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The VAR’s Path to Managed Services

VAR path to managed servicesThis blog by Axcient VP of Products Todd Scallan was originally published in The VAR Guy on April 13, 2012.

The cloud provides a natural, evolutionary path into managed services for IT resellers serving small and mid-sized businesses (SMBs). In particular, backup and disaster recovery is a great entrée into the cloud because it provides a predictable revenue stream, it offers higher margins than the traditional product sale, and there’s a growing need for SMBs’ data and application uptime.

Best of all, the cloud has a similar sales motion as that for IT products. In other words, think of the cloud as a product disguised as a service that can complement on-premise offerings.

The Cost of Downtime

In 2010, over 8.8 million servers were sold with more than half going to SMBs for business critical applications and data. In addition, 246 million laptops were sold, on which 60% of business data resides. Not surprisingly, SMB IT spending priorities are directed at data growth, especially on improving data protection and implementing a disaster recovery plan.

Now consider that IT downtime costs the average North American business more than $159,000 per year. This is attributable to lost revenue during downtime, the inability to comply with regulatory requirements, and customer defections due to brand damage. Most alarming is that 66% of businesses don’t have a business continuity or disaster recovery strategy in place to protect against this costly downtime.

An Evolutionary Transformation

The cloud model is predicated on monthly recurring revenue (MRR), which tends to offer much higher margins than the traditional product sale. It also provides a continual revenue stream that grows with each new customer. To illustrate, let’s compare $1,000 of new MRR with $100,000 of new hardware sales each month over a five year period.

The $100,000 of new hardware sales each month will lead to a cumulative revenue of $6 million after five years. That’s an average profit margin of 7 percent and a net profit of $420,000. But your ongoing annual revenue would be zero.

Now consider that $1,000 of new MRR. After five years, your cumulative revenue would total roughly $1.8 million. But your average profit margin would be 30 percent — far higher than your 7 percent profit margin from $100,000 in monthly hardware sales. Moreover, your net profit over that period would be $531,000, and your ongoing annual revenue would hit $750,000. View a chart of the above example on The Var Guy version of this article.

The addition of just $1,000 in new MRR every month yields more profit than the lower margin hardware sale of $100,000 per month. Moreover, if all selling stopped after the fifth year, the cloud would still provide an ongoing revenue stream. MSPmentor talks about this in a recent article, “How to Add $700,000 in Recurring Managed Services Revenue.”

Since the reseller channel will continue to be the preferred route for delivering IT solutions to the SMB, a cloud-based backup, business continuity, and disaster recovery solution enables the gradual addition of highly profitable MRR.

Ongoing Engagement

While the cloud has a similar sales motion as traditional IT products, there’s one fundamental difference: Managed services require the reseller to engage the customer on a regular basis as a trusted advisor. This means truly understanding the customer’s needs, recommending the level of service that’s most appropriate to meet those needs, and staying connected with the customer to identify when to dial services up or down to meet new needs. Examples include adjusting the amount of cloud storage for backups or granting access to additional data protection features.

Resellers should only move into managed services if they are committed to this shift in behavior. Doing so will ensure the customer remains committed to the reseller, which in turn will keep competitors at bay and uncover new selling opportunities.

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