Vendasta’s Desiree Kupietz shares insights to maximize software reseller margins

Continuously looking for ways to maximize your software reseller margins and revenue is part of good business discipline for agencies, MSPs, media companies, and other distributors of digital marketing products and services.

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In fact, boosting revenue and margins is a core mantra for some of the world’s best-known brands like Microsoft and Netflix; these giants get away with price increases in most years because they’re continuously innovating their offerings. As a SaaS reseller, you must think of doing the same.

Simply put, revenue is the total income a business generates. Profit margins are the difference between revenue and costs, and they are usually expressed as a percentage. Specifically, software reseller margins are the difference between the retail prices of software resold to customers and the wholesale prices paid for those solutions.

Not only must you ensure that you bring in as much money as possible (revenue). But you must also ensure the gap between your revenue and costs (both overall profit margins and software reseller margins) is as far apart as practicable. This is fundamental to the overall profitability and sustainability of resellers.

But there are different ways and means to do it, and dangers must be avoided.

In this blog, Vendasta’s own Desiree Kupietz, Vice President of Enterprise Strategic Partnerships, leverages deep insights from her client relationships to offer tips, tricks, and traps SaaS resellers should know about in their quest to improve profitability.

She also shares a case study on how one of Vendasta’s top clients takes a balanced approach to revenue and margins when selling online service packages to small and medium businesses (SMBs).

Tip: Consider expanding your service levels

One effective way to improve revenue outcomes is to consider providing more types of services and handle some (or all) of the work for your clients. But before that, how do software resellers make money?

For context, there are three common service tiers in the agency world:

1. Do-it-yourself (DIY): The simplest and lowest touch of all service offerings, DIY is where a reseller simply resells one or more software solutions to a client, educates them on how to best use it, and leaves them to their own devices.
2. Do-it-with-me (DIWM): In DIWM, a reseller sells software and handles some, but not all, of the fulfillment work for the client. This may include responding to online reviews and scheduling social posts, but not creating all the underlying content.
3. Do-it-for-me (DIFM): DIFM is the highest-revenue, highest-effort digital marketing service level as it entails managing most or all of the client’s digital marketing tasks. This could include spending their digital ads budget, creating content for social media, finding listings, and so on.

Many agencies are attracted to the DIY model and simply become a white-label software reseller because of its simplicity and lucrative margins. For example, Vendasta partners often generate software reseller margins of over 100 percent on online presence packages distributed to local businesses. They might go on to become a Google Workspace reseller and then a local SEO reseller as they expand their suite of services.

But there’s also the opportunity to generate greater revenue by taking on and charging to do some of the work for clients, such as responding to online reviews on their behalf, managing their listings and posting content on social media. This forms part of the DIWM and DIFM approach, which is utilized by businesses known as “value-added resellers.”

“By simply reselling white-label software and taking the DIY approach, you can absolutely make great margins of over 100 percent. But when you look at the actual revenue, it’s quite small,” Kupietz says.

“You may be paying $50 a month wholesale for reputation management, listings, and social marketing software and reselling it as a package for $100 a month. So, is there an opportunity to earn more revenue by adding value and fulfilling some of the work for clients? It may come at a cost to your margin, but revenue and margin should not be thought of in isolation.”

Trick: Look to outsourced fulfillment

Of course, the big question that arises when resellers look to expand their service level is: “Who’s going to do the work?”

Kupietz says one common thought among her clients is to hire someone to produce deliverables for small and medium businesses in house. However, that’s often associated with concerns, including:

• Can they find and afford good talent in the tight labor market?
• Is (or will) there be enough demand from clients to justify employing that person on a full-time basis?
• Is there sufficient profit margin between what clients pay and the hired talent’s salary?
• What are the costs to hire and onboard them?
• Will the person be a good fit and have the experience to fulfill clients’ needs?
• Will they be able to retain that person, and what happens if they go?

“If you can answer all those questions confidently and have done the numbers, then great, hiring in-house talent may work for you,” she says.

“If you can’t, or you’re just struggling to find good talent in this environment, then outsourcing fulfillment could be the way to go.”

Kupietz says many of the smaller agencies she has relationships with prefer leveraging Vendasta’s outsourced marketing services team because:

• They pay a fixed cost per project
• They don’t need to worry about employee overhead costs
• All work produced is under the reseller’s brand

“But the other component is that leveraging an outsourced fulfillment provider can help you meet most, if not all, of your clients’ needs including web design, content services, and digital advertising—skill sets one person is very unlikely to have,” she says.

Trap: Not distinguishing software reseller margins from services (and margins from revenue)

A key mistake agencies and other SaaS resellers tend to make is being obsessed with achieving a certain margin target. That’s a trap that can cause resellers to throw away valuable revenue opportunities, Kupietz warns.

“Going back to the DIY example, if you’re reselling online presence packages for $100 a month on a 100-percent margin, you need tremendous volume to succeed,” she says.

“But let’s assume your clients are willing to pay $500 a month to do some of the work for them, and your delivery costs are estimated at $300 a month. Even though the margin drops to 40 percent, you’re leaving $200 of revenue and the opportunity to deepen the client relationship on the table.”

Typical software reseller margins for some of the biggest reseller programs

Hence, Kupietz says software reseller margins must be viewed differently to services. As a guideline:

• Agencies should target 100-percent and up to 200-percent margins for reselling core DIY Vendasta solutions, such as Reputation Management, Listings, and Social Marketing
• Use 50-percent margins as a rough guideline for value-added services

“That services margin needs to be flexible, and targets need to be made on a case-by-case basis,” she says.

“For example, if you’re aiming to make a 50-percent margin on digital ads, then you’re generally going to be priced out of the market and find it hard to scale and succeed based on the competitive landscape for that type of service.”

A good alternative for value-added resellers is to set “blended” or “average” margin targets. This entails calculating the reseller profit margin across both software and services to help better inform decisions around the pricing of DIWM and DIFM packages. This calculation is explored later in this article in a case study.

But on that note, Kupietz stresses that the thought process cannot purely revolve around margins.

“If you only focus on margin and are not looking at the revenue side of the equation, you’re not going to really see total income opportunity. In return, you won’t be able to really drive long-term success for your organization,” she says.

Tip: Use DIY to go to market quickly

The most successful value-added resellers are those who use the DIY approach to win clients by selling them software as part of their go-to-market strategy, but then strategically nurture the relationship from there.

“When SMBs get their hands on our Reputation Management or Social Marketing software via our partners, they’re blown away. They feel like all their problems of centralizing their marketing efforts have been solved. That is, until they realize they still have to do the work and create posts or respond to reviews. And that’s where they find they don’t have the time,” Kupietz says.

“Simply reselling software gets you past the door, but there needs to be a strategic path where you start with DIY and move your clients up the value chain with managed services.

“Because for DIY to be successful in its own right, you’re looking at a huge volume play. You’re going to have much higher churn if clients aren’t using or don’t have time to use the software you’ve sold them.”

Trick: Develop a strategy to upsell clients

Vendasta's Churn Study shows that when digital marketing experts provide DIY software solutions coupled with services, proof-of-performance and regular engagement, clients are far less likely to switch.

“When you’re offering DIY that’s supported with value-added services, you’ve already increased the lifetime value of that customer.The likelihood they’ll stay with you and the revenue potential from that relationship will only keep growing,” Kupietz says.

But clients can’t merely be upsold. Software resellers must continuously validate their work with a great user experience and show them results every step of the way. This could include tools such as Vendasta’s Executive Report, an automated assessment that gives clients regular proof-of-performance updates.

“It’s more important to think about your revenue trajectory by combining DIY with DIFM or even DIWM strategies. It’s also critical that you prove along the way that you deserve more marketing dollars. In return, you can charge higher prices to your SMB clients and thus improve your profit margins,” she says.

Trap: Not doing research on your market and competitors

A common mistake Kupietz observes among resellers is not conducting sufficient research and competitor analyses to set software reseller margins, service margins, and prices that clients and prospects can afford to pay.

“You need to find that sweet spot by looking at your market, customer segment, individual customer appetite and what competitors are charging. You can’t price yourself so low that you’re not making any money, but you can’t set it so high that you price yourself out of the market,” she says.

“And one of the improvements we’re making at Vendasta is providing more data around recommended retail pricing that resellers can set with their clients.”

She adds there’s a misconception that many clients and prospects don’t want to pay prices that provide attractive returns to resellers for new and incremental services added to their software and marketing packages.

“That’s not the case at all. In fact, it’s usually the case that resellers are trying to upsell more products and services without proving the value of what they’ve already sold and delivered to clients,” she says.

“From my experience, clients who do a great job on the user experience, delivering what they’ve promised to clients and showing them the results, they’re the ones who can sell more while increasing prices and margins because they've provided the proof in the pudding.

“Some of my value-added reseller clients are charging 50-percent margins on digital ads. You’d think that’s impossible. How did they do that? By proving out the value.”

Case study – Reseller achieves rapid revenue growth with blended margin of 50 percent

The following is a case study on one of Kupietz’s and Vendasta’s top value-added resellers (named “Company X '' for the purposes of this blog). It looks at how Company X leverages the Vendasta platform to go to market and win clients, prove out the value, and earn attractive software reseller margins and blended margins.

Goal

Company X is seeking to drive rapid digital revenue growth by offering new and desirable solutions with a blended profit margin of 50 percent.

Strategy

Evaluate best-in-class digital solutions and build packages based on the segment of business and budget thresholds. The packages determined also had to be designed to drive success of specific outcomes including:

• Increased online visibility
• Greater advocacy on Google and Facebook
• More direct leads

Launch plan

Company X included three main offerings: Reputation Management, Social Marketing, and Listings. These offerings would deliver on the most common business objectives of improving an SMB’s online presence. The company set competitive retail pricing while achieving no less than a 50-percent profit margin on each package.

Margins fluctuated by solution; some went as high as 150 percent and some as low as 30 percent to remain competitive in the market. With each package offering, the blended profit margin stayed at or above 50 percent by taking a more strategic approach to setting the retail pricing.

Additionally, as part of the launch, all business contacts were emailed an invite to a 1-hour digital seminar that provided tips on how to manage their digital presence online. This gave Company X the opportunity to strategically nurture relationships from a DIY approach to a DIWM/DIFM.

As part of attending the seminar, they would receive a Snapshot Report of their virtual doorway and a Google Business Claim to get them started. The show rate was 65 percent and at least 50 percent of the attendees set a follow-up appointment the day of the seminar.

Outcome

Within the first 60 days of going to market, $46,000 in revenue was generated of which $30,000 is monthly recurring revenue thus equating to over $200,000 in annualized contracted revenue at a blended margin of 50 percent, driving profitable digital growth for Company X.

Maximize your software reseller margins

It’s important to understand that software reseller margins and margins overall are not the be all and end all of the reseller business model.

In fact, margins must be viewed in conjunction with other key business metrics. It is a fallacy to believe that high software reseller margins are reflective of true business success if the other key ingredients of high revenue growth and low churn rates aren’t present.

To ensure profitable, sustainable growth, resellers must look to continuously add value on top of the software they sell. All the while, they must manage costs through strategies such as outsourced fulfillment.

Only in proving the value of their services, while keeping costs low, can resellers confidently raise prices without losing the client.

If you’re looking for a SaaS partner that can help you both resell white-label software and deliver value-added services to help you grow your business and move up from DIY to DIWM and DIFM, why not book a demo with a Vendasta representative to learn how today?