Hidden Costs of White Labeling Hosted VoIP
Many Interconnects and MSPs are attracted to white label service. The appeal is selling their own brand and the perception that white labeling produces higher margins than an agency sales relationship.
When evaluating margins, many prospective white labelers measure anticipated sales price against anticipated costs. They assume that the difference in price and cost is their margin. They compare their margin to offers of commissions for Sales Agent Agreements in order to assess the white label opportunity.
There are many hidden expenses including personnel, time, risk and lost-opportunity costs missed in this crude assessment. These unexamined expenses are generated by sales personnel, billing, compliance, audits, price limitations and Tier 1 support. This paper will examine each category.
Selling voice and hosted VoIP is a highly specialized skill. In fact, the top white label providers will encourage their customers to hire and train dedicated sales personnel. They know that without dedicated and specialized sales personnel that the white labelers success will be a small fraction of their potential.
Unless the white labeler is already a voice specialist, hiring the right sales talent may be a difficult task. They could incur expense in hiring, training, ramp times and employee churn. Their other choice is to realize only a small subset of their opportunities. Do fewer accounts at higher margins outweigh the potential commissions of multiple sales in new monthly recurring revenue through an agency agreement? Is the white labeler prepared to expend cash until the sales volume pays for the cost of their dedicated sales personnel?
By contrast, the right hosted agency provider will supply sales talent to assist and possibly complete the entire sale for their agents. Every opportunity won brings positive cash flow.
Billing and Compliance
White label resellers are invoicing their customers for their service. This leaves them directly responsible for collecting and remitting all local, state and federal taxes. Several companies specialize in handling invoicing and compliance, however, they come at a significant cost, especially at low volumes where minimums may be in effect.
Some white label providers will claim that they will direct you through all the compliance steps. This guidance can be helpful, but beware, they are not at risk for a mistake, you are?
Should the reseller decide to manage compliance on their own, they will be tasked with managing a myriad of complex taxes, fees and reports. The burden of these tasks should not be underestimated.
These start at the federal level and with the FCC. De minimus filers may be able to avoid collecting USAC fees, but they will still have to provide regular 499 submissions. In addition, they will need to file the complex semi-annual 477 forms with geocodes for every end point, CPNI certification and CALEA compliance statements.
Many providers believe that federal excise taxes no longer need to be collected. This is not true. The writer of this white paper has been through an IRS excise tax audit. Excise taxes are still collected on certain voice traffic and on rented equipment. Tax exempt nonprofits must still pay excise taxes, but municipal governments do not.
State and local governments can vary widely in levied taxes, how reports are filed and remittance. In some localities, many of the taxes are filed and remitted on a state level while other localities require individual relationships with many city and county governments. State governments which have centralized reporting may have very complex reporting structures breaking down many sales figures and individual taxes by different city and county governments.
Resellers are responsible for the collections of their invoices. This includes charges associated with various forms of payments and supplying the personnel to make collection efforts as necessary. An agent’s commission is at stake when a customer does not pay. For a reseller, the entire invoice is at stake and the costs incurred by the customer still must be paid to the white label provider. Further, if phones are rented and the customer vanishes, the reseller will be out their cost of the equipment.
You will get audited. As your enterprise succeeds and moves into different geographic areas, the opportunity for audits increases with each new taxing authority relationship. Preparation time for audits can be significant and some audits are best handled with hired representation. Each audit comes with the risk of findings. Findings may have a financial impact with penalties and interest, or they may require additional time to correct errors and refund money to all customers incorrectly invoiced.
White labelers are constrained by the underlying cost of the service that they are reselling. Price constraints may improve as the white labeler builds volume. However, these costs may become very limiting in large and hyper-competitive opportunities.
Some white label providers sell their service on a usage model. The usage model may deliver a lower overall cost to the reseller, but it also transfers the risk of high use customers from the white label provider to the reseller. Again, this risk becomes exaggerated in large and hyper-competitive opportunities and often eliminates bidding on contact or call centers based on traffic volume.
Service Interruptions are dreadful for all participants in the industry including customers, agents, white label resellers and service providers alike. During service interruptions, both the agent and the white label reseller can expect to receive a lot of communication from customers and need to respond with limited information at times, regardless of normal business hours.
There is a significant difference between the agent and reseller, though. With agents, the customer may call the agent or call the service provider directly. Additionally, the agent can direct the customer to any communication from the service provider about the service interruption.
Conversely, the reseller is the Tier 1 support for their “service” and will receive and must respond directly with all customer calls. They will not be able to refer their customers to communications from the service provider. Additionally, outages may harm their brand.
Here are some additional considerations: If the white label reseller is using their own white labeled service for their telephone system, how will they receive and respond to calls during an outage? Does the white label reseller have the resources and personnel to effectively communicate with their customers during an outage?
An agent can advise a customer to shift to another service provider which they have an agency relationship, if a recommended service provider does not perform. Thus, the relationship can be salvaged from a poor performing provider and the revenue stream may continue without harming their reputation.
Tier 1 Support
Hosted VoIP service requires a high level of Tier 1 support. Besides calls for routine moves, adds and changes, support inquiries will include users with dropped calls, poor voice quality, phones unable to register, firewall and internet issues. Worse, many trouble reports will contain misleading information such as reporting a dropped call when the actual issue was one-way audio. Does your organization have the knowledge and tools to quickly identify and diagnose these problems?
If you do not have these tools and personnel already in place, the top white label providers will recommend that you hire, and train dedicated personnel. They may also recommend that you purchase specific tools. Finding, hiring and training the right personnel can be expensive and challenging. Further, some customers operate 24 hours a day and support may be expected to be available for any emergencies.
All Eggs in One Basket
Almost all resellers use a single white label provider in order to consolidate price advantages as their customer base scales in size. Unfortunately, the reseller is left 100% vulnerable to the performance of their provider. The performance of any provider can shift over time and can change drastically when the provider is acquired. Once established with a white label provider, switching to a new white label provider will be a distracting, expensive, time-consuming and difficult decision.
The appeal of reselling a white label service is understandable. Many interconnects, MSPs and others want to promote their own brand and are attracted to the idea of higher margins. However, your brand is at risk to the performance of the provider when you choose to white label a service.
Gross margin analysis of the difference between expected sales price minus anticipated cost is not a complete analysis. White labeling requires a basic business plan which, in addition to gross margins, includes projected costs of invoicing, collections, compliance, audits and 24×7 Tier 1 support.
Further, the reseller may be eliminated from large and hyper-competitive opportunities because of margin constraints. And resellers may be eliminated when it is discovered that they are not the actual provider.
When all these factors are taken into consideration, are strong agent relationships a better opportunity than white labeling?
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