What it means
A plain reseller buys a product, adds a small markup and passes it on. A value-added reseller does more, bundling the product with other goods and services so that the customer receives something that works for their particular situation.
Typical examples are an IT firm that buys servers and software, configures them for a client's offices and provides help-desk support, or a security company that supplies cameras along with design, wiring and monitoring. The manufacturer benefits because the VAR reaches customers it could not serve directly and takes on the local expertise and after-sales burden.
For the VAR, the business model is different from simple distribution. Margin on the product itself is often thin because the manufacturer sets prices and competing resellers sell the same item, so the real profit comes from the services, which are harder for customers to compare.
That brings both opportunities and risks. Service revenue tends to be higher margin and more recurring, especially where support contracts renew each year, but it depends on skilled staff, and a VAR that loses its engineers loses its edge.
Finance teams watching a VAR look at the revenue mix, splitting product sales from services and support. A business whose profit comes mostly from recurring services is generally valued more highly than one that depends on one-off product sales, because the income is more predictable.
Dependence on one manufacturer is a nuance worth noting. If the vendor changes its pricing, sells direct, or drops the reseller from its programme, the VAR's whole business can be put at risk.
In practice
Real-world examples.
Example
An accounting software reseller buys licences from the vendor and sells them to small businesses along with data migration and staff training. The training and setup fees bring in more profit than the licences. Customers value having one firm to call.
Example
A solar installer buys panels and inverters at wholesale prices and sells complete rooftop systems to homeowners. The price includes design, permits and a ten-year maintenance plan. The installer earns most of its margin from that bundle.
Example
A medical equipment dealer buys scanners from a manufacturer and adds site preparation, staff certification and a service contract. A hospital buys the whole package for a single price. The dealer's recurring service income is more valuable to its owners than the one-off scanner sale.
Formula
Calculation
Gross profit = Selling price - Product cost - Cost of the added services
Gross margin = Gross profit / Selling price
A VAR sells a complete office network to a customer for $100,000. The hardware and software it buys cost $40,000, and the labour to install and configure them costs another $20,000. Gross profit = 100,000 - 40,000 - 20,000 = $40,000, and gross margin = 40,000 / 100,000 = 40%. A plain reseller that sold the same $40,000 of equipment at a 10% markup would charge 44,000 and earn $4,000, a margin of 4,000 / 44,000, which is about 9.1%.Case study
Seen in the real world.
This illustrative story is about a fictional firm, Calder Systems, which for years resold networking equipment at a margin of around 8%. Competition from online sellers pushed prices down, and the owner was considering closing the business.
Instead, the team decided to add a service layer. It began to design networks for local dental and legal practices, install them, and offer a monitored support plan for $400 a month per client. After a year, 60 clients had signed up, bringing in $24,000 a month in recurring revenue on top of equipment sales.
The fictional firm's total margin rose to around 30%, and the owner was able to borrow against the predictable support income. The lesson is that the value added, not the product, was what customers were paying for.
Watch out
Common mistakes.
- Assuming a VAR is just a distributor with a different name. A distributor mainly moves product, while a VAR changes the offer by adding services or features.
- Pricing the services too low because the product margin looks acceptable. The service layer is where the profit and the risk both sit, so it needs its own costing.
- Relying on a single vendor. A change in that vendor's terms can wipe out a VAR's margin overnight.
Questions
People also ask.
How does a VAR differ from a systems integrator?
A systems integrator typically builds complex solutions from many vendors' products, while a VAR often focuses on a few vendors and adds services around them, though the two overlap.
How do VARs make money?
They earn a margin on the product, charge for installation and customisation, and often earn recurring fees for support and maintenance.
Is a VAR the same as an agent?
No, an agent usually arranges a sale for a commission without owning the goods, whereas a VAR buys the products and takes on the ownership and the risk.
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