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.
[stextbox id=”warning”]Group 2 and 3 need to be alert when determining how PS costs get quoted, as they are the groups who typically farm out the installation of hardware, they are also the groups that may not know all the steps involved in implementing the solution they desire. The PRO of hourly is that if the VAR has really smart people working for them that can complete the project quickly you may get a cheaper price than flat rate. The CONs of hourly is that if your VAR doesn’t have a smart person doing your install you could get burned with a bill for lots of hours. Flat rate projects have the PRO of being a fixed fee so if the VAR gets stuck with an extra 10 hours of labor, due to an unforseen problem, you still pay the same price. The CON of a flat rate project is that if you pay $5000 dollars for a project that would take you 40 hours to complete, but it takes the VAR 8 hours to complete (because of their advanced training) you may think that you over paid.[/stextbox]
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)
[stextbox id=”alert”]So what this means to you is that if you want the best deal, sometimes it pays to work with the most highly certified partners because they may be the ones getting the best discounts.[/stextbox]
Second up are special programs. This is where deal registrations come into play.
[stextbox id=”info”]Deal Registration – (from wikipedia) is a form of compensation as an incentive for previous issues common in the technology industry where a channel partner selling a technology product from a supplier is able to register their sales opportunity with the supplier to earn incentives exclusively available to the registrants.[/stextbox]
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)
So what this means to you is …
- This means if you want the deepest discount… you better make sure that whoever you mention your project to FIRST is who you want to work with. I have seen it a hundred times where an IT person will get a call from a monster mega reseller “just to chat”, then the IT guy (thinking he has made a new friend that really cares about him) spills the beans about upcoming projects, and BAM! the monster mega reseller has the deal registered the same day and now no other partner has access to those extra discounts. You are pretty much suck buying from that huge reseller at this point because their quote will be A LOT cheaper than anyone else.
- The reseller is not required to pass on this extra discount. While they certainly can pass it on it is technically up to them to decide. I bring this up because I think that you should always maintain a strong relationship with your reseller, you should want them to have your business, and in return if they are feeling the love they will almost always pass on a discount.
- you should be asking your reseller if they are planning to register the deal. I personally don’t think this is rude, in fact to me that tells me you want to work with me… you want me to win and in return you know I’m working to get the best deal for you.
[stextbox id=”info”]One exception to the above info happens when an RFP has been released and the vendor knows there are many different VAR’s competing for your deal. In this case most vendors will wait to award deal registration until you have picked the VAR you want to work with. So keep that in mind.[/stextbox]
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.
- The time it takes to get a quote can also be affected when the bill of materials changes frequently. If a VAR has to go back to the vendor and explain that the bom has changed yet again, it can sometimes mean that special pricing has to be reapproved too.
- If you know that you have a purchase coming up and it can be aligned with a vendors end of quarter (or better yet end of year), then you stand to get deeper discounts than normal. Using phrases like “if we execute before end of quarter can we get a deeper discount?” is a great way to start that conversation. But there is a caveat… if you use this method to get that deeper discount you should have a PO ready as that discount won’t last long.
- Speaking of having a PO ready… if you are going to beat up your sales rep for better pricing I would also recommend verbal commitments, email is even better. If there is one thing that account managers don’t like, it’s having to explain to their manager and the vendor why they still couldn’t close a deal after getting the customer even better pricing… it makes them look bad and it makes the customer look unmotivated.
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!
Very good article! It definitely helps to know this information when you’re dealing with resellers and vendors.
What I have noticed so far, especially with bigger organizations, the right timing and finding the right part of the organization brings you the A-game. When contacting the right personel, who get the idea that getting this product improves their companies results and by that make their look better in their managers’ eyes gives them the motivation to actually sell your product!
That’s very true. But thats also from the sales person site. I was trying to explain things from the customer side.
Great article! It is also very important for a customer to interview the service manager, or implementation team lead so that integration timeline expectations are communicated and agreed to in writing, with remedies. Many customers have been soured on a VAR or Disty due to a sliding cutover date, or re-directed resources.
Thanks for the tip Basalty!
Wow incredible article Justin, you just opened up a whole new world for me….I was always wondering how this worked! I feel so much more prepared now.
Glad it helped! let me know if you ever have any questions.
Justin, do you think a self service pricing application (returning “standard” or “street price” type discounts) would help this process? If IT buyers could get pricing early on, instantly and without engaging a VAR, and then evaluate VARs based on project needs?
You have to remember a couple things.
I would say at least 50% of the “IT people” out there arent IT people. They are accountants, or architects, or secretaries, etc. So while they may by product based on price they do not have the skill set to build out the project on their own. These are the people who just see a bucket of Legos. So they will typically have a go to VAR that does all of the architecture and planning for them and therefore they also purchase from them… the reason is because they are purchasing a result…. not a product. So for these people your pricing application would be worthless because it would only show them product pricing and not “result” or “project outcoming” pricing.
Secondly, I think you would be hard pressed to build out your application with pricing because most VAR’s will not share their street pricing with you, nor will most vendors. So while you could probably get list pricing pretty easily, I think that your street pricing would be few and far between. VAR’s only have a couple ways to make money… margin on prodcut is certainly one of them and most vendors arent leaving a boat load of margin for the VAR to begin with so undercutting each other would just cause a race to zero. Which in turn would cause a lot of VARs to close the doors.
My advise to a customer who is super sensitive about pricing is to work with a technical consulting company (a var) and let them know up front that no matter where they purchase the hardware they will want them to do the professional services and architecting work. Kind of like when you build a house… you get a general contractor, but you might buy the wood from Lowes, Menards, or a local place…. either way you arent going to frame it yourself….
However I would just make sure you understand that if you do it this way the technical consulting company will probably not take responsability to get hardware replaced or swapped out if the wrong parts show up… again you didnt pay them for the whole package being turn key… you payed them to put the parts together…. so if you dont bring them the right parts they will just sit and wait for you to get the right parts…
Great points. The reason I asked is my team and I have a hypothesis that the IT buying process could be made much simpler, and be a better experience for IT people.
Largely built around the premise that because sales teams have so much control over access to pricing, IT teams are forced to take meetings with any and all potential vendors (often more than 1 meeting per vendor for a given need/project).
The need for multiple meetings to arrive at a budget cost and narrow down the “short list” seems inefficient for both sides. Most of the product info is available online its just the pricing that isn’t.
We may very well be incorrect… Do you feel there is a general frustration among IT people with this requirement to meet with sales for pricing?
We’re looking at ways to capture basic project requirements that our team of engineers can map to product designs and budgets. Provide access to pricing and a team of engineers who don’t work for a sales organization – no sales involved.
In addition, provide info around the local VAR community via a peer-referral network. Basically one place where IT people could come to build and price solutions, speak with certified engineers (without having to engage with sales) then read peer reviews about VARs based on skill relevant to their project.