By Pino Vallejo

Over the past 30 years, the North American VAR channel has succeeded in dominating the IT spend-scape. Creating a successful channel strategy became a prerequisite for success, and in many cases helped launch some of today’s most successful high tech companies like EMC, IBM, VMware and others. Resellers became an important part of the IT purchasing process, offering economic advantages by helping to increase scale, time to market and strong, long-term customer relationships.

The recent evolution of subscription pricing models, and now utility pricing, has significantly changed and challenged the VAR channel as it currently stands. While a services component to subscription-based pricing still exists, SaaS companies have yet to crack the code on integrating with channel partners, leaving many sales teams low on, and in some cases out of, commission.

In the past, resellers received a high margin on product sales (between 15 and 40 percent), with the same margin on year one maintenance plans. It was a simple net 30 process. Subscription-based services turned this notion upside down. While there is the services component, a typical first year deal is somewhere between 30 and 50 percent of the total for a perpetual deal, with maintenance included. To compound the issue, many companies pay the subscription on a monthly basis. This is a big cut for most VARs.

If, let’s say, a perpetual deal is $100K, then the year one subscription would be around $40K. Now, what if the customer decides not to take an incentive to pay upfront? Do they go monthly? The reseller would receive a check for only $3.3K for the first month. While it works long term, its lethal for a short-term cash flow. In an effort to keep their top talent, some resellers initially looked at a more favorable plan – paying reps upfront and simply carrying the cost of the cash. This was a band aid-like solution that quickly proved itself unsustainable.

Moreover, there are certain industries more vulnerable than others. Storage, for example, represents a significant piece of overall revenue for VARs. A quick peek at AWS’ revenue numbers and Azure’s momentum leads me to think the storage industry will be hit hard over the next three years. As companies like EMC and NetApp struggle to keep their data center footprint, the trickledown effect on VARs will be felt, especially by those that focused specifically on that industry.

What we’re likely to see is a significant amount of consolidation within the VAR industry. Those that rule the market today may not exist in their current form five years from now. Those that create a cloud-only team—such as CDW and SHI—have had much success within the market and have significantly increased their cloud services teams. That said, these are companies with the time and resources to rebrand and work on their cloud reselling strategy for the past five to eight years. For smaller VARs, it may not be as easy to pivot. 

We’re headed into a time where almost all industries will be disrupted by subscription-based pricing in one way or another—be it directly or a trickledown effect. All we can do is prepare. Rethink your current compensation plan, set a timeframe to close boxes and perpetual licenses, pay team members on monthly or quarterly accrual. Moreover, change the customer conversation to applications and not delivery.

There are ways to weather the storm, and there are ways to come out even stronger.

About the Author

John leads Velostrata’s worldwide direct and channel sales teams, leveraging more than 25 years of experience in a variety of sales leadership roles. Prior to joining Velostrata, John was Senior Vice President of Sales at MobileIron where he was responsible for driving the company’s global revenue growth from pre-revenue to a $150M annual run rate, culminating in a successful IPO in 2014. Prior to joining MobileIron, John was Vice President of Sales at Symantec. He joined Symantec as the result of the 2007 acquisition of Vontu, where he led worldwide sales and established the company as the top provider of enterprise data loss prevention (DLP) solutions, with more than a third of the Fortune 100 as customers. In his career, John has grown several start-up companies, including Talking Blocks, Kana Communications, Connectify, and NetGravity, from early-stage to public market or acquisition. He started his career in sales more than twenty-five years ago with Wang Laboratories and then Parametric Technology. John has a B.A. in History and Communications from Boston College.