ChannelTrends: Has Margin Been Put Out to Pasture?

Just a few short years ago when I was chief editor at a channel publication, almost every conversation included numerous references to the amount of margin a product or service could drive. It didn’t matter if I was interviewing a solution provider, vendor or distributor; that one word typically dominated the conversations. Margin was frequently part of the headline and featured in many manufacturers’ promotional information—it was truly the “buzz” word of the day.


Has the transition of the channel from a hardware+services focus to a recurring revenue model made it possible to retire the term? After all, the center of attention for most solution providers has shifted from margins on products to solutions for specific clients. That’s not to say profitability should be ignored, but the discussion has moved “behind the firewall”, inside the business as part of an overall portfolio strategy. Over time, without a sufficient cash reserve, organizations may not be able to meet their financial obligations or fund their growth obligations. It takes money to make money.


Recurring Revenue
The best replacement for the term “margin” in the IT channel vernacular would be “recurring revenue,” principally due to the importance it plays in the value of a solution provider’s business. Managed services contracts and cloud service portfolios not only offer a steady monthly income level for VARs and MSPs, but increase the market price of their companies. When they can demonstrate steady growth (or retention) in recurring revenue, prospective buyers are likely to boost the amount they’ll pay for the business when the owner decides to retire or just “cash out”.


The public discussion around cloud and managed services software doesn’t focus on margin, although I’m sure it’s in the back of many solution providers’ minds. If an offering is unique and fills an important need for their clients, a fair profit will typically be derived through discussions with the vendor. Though there are exceptions, cloud suppliers and managed services software companies want a win-win-win relationship with their channel partners and their clients. If each company isn’t making a fair profit, the imbalance will likely shorten the duration of the business alliance. Margin isn’t a predominant part of the discussion anymore. For unique offerings, it’s more a matter of how much you COULD charge for them (within reason). The margin dialogue for these services has basically been “marginalized”.


Complementary Services Drive Revenue
MSPs do not derive a significant portion of their profit from basic products and services, but from the advanced monitoring and proactive management of their clients’ systems. Their revenue also gets a boost from the less conventional things they do for their clients. In a recent column in Business Solutions magazine, Gennifer Biggs recants her discussions with “IT solutions providers that started out in the IT consulting business, but then discovered that deep pools of revenue lurked behind those in-depth assessments and recommendation reports.” Charging clients and prospects for network or print management audits is not only profitable, but is commonplace these days.

IT service companies (despite the reluctance of some to acknowledge it) are valued business consultants. Why wouldn’t you expect to receive fair compensation for your time, training and efforts? Again, “margin” doesn’t factor into these service discussions, but several companies have indicated this part of their portfolio can be quite profitable—and it allows them to help their clients’ reap the rewards as well.

Portfolio Profitability
“The whole is greater than the sum of its parts.” That old adage perfectly describes the new IT channel era, as solutions take on a much greater role in driving growth and revenue. While the product/service margin discussion has diminished, overall portfolio profitability has become a more important part of MSP and VAR business plans. When solution providers can support more of their clients’ needs, it diminishes the need for customers to bring in a competitor to fill any voids.


This approach gives solution providers an opportunity to deepen their client engagements. Cloud services provide a great example of this opportunity, as Larry Walsh shared in a Channelnomics post this week. In the same manner as managed services, virtual solution delivery gives solution providers more options to meet the needs of a larger variety of clients. When you broaden the areas of your expertise, it increases your engagement opportunities, which can lead to greater revenue potential.


Five years ago, I could name several solution providers who wouldn’t work with a vendor if they couldn’t get 20-percent margin on every product or service. That limit no longer exists. They may have realized that it was better to make 10 percent on a unique security offering that kept their clients loyal than to allow a competitive company to get a foothold in the account. After all, once a rival gets in, the risk of losing some (or all) of your business can increase exponentially. Rather than lose an account that drives a 40-percent managed services profit, adding a cloud offering that brings a lower up front yield may secure the business. When you consider the recurring revenue that virtual service can bring you in subsequent years, it becomes much more palatable.


Brian Sherman is founder of Tech Success Communications, specializing in editorial content and consulting for the IT channel. His previous roles include chief editor at Business Solutions magazine and industry alliances director with . Contact Brian at [email protected].