How to stay profitable in the reseller business

For many small and medium-sized reseller businesses, expanding your line of business takes time and money, and it's important to know both your up-front capital expenses and ongoing costs so that you can calculate your return on investment (ROI). Here's some advice for becoming and staying profitable as a reseller.

For many small and medium-sized reseller businesses, calculating profitability can be a bit of a black art. Buying a product and selling it for margin is relatively simple, but with prices falling on hardware and software, more and more value-added resellers (VARs) are trying to get into more lucrative, services-based markets.

Expanding your line of services takes time and money, and it's important to know both your up-front capital expenses and ongoing costs so that you can calculate your return on investment (ROI). At first the equation looks pretty simple: Your margins are the price of the service minus your cost to provide it, from which you calculate how long it'll take you to make a profit.

But if you're creating a new line of service, and especially if you're transitioning to a service-based business from a straight reseller business, there are ways to lower both your capital investments and ongoing costs to make sure your new enterprise gets in the black as soon as possible. Here is some advice for becoming and staying profitable as a reseller.

Gauge market demand

Your reseller business's new venture won't earn you money if you can't find customers for it. Make sure there's enough demand from your customers, which of course means looking not just at what people are buying, but also at your competitive landscape.

To make cross-selling the new product or service easier, you should expand into an area that complements your existing portfolio, according to Mike Backers, CEO of Altoria Systems LLC in Cincinnati. This approach will maximize your investment because the old and new lines of business will help each other instead of struggling independently. Another way to choose the right area to expand into is by keeping in touch with existing customers to find out what they want, beyond what you're already providing. Then you can sell the new service to them instead of having to develop a separate client base, saving you sales and marketing costs and lowering the risk of developing a line of business that nobody wants to buy.

Know the difference between fixed and ongoing costs

One of the key concepts for selling services, and especially managed services that require hosting on your end, is the difference between capital and ongoing costs, labor in particular. Unlike the capital cost of hardware, which is easy to compute, ongoing costs of labor require planning and foresight. You need to be able to both contain your costs and accurately predict them so that you can set profitable prices.

Correctly estimate non-billable hours for each project

It's important to distinguish between billable and non-billable hours, according to Kurtis G. Kent, CEO and technology strategist at Kent Network Solutions in Dallas. Non-billable services include time spent getting feedback from the client as well as providing services above and beyond your obligations under your service-level agreement (SLA). Providing these extra services can be important for keeping your customers, but to be profitable, you have to factor them into your prices -- just as you would rent and utilities.

Use scheduling software to maximize staff allocation

Beyond non-billable overhead, there's another important labor-related consideration: staff allocation. Labor is often one of the biggest costs for a reseller business, so it's important to make sure your staff is used to its fullest, said Bruce Mills, president at Littleton, Mass.-based Inforonics LLC. It's worth investing in scheduling software and other automation tools so that you can more efficiently use your staff, he said.

To make sure his business is working efficiently, Kent uses customer relationship management (CRM) software to track which of his technicians is doing what with each customer. That lets him see, for instance, if low-level engineers are booked to the point that he has to send a senior engineer to do a break-fix job on a printer -- increasing costs for a task that's still going to be billed at the low-level-engineer rate.

Keep long-term pricing in mind when evaluating a project

If you're lucky enough to be the first reseller business in your area to provide a given service, you'll have the luxury of setting the bar for pricing, Backers said. But if you're not, you should take a look at the market and make sure it'll still be viable in the long term as prices drop, he said.

"There are many, many times when you can't set the price -- the market sets the price for you," Backers said. "That's where I think a lot of companies get into trouble, because they don't figure on cost of service. They figure on [the initial] cost of sales, and they don't figure that down the road, a particular product is going to deflate in price [they can charge]." That means you'll get less while still having to pay the same amount for the service labor, he said.

Be realistic about asset costs

It's also important not to underestimate the capital investment you'll have to make. If you're getting into hosted managed services, your network operations center (NOC) and the monitoring software licenses will be a substantial up-front cost. You'll also have to spend time and money training your staff. If this is the first time your reseller business is offering services on a recurring revenue basis, you should not underestimate the mental switch your technicians and sales staff will have to make; you may even need to replace some of them, if they can't make the transition to managed services.

Take advantage of existing assets

You can lower your capital investment costs by looking for opportunities to reuse investments you've already put into your reseller business. For instance, Inforonics had invested in a NOC for its managed services hosting arm and, in doing so, had to hire technicians to monitor the system, Mills said. Although he had to keep that staff in case of emergencies, most of the time they weren't being used. A few years ago, Mills decided to start a technical support business using that staff as a base, which has proven successful so far, he said.

Consider partnerships

If launching the new line of business will require huge capital investments you're not prepared to make yet, you should consider partnering with a vendor, or even another reseller business, Kent said. That's what Kent does when a customer needs Microsoft Great Plains consulting, for instance. When deciding whether that investment is worthwhile, be sure to factor in the price of borrowing money due to the time value of money (TVM).

TVM is the idea that a dollar today is worth more than a dollar in the future. There are several reasons why this makes sense, but the most important are inflation and interest on loans; both are factors in investing. If you invest a given amount in your new line of business, the cost to you will be significantly more than that initial amount in the long term. Since that's an additional cost, it's important to include it in your ROI calculations.

Making a buck

At the end of the day, of course, the goal is to turn a profit on your new reseller business line. Once you consider all of the costs and risks, the calculation itself is relatively simple, Backers said: Calculate how much money it'll take to start the business, calculate your expected profitability each month or quarter, and use those numbers to calculate how long it'll take for the business to make money.

Backers had one more piece of advice: If you're doing things right and adding good value to your customers' businesses, don't be afraid to charge them for it. "To be honest with you, we have gone through and on certain products raised prices, and the feedback we've gotten was, 'Wow, we were wondering when you were going to do that,'" he said. "If you add additional value and you create additional value, customers expect to pay more."

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