The Managed Services Pricing Debate Continues
Managed services started out as the sure-fire way for traditional VARs to insulate their businesses from the commoditization of hardware and software. Not only did they get a predictable recurring revenue stream, but also clearly defined and predictable profitability. The promise of managed services was sustained profitability, not just better margins.
Well, that’s beginning to change, and for no good reason. A couple of weeks ago, Channelnomics wrote about the artificial commoditization of managed services. Profits are falling because MSPs are competing on price, not value. They’re reacting to shadows of competition, not real competitive pressure. And they’re not articulating a clearly defined value proposition that will compel end users to pay a fair rate for the services they receive.
>> CHECK OUT: MSPs Undersell, Underprice Managed Services
These were the issues debated yesterday on a webcast with me, NetEnrich general manager Justin Crotty and N-Able’s manager of partner development Kevin Kirkpatrick. While many of the pricing problems were revealed by this open discussion, so too were possible solutions.
Here are a few things managed service providers can do to improve their pricing policies.
- Value-based Pricing: Set prices based not on expense, but on the functions and benefits provided to the end user. Too often, MSPs price their services based on their expense, as they’ve done in the past with hardware and software products.
- Specialization: MSPs are too often delivering the same services as their peers – network management, email, basic security. MSPs delivering business-value and mission-critical services have higher value to their customers and command higher prices.
- Saying No: Part of the reason some MSPs drop their prices when challenged by customers is they’re afraid of losing a sale. They’d rather take a lower price than lose the customer. Sometimes it’s better to say no and walk away from a bad deal.
Many more ideas and tips came out of this discussion, so I won’t deprive you of the full experience. Channelnomics is partnering with NetEnrich and N-Able to further explore the issue of pricing best practices and price integrity in managed services. Look for that report in December.
6 Responses to “The Managed Services Pricing Debate Continues”
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The idea of value-based pricing should not be lost on managed services alone. A great book that delves into this area is The Art of Pricing by Rafi Mohammed, and Rafi followed up with a second book called The 1% Windfall. Through these texts, many of us can learn how to shift from a cost-based approach for pricing, to one that maximizes margins and profitability.
I think that building the relationship with customers in order to understand what they do is key. In SMB, for example, one size does not fit all when it comes to pricing. Proper segmentation and targeting is important. Also, understanding where a given managed service fits in a customer’s cost management structure is very important. CapEx vs OpEx, build vs buy, taking a big cash flow hit upfront vs amortizing over time are but a few examples of how SMBs look at expenditures and consider investing in technology solutions. Budgets are still tight, these days.
Great posting. There’s a book on negotiating sitting near my desk. The basic tenet is that you have to be willing to say “no” at the beginning of negotiations and work from their instead of being overly warm and fuzzy, opening by discussing “win/win” business dealings rather than solution selling.
Take two vendors – Vendor 1 is willing to give away service A to win B. Vendor 2 is willing to give away B to win service A. The customer is motivated to get “the best deal”. We have an untenable situation here.
Cost plus pricing won’t work in this world. Specialize, differentiate, build up trust. Competing purely on price alone creates a slippery slope that in the long run benefits neither the MSP’s nor the customers.
Again, Larry, excellent post and point. I think between Ted and Jim you’ve got an ideal foundation to fight the forces of artificial commoditization: segmentation, targeting, sales execution. I could not possibly agree more. And Ted’s point truly resonates: those who charge more actually tend to sell more. Operative word: SELL. Of course you need to have excellent services, but even the very best services will commoditize if not surrounded by sound business strategy and execution. Thanks for beating the drum!
There is another irony not mentioned here: partners with the highest prices for managed services are also selling the most.
Why is that?
It is about a focus on sales excellence. The MSPs that have a focus on sales will more easily outpace the commoditization trend and beat their competitors.
For more on this topic, check out my blog post:
“Six Sales Insights from ConnectWise IT Nation”
To get to the blog, Google: “Ted Hulsy Channel Check”
While I do agree that many tradiitional MSPs are selling on price vs value these days, in the microbusiness sector, it’s always been a case of price first, which is why most of my peers avoid the sector like the plague.
In microbusiness, and I’ve said this before, I know, ROI is measured in weeks, not months, or quarters. MBs are faced with financial challenges that larger, more mature companies are not, or at least not in the same way… As a result, offering managed solutions to SBs is a much different animal, and, yet, it’s very much price-driven. Yet, that’s no reason to give away the store when selling to this segment.
We find that most MBs start a relationship with us as the result of a disaster: loss of access to data, old computer that finally dies, a wrong investment in equipment, or problem that they just can’t figure out for themselves. And, these days, with the popularity of the iPad, we get tons of inquiries about support and education.
Rare is the client who comes on-board as a managed services subscriber. More often than not, they ‘date’ us for awhile, using some of your services on an on-demand basis. Only after building a trusting relationship can we convert some of them to managed services clients. The rest? We’ve had clients use our on demand services for years. We continue to try to educate them.
There is a fine line here between value and price, as the latter is always on the mind of the typical MB customer. The good news: their expectations are lower. Many have had the pleasure of using outfits like The Geek Squad or their local communications provider as their outsourced IT department, with generally less than stellar results.
Many MSPs think that MBs require a lot of hand holding. This is true if you are offering the same service that you offer to your 50+ user clients. Device a solution that meets the needs of a typical MB, and you’ll find that they’re surprisingly easy clients. Just make sure that SLA covers everything, and that it’s readable.
It’s true that, at the 30+ level, especially at the 100+ level, there are some nasty price wars that end up damaging, for lack of a better term, the value proposition of MS, while at the MB end, because requirements are different, it’s possible to offer a service at a reasonable value AND price in the mind of the client….
Jim Van
Logicomm
http://www.logicomm-inc.com