Thanks to overall commoditization, increased competition, and the industry pricing itself to the bottom, product margins have evaporated. In many places, new powerful cloud solutions have replaced the need for on-premises infrastructure. What will things look like five years from now? We won’t see a shift back to product sales. Rather, the cloud will grow in power and popularity, and remain a relevant option.
In addition, many VARs have tied their fates to one or two vendors. They are essentially acting as sales agents for that vendor. What happens when that vendor goes out of business and your line card disappears? It’s time to build or strengthen your book of business with monthly recurring revenue (MRR).
The buying patterns of your customers have changed; in particular, as younger generations get more involved in running businesses, they want to consume technology differently. Today, we live in a subscription economy where many decision makers are used to paying monthly fees for services. As all industries look to control their costs, shifting traditional costly IT expenses to monthly payments is more manageable and appealing.
Additionally, as we’ll detail in a later section, many of the services you can provide under this model give your customers a higher-quality level of service and solution reliability than they currently experience. There is a peace of mind provided to customers under this model, as is shown in the survey results of over 500 IT Buyers views on buying technology.
Travis Phillips, CEO, NAC Technology Group
Traditional Hardware as a Service or HaaS calls for the Solution Provider to purchase the necessary hardware, software and licenses up front and then recoup the cost over the course of the HaaS agreement. Many times, this ends with the Solution Provider running out of cash to keep buying equipment. However, Solution Providers have found creative alternatives to get around this issue.
Some Solution Providers partner with a bank to enable them to purchase the inventory needed to rent to customers. However, they can run into issues with scaling if the bank places a cap and they still bear all the financial risk.
The Managed Service Provider pays the manufacturer directly on a monthly basis and then marks up the cost to rent it to customers. However, there are often other hardware and software elements left out of the monthly payment.
Leasing lowers the Solution Providers up-front costs and the finance company takes on any risk if your customer stops paying. There are some trade-offs, like the customer pays two separate invoices and there isn’t as much control on what happens at the end of the lease.
HaaR is similar to a traditional lease, where the Solution Provider is paid for the hardware, software and installation up front. They do not assume any of the financial risk. All payments the customer owes are rolled into one invoice and there is full control when the lease ends. Generally, the customer upgrades without significantly changing their monthly IT spending.
However, although there are plenty of MSPs (managed services providers) and born-in-the-cloud solutions providers who relentlessly pursue nothing but monthly recurring services revenue, it’s unrealistic to expect traditional Solution Providers to make such a drastic change to their organization.
As we’ll discuss, the changes are complex and require quite a bit of work. Additionally, unless you are flush with cash reserves, making such a dramatic change would create significant cash flow challenges for you. The most prudent approach for established VARs is to adopt a hybrid model to ease into offering recurring revenue-based solutions alongside traditional sales.
