Disclaimer: What I share with you in this article is not a secret, if you do your research you can find all of this information with the help of Google.
I’ve worked in the VAR (Value Added Reseller) business for over 6 years and I am still surprised at the number of IT people who I speak with who have no idea how purchasing works from behind the scenes. Hopefully by the time I’m done with this post you (the IT director / CIO / etc) will understand two things. 1. Have a better idea of how the process works behind the scenes so that expectations of quote delivery times etc are set. 2. How to leverage your power as the customer to not only get the best deal but also how to make sure you get to work with the people you want to work with.
First let me explain how I categorize customer organizations:
- Design it yourself, then look for the best price – These are typically the larger customers. They usually have a bunch of smart people on staff (typically in the normal IT silos) who are fully capable of designing infrastructure for whatever the project needs are. These customers sometimes buy directly from vendors, but occasionally purchase through VAR’s for products which are not sold direct.
- We have an idea of what we want, but need help to design and execute – Probably my favorite group to work with. This group usually has some smart people who are more generalized, they are the jack of all trades, but also know what their limits are and rely on a technical consulting company (that’s the Value Add in VAR btw) to help them with designing out what is needed to support their IT challenge. What makes this group awesome is that they are enthusiastic about technology and usually open to trying new things.
- Sounds great, make it work – This group is typically found at smaller shops. Typically the person in charge of IT might not be an IT person by trade and probably has little interest in technology outside of keeping it working so the business keeps running. There are pluses and minuses to being this group. The upside is that you probably have a much smaller investment in IT staff because you are leveraging managed services or cloud technology. But the downside is that you are probably better friends with your sales rep than some of the other friends you have. Don’t get me wrong, I’m not saying to not be friends with your rep (more on this later actually), but you may be leaving money on the table that you don’t need to if you don’t keep your eyes open. (what I’m getting at is if you do whatever they say and never double-check … you’re probably not getting the best technology or the best price)
I don’t point these out to make one sound better than another. All three have pro’s and con’s, the reason for pointing them out is so that you understand which ones have problems at which stages of the sales cycle. And hopefully you will be able to identify which one you are so you know when to be alert.
Next let’s talk about how a typical project evolves from start to finish.
- You (the customer) and your team determine there is a need for something
- Technical design to solve the problem takes place (either in-house or by a consultant/VAR)
- Quotes from one or more vendors (or resellers) are obtained
- You determine who and what you want to work with (a decision is made)
- PO is issued, gear arrives
- Someone installs it
- Problem solved
This is meant to be really high level because everyone’s process is different but generally that is what the process looks like.
Next let’s talk about how VAR’s survive, it’s pretty simple on the surface…
VAR’s have just a few ways to make money, they are:
- Professional services
- Sell Product (Keep Margin)
- Leverage special programs (provided by vendors)
The easiest to explain is professional services; in exchange for work done by a smart person employed at the VAR you pay the VAR money. You either pay an hourly fee or pay for an outcome, typically this is negotiated per project.
Next up is product. Vendors set a suggested retail price (MSRP) of what they believe each product is worth. However, to sell a higher quantity of a product, vendors partner with reseller organizations. This gives them a much larger sales force than what they could manage on their own. In return for selling a product, the VAR receives a discount from MSRP when they purchase the product, this is their cost. The difference between MSRP and Cost is margin. Margin is the second source of income for a VAR. Therefore in order for a customer to get a discount the VAR will give up some margin in order to get the deal.
The last source of income that I will talk about are special programs, which include rebates and deal registration to name just two. (I name just two because each vendor is different but these are the two most common.) Basically vendors have created incentives in order to get VAR’s to not only sell more but to also get them involved in forecasting exercises, in return the VAR gets a deeper discount on product.
So why do you care?
First lets take professional services out of the conversation, for the purposes of this article PS doesn’t really matter. We will lightly touch on it, but it isn’t meant to be a focus. You do however need to care about the second two ways a VAR makes money… because the more you know, the more you can act like the lady in the Experian credit score commercials. (If you don’t get the reference click here.)
First up is who you work with. Every vendor requires their resellers to have some sort of training, and each of them typically will have partnership levels that resellers can achieve based on how much training they have. VMware for example lists their Solutions Provider Program here. There are three levels of partners: Professional, Enterprise, and Premier. That page also lists some of the benefits of being at each partner level, I say some because no vendor is going to disclose their partners purchasing discount(nor will I), but with that said rest assure that all partner programs will have some sort of discount from list price and some will even have deeper discounts for the higher partner levels. (again not saying that is how it works at VMware, but they just had an easy to read partner page)
Second up are special programs. This is where deal registrations come into play.
Simply put, when your deal gets registered by a reseller they get extra discounts from MSRP. Other resellers who sell the same product will not be eligible for this extra discount.
Rebates are programs that vendors occasionally have if they are trying to push certain product lines. I didn’t plan to talk a lot about these because they seldom affect the price to the customer. But if you know you are going to purchase a particular product… it might not hurt to search and see if they are currently offering rebates to the VAR. The reason rebates will seldom affect customer pricing is because the ones that I have seen are typically quarter based, so the VAR has to fill out forms after closing your deal and after the vendor approves them they must wait until after the quarter has ended to receive a check. This process is long, slow and very time-consuming, if anything just think of these as a bonus for your VAR for doing a great job and getting the deal closed. (in a nut shell they work just like a rebate you might send in for a product you purchase for at home)
If you still aren’t convinced that deal registration is important you should use google to search for “<vendor name> deal registration discounts”. I did and found some public documents that openly list the discount that resellers get when they do a registration. Some of the public discounts are as much as 48% off list price… most were at least 10% in addition to the normal discount. So it is certainly worth keeping in mind when you are spending six or seven figures. Lastly keep in mind one thing… don’t expect to get every single percent of the discount handed to you… if you do expect that then a VAR is probably not for you… you should probably work with the monster mega reseller as they operate more on quantity than
Now that you know…
Hopefully now that you fully understand all of the things that take place on the back-end you understand why it can take more than a couple of days to get a quote. That is probably the biggest thing that was disappointing to me as a pre-sales architect… customers would want a reliable solution, with the best price possible, and before 5pm (assuming its 8am when they call). You old saying holds true… you have pick any two of the three you want… just not all three. In most cases turning around a deal registration with that extra discount on pricing can be a 24-72 hour process on its own.
Did I forget anything ?
I’m sure I did… and that is why I always allow comments, so if you have something to add please do!
Also I hope that as an IT person you are now more aware of what happens on the other side of the table so that you can use it to your advantage when the time is right, but I also hope that you develop a better relationship with your reseller and account manager and start thinking of them more as an extension of your technical design team. Remember they will take care of you if you take care of them, because in the long run they want you to be their customer for a long time not just for one deal.
Have more questions or need clarification?
If so drop me a note about your specific situation and I’ll be glad to follow-up and help you out!