How to make a Fair Profit by being a Value Added Reseller and Open Book Pricing

“You’re making how much profit?!” the irate vendor salesperson seethed down the phone to the reseller salesperson, “I gave you 70% discount and you are making 15% profit! You should be thankful and make 5%!”

In this guide, we will discuss how to make or allow a fair profit, as well as “open book pricing”.

Thanks to E.S. for the question on Open Book Pricing.

The same situation from the perspective of the vendor salesperson:

“I am handing you an opportunity to break into a new customer, they are expecting you to make 5% profit on a 70% discount”.

This is a very hotly debated topic. If the customer perceives value, is happy and purchases, the vendor salesperson should be happy, and then disregard their knowledge of how much profit the reseller made.

HOWEVER, the vendor did throw the opportunity to the reseller, and the reseller should be mindful of that favour and not be perceived to be greedy, after all, the reseller may not have spent money on marketing to acquire the lead.

HOWEVER, the reseller may have invested heavily skilling up in the vendor’s technology, and thus needs to make a minimum profit in order to cover these costs, and intends to offer post-sale services and advice as their value.

HOWEVER, if the reseller is making too much profit, the vendor’s product is now perceived to be more expensive as the customer was expecting a price with 5% profit. Worst case scenario is that the customer does not purchase the product as it is too expensive.

And on and on and on…

The lesson here is that a “fair” profit is down to perspective and perceived value. In this story, the reseller has put in zero effort into acquiring the customer, but has a good enough relationship with the vendor to attract new leads — although one could argue that they would be wise enough to honour the suggested 5%.

Note: it is illegal in most countries for the vendor to dictate the reseller’s sell price to the customer, they can suggest, but not enforce. Thus as reseller, whilst it may be eye bleedingly obvious, your profit should be kept confidential.

So as reseller salesperson, how do you ensure your deals are profitable for your company but ensure perceived value?

And as a vendor salesperson, how do you ensure resellers to make a fair, honest profit?

Value Added Reseller — making a fair profit by adding value

The key here is “fair”, if the customer feels you are ripping them off you can expect angry phone calls, or if in the UK no calls at all. So how can a reseller become a “value added reseller” or “VAR”?

Well the main point is that you add value and not just cost (your profit) to the product. Value can mean many different things to different customers and is often as intangible as “customer satisfaction”.

Using your people to add value:

Pre-Sales or Solution Architects — utilise your in-house experts to help discover, design and define the solution requirements, and write a Scope of Works. Good Pre-Salespeople are worth their weight in gold, but their experience does vary massively. The difference between a “Subject Matter Expert” (SME) and a Pre-Salesperson is that the Pre-Salesperson can understand and articulate how the technology will integrate to the customer’s specific needs, and will have a wider knowledge of the product area and not just the vendor you are positioning. E.g. if discussing Data Center servers, the Pre-salesperson will not only know your product, but also have knowledge of Cisco, Dell, HP, Intel, Supermicro, NVidia, Huawei, and if truly skilled, understand cloud-based servers e.g. AWS, GCP and Azure. They add value as they can speak independently of the vendor you may wish to sell into the customer, which is crucial for building trust and credibility, e.g. if you only know Cisco, then when a customer speaks with you, the answer will always be Cisco! However, if your pre-salesperson is aware of the landscape, and can match your strategic requirements to a vendor objectively, the customer will receive a much better solution and you will earn their respect as a trusted advisor.

Internal Sales — utilise in-house resource to manage and track quotations, delivery of items, and hand-over to Post-sales. Internal salespeople’s roles vary massively between companies, however the role we are referring to manages and coordinates all of the paperwork behind the scenes, to ensure the commercial and legal admin is kept in check. They play an vital role of keeping all parts moving from sale to post-sale, ensuring that items are delivered correctly, and that the post-sales team(s) are aware of incoming customers. These team members are incredibly valuable for keeping a customer proactively updated throughout the sales/post-sales cycles and should always be rapid to respond to requests.

Post-Sales — these teams will vary depending on the solution or technology sold, and can include Professional Services, Managed Services, Adoption services and so on. Typically, the vendor will not have the scale to support all customers with these services and will look to skilled partners to provide these services to the customer. With margins squeezed on reselling vendor’s technologies, this is the main area where a reseller can generate profit and offer massive benefits to the customer in return.

Using a different approach to add value:

Ultimately your perceived value will depend on the customer’s tactical and strategic needs and how you approach fulfilling those needs. We have discussed a few examples of our experience below, the application to your business will depend on what services you can offer:

Examples of a customer’s tactical needs and how a Reseller (basic) and a VAR (advanced) can deliver them are:

The customer requires rapid delivery of a product to meet an urgent demand.

• Basic: You can utilise distribution that hold stock of the items the customer requires. This isn’t ideal as using a distributor may eat into your profits, and if different from your normal procurement route, it may cause headaches in tracking items for RMA.
• Advanced: You understand their project or monthly/quarterly run-rate thus can accurately forecast when they might need a product, and pre-order the items ready to dispatch on short notice.

The customer has budget left at the end of a financial period and would like to use it up.

• Basic: Offer them a discount based on a quick order of run-rate products. This isn’t ideal as you will be losing profit for a quick win. It may make the sales manager happy, but over the long term, the customer will learn to never spend until the end of financial period to get better pricing.
• Advanced: Offer them products or services that they can be invoiced in the period, but will generate future additional opportunities or make you stickier, e.g. a health-check of infrastructure to identify legacy configurations or code drift, product training, or extending a support period.

Examples of a customer’s strategic needs and how a Reseller (basic) and a VAR (advanced) can deliver them are:

The customer would like to secure long-term pricing for a project that will roll-out over 12 months

• Basic: Agree a pricing framework upfront for the full deal, divided into a delivery schedule. This is only ideal if the customer places an unconditional PO that you can call off over 12 months, or signs terms that they will purchase the full framework over 12 months. Very unlikely in our experience.
• Advanced: Agree a financing package enabling the customer to have access to all of the product from day 1, and extending a monthly payment plan over 24–36 months. Whilst it may sound complex, this is a common type of agreement similar to a mobile phone or broadband contract, where you pay for the initial cost over the term, and can ‘bolt-on’ or add additional features over the term of the contract and have the costs co-termed. Assuming the customer qualifies and would like an OpEx based spend, this methodology helps them better manage cash-flow and thus grow much faster.

The customer requires training to help them adopt the technology.

• Basic: Sell them a training package delivered by a 3rd party, e.g. vendor direct training. This is not necessarily ideal as 3rd party training is likely to be a standard out-of-the-box package with no customisation, is likely to be expensive already, let alone after adding the reseller’s own profit on top. Thus reselling 3rd party services should be treated like a product sale, and can only attract a modest profit e.g. 10–20% as opposed to 40%+ for using your own resources.
• Advanced: Deliver a training and adoption plan. This can include a layered training scheme tailored to the customer, and includes services such as: “hands-on workshop-style training sessions”, “train the trainer”, “resident engineer”, “adoption plan tracking”, or “quarterly adoption reviews”. All of these services can be wrapped together into a “training and adoption” package. This approach not only offers far greater upsell and thus profit (if using your own resource), but it ensures the customer is utilising their new technology investment fully, increasing customer satisfaction.

The experienced VAR salesperson blend all the above elements, which when combined give you the VAR’s “value proposition”, i.e. “these are the things we do differently”, or “this is our approach”. In simple terms, anyone can resell a widget, but what do you do on top of that that helps a customer use or adopt that widget and increase their satisfaction?

Vendors — ensuring Resellers are making a fair profit

It should be obvious that as a vendor, you want and need your resellers to make a fair profit on reselling your products. If resellers are enjoying making a profit, then they sell more of your product, and they can grow faster, and sell even more!

There is a fine balance between reseller profit, the vendor maturity, and the competition in the market. A fair profit is when the customer is satisfied with the service they have received from the VAR, and the easiest way to find out is to ask the customer directly!

The diagram above attempts to illustrate that as a vendor becomes more mature — (which at the same time leads to more competition in the market), the profit a reseller can expect to make from reselling that vendor reduces.

This can be seen when emerging vendors are looking to break into the market, they leverage resellers’ existing customers to close new business, but to do so, must entice resellers to take interest in their product. Side note: profit is not the only factor to gain mindshare with a reseller, but it is a major one.

As a product becomes more commoditised, i.e. lots of resellers and vendors are reselling the same type of product, e.g. laptops, in a free market economy, it is natural for profits and revenues to get squeezed as competition increases. The problem with low profitability is that VARs have higher costs of staff and services to deliver your product to the standard that you need and will then struggle to maintain the profit margin they require to survive, thus will look to other more profitable vendors. This leads to a lack of skilled VARs who can deliver your product without the need for the vendor to babysit them through the process, and only resellers with little or no skill in the vendor will be left. This is not good, as it means the vendor can no longer use VARs to support the scale of the customer base, ultimately leading to customer dissatisfaction, and loss of customers. Loss of revenue leads to poor product development and support, and everything then spirals downwards.

We have seen this exact cyclical process repeat itself time and time again.

So how do you ensure resellers maintain a profit when they sell your product?

Firstly, please read our guide on “What is Deal Reg?”, as this is a core concept that should be understood first.

Secondly protecting and promoting your leading VARs is important, as is removing reliance on VARs who make low profitability (low margin means they are less likely to be interested into reselling your product). A leading VAR that you should focus on can be identified by the following:

• They require little support to win new business. The best VARs require little or no support or interaction to close deals. This is because they have the sales, pre-sales and post-sales expertise to deliver your product without your help. This is MASSIVE. This factor alone ensures you can scale rapidly, not only because you don’t need to babysit the VAR, but because you can pass them new leads or unhappy customers and be confident they will close business. These VARs should be rewarded by ensuring they are making a good profit from your product, by yielding additional discount and protecting their existing customers, as these VARs will make your life much easier.
• Overall NEW revenue generated. We can’t stress “new” enough, a reseller might be bringing in large revenues, but if they aren’t adding new customers, you can’t grow. This also includes them introducing you to their other customers that don’t currently purchase your product.
• They have and maintain the highest accreditation in your product, and importantly they have a high accreditation per head ratio. I.e. they might be a top-tier partner with 5 experts in your product, but if they have 1000 salespeople or 0.5% trained, they are less likely to be focussed than a partner with 10 salespeople or 50% trained.
• They have a vendor specific business plan. Sounds simple, but if a VAR is serious about a vendor, they will have a business plan that centres on working together. This may only be appropriate for sales directors to be privy to, but you can always ask them if it is in place, and both parties are meeting the targets.

Promoting the VAR is then very simple, recommending them to customers who are looking for a reseller partner, or praising their services to the customer without the VAR being present.

Protecting an incumbent VAR is crucial to build trust with the VAR, however should a new competing reseller attempt to displace the incumbent, then ensure you (as a vendor salesperson) speak with the customer to understand what they want, do NOT blindly accept deal registration that could cause a political nightmare with the incumbent and customer.

Thirdly, the most common and under-appreciated tool is rebates. All major vendors provide quarterly or bi-annual rebates back to their resellers. A very simple concept, but when utilised effectively allows resellers to re-invest in additional services, training or regional expansion. HOWEVER, word of caution, some resellers utilise the rebates to provide a further discount to your product. This is not a practice that should be encouraged, as it reduces the overall profitability of other resellers, as it becomes a race to the cheapest price. As the profitability of your product disappears so do the VARs that you need to scale and deliver your product.

Finally, avoiding Open Book Pricing.

Open Book Pricing

Open Book Pricing is where a customer can see exactly how much profit a reseller is making. If anything we have discussed above has sunk in by now, you should appreciate that this is not beneficial for anyone in the long-term.

• Open Book Pricing is typically used when a customer demands that a reseller is making less than 5% profit on a vendor’s products.
• Low profit for the reseller leads to lower long-term investment in ancillary services to support the vendor’s product.
• Lower investment in services leads to lower customer satisfaction.
• Lower customer satisfaction leads to lower revenues
• And so on.

Outside the US, most customers will purchase in the local currency, i.e. not USD. Most US-based vendors sell to resellers in USD, this means that the reseller is effectively a currency exchange. In a low profit situation, a fluctuation in currency can further shrink the profit, or increase it, this represents a further risk to the reseller, who is already at a low profit margin.

Some customers and savvy procurement departments demand open book pricing. To combat this, vendors can offer increased rebates, or higher discounts/profitability on another customer.

There are some situations where a customer will purchase products using open book pricing, but will also procure services from the same VAR. This is a better outcome as it ensure that the VAR is profitable, and thus will service the customer better.

In short, as a vendor, the best strategy is to discourage the customer from going down the route of open book pricing, but instead, insist that the reseller shares their quotations with you, so that you can confirm to the customer that they are getting a “good” deal.

As a reseller, understanding the potential up-sell of services into Open Book customers is crucial. The product margin is often so low, that without a decent profit buffer from services your business is at huge risk of going bust.

In conclusion

Resellers — understand how you can add value to customers, what can you deliver to increase their satisfaction?

Vendors — empower your VARs, make them profit, and they will make your life easier.

Happy selling!