom, if ever, have carpenters, electricians, plumbers or other tradesmen on their own staff. They simply subcontract everything they need for each project as they come up. More than one construction GC has commented that they only need a desk and a phone.
This channel partner grew its business handsomely, increased profits significantly and created far closer, stronger relationships with their customers than ever before. The secret to its success was not to depend on product margins, which they agree are next to non-existent, but instead, to focus on selling what its service partners do, which carries far higher margins.
The partner also enjoyed an interesting side benefit. Many of the service partners it works with now source all of its customers’ product purchases through them. It's not a big contributor to their bottom line, but it does make them the darling of many manufacturers, software providers and distributors.
Business Model for the Cloud Age
This new business model (partnering to provide all needed services and solutions) is ideal in the age of the cloud. Enterprising sales professionals, combined with talent for managing projects, can deliver a full scope of services and products without ever investing a dime in infrastructure beyond an email account and a phone.
With products commoditizing with ever-increasing velocity, and margins already tissue-thin and getting thinner, perhaps the best strategy for survival is to focus on services, selling your customers what you can get done for them beyond the hardware and software they need to do it. Remember, the services you sell don’t have to be produced by you but need to be of the level of quality you yourself would deliver.
Howard M. Cohen is a 30-plus-year IT industry veteran who continues his commitment to the channel as a columnist and consultant.