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VARs and the Inevitable Recession

What pressures does the VAR market face in a recession from both the buy and supply-side? And how can the VAR industry prepare for an inevitable recession?

It’s without question that we’ll inevitably face a recession. 

According to many experts, we’re currently ~ 4.5  years overdue for one, when compared to historic expansion and contraction cycles (Recession Is Overdue By 4.5 Years, Here’s How To Prepare). 

Unfortunately, even equipped with this information, we can’t exactly tell when a recession will occur. We could steep into one next year, two years from now, or five years from now, no one really knows. The only thing we do know for certain is that it will happen, and seemingly sooner rather than later.

Although we can’t predict the unknown, we can prepare for it by analyzing the kinds of market pressures a recession can theoretically put onto companies (in this case, VARs), and by thinking about how strong those pressures will be (and why).

The Real vs. Financial Economy

Whenever a good or service is bought and sold in the marketplace, that happens in the “real economy”. The majority of companies, including 99% of companies in the VAR market, primarily operate within just the real economy, meaning they are directly rewarded by how well they sell their goods and/or services in the marketplace. 

However, there are a small percentage of companies that can generate capital without directly selling goods and services in the real economy — the publicly traded ones (including the G2000 companies). They participate in the “financial economy” in addition to the real economy, which gives them access to capital from the stock market, low interest rates, QE liquidity etc. 

Since 2008, companies that participated in the financial economy have amassed billions of dollars in wealth due to the bull economy that has been driven by stock buybacks, acquisitions, among other things that bolster their capital. This growth in the financial market was what fueled the massive increase in company spending without them “caring” as much (more money to buy things means less pressure from the people buying), which trickled down to their vendors.

In the VAR industry, less cost-sensitive buyers coupled with the fact that infrastructure and tech has become an even more “mandatory” cost (when compared to the preceding decades) has been a boon. But it also means that pressure from buyers this past decade has been as low as it will ever be (relative to us having an even stronger bull economy)

(Thought experiment – when’s the last time you had to argue with a client about sitting between them and the OEM?)

In other words, VARs (and many other types of companies) have been able to grow in tandem with the financial market largely due to the close ties between what they sell and what buyers absolutely needed, regardless of the cost, and not directly due to the value they brought those companies. 

The point we’re trying to make is that, VARs and their bottom line are in a position that is heavily affected by changes in buyer (and supplier) pressure, because they sit right in-between them. Buyer and supplier pressure dramatically changes based on the financial conditions, and right now, market pressure is relatively low from both the supply and buy sides of the market because of the healthy economy. 

But what happens to the market dynamics when a recession suddenly occurs?

Everything reverses — revenue becomes secondary to cost, growth becomes secondary to survival. The only purchases made are the absolutely mandatory ones and they’re done with the intent to keep costs low, a.k.a buying pressure increases. 

High buying pressure (compounded in a bad economy) means two things are more likely (because these things can and do happen in a good economy as well): 

  • The available margin between the OEM and the buyer closes in – Profit for anyone in-between the OEM and buyer is reduced.
  • Disintermediation, or removal of the middle man – Anyone in-between the OEM and buyer is completely removed if possible. This didn’t happen in 2008 because the industry wasn’t ready for disruption. From 2008 – the present, disruption mostly happened in the B2C market because buyer pressure since then has steadily increased (the dollar is worth less now than 20 years ago, hasn’t caught up with inflation while costs increase, etc.) but in the B2B market, the opposite happened, buying pressure decreased. The next recession will likely cause buyer pressure in the B2B markets to increase, which will increase the likelihood of their vendors to be disintermediated by either a disruptor or by market pressure.

There were many companies in similar market positions as VARs that survived and even thrived in a recession. For example, Lego, a company that sells toys (which isn’t a mandatory expenditure for families), actually grew their profit by 63% in the 2008 recession (You Can Beat the Next Recession: Here Are 5 Companies That Did Just That). How did they do it? 

By expanding their sales territory. They went international and sold to consumers in Europe and Asia, and VARs certainly can and should do the same (FGX’s expertise is in helping VARs sell international deals from the US in a way that benefits both them and their clients).

Another strategy that VARs can entertain is to go after governmental clients, since governmental agencies rarely change vendors due to their onerous onboarding requirements. Once a VAR gets into a governmental client, that same onboarding process serves as a barrier to entry for competitors. In a recession, that process is likely to become even harder to overcome. Governmental clients are also much less cost sensitive.

On the marketing / product side, VARs can make an effort (starting now) to not only create a loyalty program, (if you don’t have one already), but to advertise and showcase it. Speaking of loyalty, one of the best things any brand can do for themselves is to build a loyal customer base — but how to do that is an entirely different discussion.

There is a big difference between repeat business and loyalty. Repeat business is when people do business with you multiple times. Loyalty is when people are willing to turn down a better product or a better price to continue doing business with you.

Loyalty is when a company will support you as a vendor even when it’s difficult to support themselves. Will most of your clients stick around when they have to cut costs by 20%?

Another good question to consider is, “what are things specific to VARs that they can do to create loyalty, besides lowering cost?”  

There are many strategies and tactics that companies can use to put themselves in a better position for a recession. But using them without understanding “first principles” and the surrounding context is akin to shooting in the dark. Hopefully our discussion about market forces has given you a bit of context so you can come up with your own ideas and solutions.

The last piece will be about FGX’s expertise — the global IT hardware market. We’ve helped U.S. VARs grow their business by 25% and upwards within the past 5 years, and we’ll explain how and why it works. It’s titled, “A Better International Solution for VARs”.