Should Cloud Be a Loss Leader?

Too often, selling cloud doesn’t pay the bills. To gain traction with new clients, some VARs are willing to offer cloud as a loss leader. By Chris Nerney

Cloud computing is increasingly desired by SMBs, but as channel pros are all too aware, selling it doesn't pay the bills, at least not initially. To gain some traction with new clients, however, some VARs are willing to offer cloud as a loss leader.

Steve White, program director for the Strategic Alliances Leadership Council at IDC, sees that as a trend in 2013. In a January blog post, White writes: “IDC predicts that in 2013 we will see a dramatic growth in how partners use cloud to 'open doors' with new clients and re-open them with existing clients.”

In the IDC report IT Channels and Alliances: Trends and Predictions 2013, White elaborates on that prediction: “Cloud-based software and services generally have a faster selling and implementation cycle, so we think partners will leverage this with the combination of 'loss leader' pricing to drive more up-front activity, and then look to prove themselves with these customers, and in turn drive other services that are more profitable to their business.”

White says that during the past two years IDC has spoken to partners who are not necessarily “cloud-type players,” but who are now offering some cloud services and using them as a conversation starter with prospective clients. “Cloud gets them meetings,” says White, emphasizing, however, that the loss-leader concept “will not be the de facto standard. There will be partners out there for whom cloud is the absolute core of their business, so they won't be doing this.”

One of those partners is WAC Consulting Group, a Northboro, Mass.-based VAR founded in 1987 with 16 offices around the United States. “We don't discount the cloud offerings,” says Robert Distler, president and founder of WAC. “While cloud isn't as profitable as selling an on-premise system, we make margin.”

Like other VARs, WAC is being squeezed as products and services become commoditized and partners compete with vendors for customer allegiance. “Our revenue opportunities are shrinking,” Distler says. “If we use cloud sales as a loss leader, with the amount of services being commoditized, we'll be out of business.”

Greg Pierce, vice president of channel partner Tribridge, in Tampa, Fla., agrees with White that some VARs will use cloud as a deal-sweetener, though he says he doesn't know anyone currently doing so. However, Piece notes, “I don't think that they need to, and I'm not sure it's the greatest business model.”

Rather than looking for a money-losing carrot to lure in business, Pierce says channel partners need to build their strategy around “the intellectual property they can bring into play, or the unique expertise to really drive high margins for cloud solutions.”

For Tribridge, that meant building the company's own private cloud. “You need to find out what you're good at and wrap services around it,” Pierce advises. “There's certainly a really good use case for people who don't want to go on premise, but also don't want the public cloud. Private cloud makes a lot of sense there, and private cloud is definitely not a loss leader.”

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