This will be an unusual post for me in that it’s a commentary triggered by a news item I recently saw on one of the financial networks while eating breakfast. Best Buy was the focus of this segment in that they had once again had reported a bad quarter. As a result, they are looking to either close stores, downsize stores, or sublet surplus space in their existing stores (as they are already doing). There are several reasons as to why they are struggling, with the downturn in retail music sales and the growth online purchases among them. This caught my eye in that it reinforced the “Wheel of Retailing” theory at work. In its simplest form, the theory states that every retailer has a life cycle where all successful retailers begin life as a small (or regional), low cost leader. As they grow, however, they add services and/or departments which eventually bloats their overhead and raises costs. This leaves room for a new “low cost” entry to emerge to render the older outlet obsolete as consumers migrate to the newer, forcing the more established retailer into a downward spiral financially. This theory is evidenced with the history of former giants like Sears, Montgomery Ward, and Kmart, and the spectacular rise of Walmart. The word “fall” is relative, of course, because some have managed to survive by reinventing themselves as a new segment. The re-birth of Target is perhaps the best example of this.
How does this apply to the greater technology channels reseller as we know them today? Let’s step in to a time machine and take you slowly back to the beginning of technology products channel sales (I was actually witness to this—at the risk of showing my age).
At the turn of this century, Best Buy was the category killer that was credited for the demise of two major giants: Circuit City and CompUSA, plus countless regional chains like The Good Guys (who eventually merged with CompUSA so they could die a slow death together). Earlier still, the now defunct CompUSA was credited for reinventing the category because they were going to steal share from the then emerging corporate resellers, Computerland and Businessland, each featuring a mix of inbound (retail) and outbound (direct sales) strategies. With each power shift, technology marketers ran scared about how the “new guy” is changing the rules by making unrealistic demands (e.g.: requiring large shelving allowances), and making them wonder “How can we meet the demands of these new guys without alienating our other channels?” . And the answer to that question is: you have to be where your customer wants to buy, and if it’s in a different store—so be it.
VARs, as a channel, preceded all these entities when it came to being an indirect channel for technology marketers. The genesis of the VAR goes all the way back when independent channels started in the mid- to late 1980’s as technology products became accessible and affordable by medium and small businesses. Prior to that, the room-sized IBM enterprise computers were sold directly to only larger enterprises who could actually afford all that computing power (which is now commonplace in the average laptop). As new devices emerged (like fax machines, personal computers, and printers) access to technology products moved down-market to smaller companies. The VAR was born because the cost of sales would otherwise be too high for a manufacturer’s direct sales force to be a profitable option. At the time, these resellers made most of their revenue from margins on the sale of hardware. These new personal computers and related peripherals were only used at the work place—albeit in increasingly smaller businesses. As technology products became more affordable by smaller businesses, corporate resellers emerged (the aforementioned Businessland and Computerland among them) and were the first category-killers in the technology space. Their emergence was expected to trigger the demise of the VAR as we know it. However, unlike the string of category killers previously mentioned in the retail world, this didn’t happen–despite all the fears expressed by VARs and Vendor’s alike. One may ask: “Could the continued existence of the VAR be a violation of the wheel of retailing”? I contend that the demise of Businessland and Computerland instead initiated a bifurcation of the technology reseller market, with each extreme appealing to a separate buyer: Retail for personal and SOHO technology, and traditional VAR/resellers for business solutions (this despite the fact that Best Buy and other retailers experimented with outbound corporate sales).
The VAR, however, is going through an evolutionary path all their own. Over time, service revenue replaced hardware margins and new segments were born. At one end, DMRs kept the pure hardware business. At the other end, consultants provided services only. Other segments fell in between. All survived because each appealed to unique customer needs in a rapidly growing market (bigger pie).
Now, however, B2B technology marketers are experiencing the emergence of what just may be a category killer for the traditional VAR: the Managed Services Provider. Similar to the reasons that forced the demise of their retailer counterparts, the MSP represents an entirely new business model—one that is built on subscription services, including hardware as a service, rather than one-time contracts. Migrating to this model will prove to be a challenge for many VARs—and it will likely require a restructuring of their relationship with their vendors and distributors alike. As a result, the big question facing most B2B technology marketers today is: “Should you help your resellers make the transition?” It is my opinion that you should learn from the hard lessons demonstrated in the “wheel of retailing” and let the strong survive through natural selection—even if it means replacing existing loyal partners with others who have figured it out. Bold stance, perhaps, but history says that if you have a market for your product, you should sell it through the resource that your consumers want to buy it from. That’s the first lesson of channel marketing—it’s all about the consumer.