Resellers vs MSPs
We are witnessing a mass migration of IT service providers (ITSPs) from the traditional reseller model to a managed service model, with the goal of attaining a predictable monthly recurring revenues. This is especially true in the backup and disaster recovery area, the most commonly offered SMB service after email
There are two ways that IT service providers can make this migration:
1 – THE RESELLER MODEL
Resell a cloud-based vendor’s offering (example – Datto, Axcient), and develop value-added services such as vendor selection, training, implementation and level-1 support on top of such offerings
2 – THE BUILD (MANAGED SERVICE) MODEL
Layer a cloud-based technology, like Vembu, on top of your own cloud infrastructure (co-lo data center or public cloud like MS Azure or Amazon AWS) and offer a true “managed service”
There are pros and cons to both approaches, but in the long run, we feel that ITSPs will be able to build a more sticky and higher margin revenue model by adopting the Build Model. Here are 3 factors to consider:
MARGINS
In the reseller model, the ITSPs’ revenues are derived primarily from reseller commissions on the vendor product and secondarily from add-on services. On the other hand, in the ownership model, ITSP revenues are derived primarily from sale of the cloud service (storage fees) and secondarily from vendor commissions. In the case of Backup and Disaster Recovery (BDR) offerings, in our experience, MSPs make 3-4x the vendor commissions in margins from the sale of cloud storage.
SETUP COST/TIME
Next, lets look at the setup time/cost. Sure, reselling an out-of-the-box cloud offering like, say Datto, requires no initial setup time or investment. However, setting up your own cloud infrastructure is getting easier by the day. Vendors like Amazon and Microsoft have made it extremely easy to setup private cloud offerings and offer pay-as-you-use models that don’t require upfront investments. Combine that with ever dropping costs in a highly competitive market – Amazon recently announced to drop its cloud prices by another 22% (http://techcrunch.com/2014/01/21/amazon-drops-s3-prices-by-up-to-22-ebs-by-up-to-50-launches-new-ec2-instance-types/) – why, you could be up and running with your own high-margin cloud infrastructure in less than 24 hours.
SUSTAINABILITY
Finally, the most important aspect of the Build model is “stickiness” of your service. On the one hand, the increasing maturity of cloud technology vendors’ delivery models, combined with the increasing application-awareness of the SMB user, is rapidly diminishing the need for add-on services like training and implementation. For example, most SMBs can be up and running with a service like Dropbox or Office365 in a few minutes with no help. BDR appliances are approaching this level of maturity. By offering your own managed service, and taking control of your customers’ data, you create a highly “sticky” customer relationship that will allow you to not only prevent customer attrition but also upsell other value-added services easily.
In summary, we feel that a tipping point has been reached, where offering cloud-based BDR services is the way to go for IT service providers looking to develop a solid and sustainable recurring revenue service.
I would like to conclude my blog with an ancient anonymous quote – “Give a man a fish and you feed him for a day; teach a man to fish and you feed him for a lifetime”
At Vembu we are more interested in teaching the channel on how to own / manage their branded cloud solution. For more details, feel free to contact me at len AT Vembu DOT com
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