If properly setup, it can be very profitable. It can be a major headache if you try overselling your hardware nodes. There's still plenty of profit to be made in the VPS Market. Good luck if you decide to go that road.
A decently managed VPS with the proper support, hardware, etc, will come close to that of a fully managed dedicated server.
VPS's don't include that same level of server management that you get with a dedicated server that is fully managed. Let's say you want that though, and so you get a VPS that is maybe $60/month, and then hire another company to manage it. Depending on the management fees, maybe an extra option or two you select, it's not hard at all to reach the pricing level of an entry level dedicated server.
If all you want to target are customers that know what they're doing and don't need that much support and server management, then sure, it can work out. If not, then you need to follow the path of a few companies (namely httpme, dotable, etc.) that charge $125+/month for a VPS. Because of how their product lines are designed, it works well for those looking for a step inbetween the dedicated servers and a reseller account.
I find it easier at better for both the client and provider (myself), to target fully managed dedicated servers around prices that aren't that much higher, maybe $180/month?
Ankit Gupta - Cernax Hosting
"We're always second in the industry, the customer comes first."