Low MSP Pricing a Symptom of Larger Problem

A new study by Kaseya finds low pricing is hurting managed service providers’ growth. Low pricing is an issue, but it’s more symptomatic of a lack of sales and value confidence among MSPs.

By Larry Walsh

Competing on price undercuts the value of managed services. This is essentially the conclusion of a new survey by Kaseya, a publisher of remote monitoring and management tools, in which it found managed service providers (MSPs) with higher-priced offerings also demonstrate higher rates of growth. The supposition is that they’re also selling based on value, not price.

At The 2112 Group, we agree with that finding, but we have a different take on the underlying issue. Price integrity is a problem, but it’s more symptomatic of a larger problem – lack of business acumen and selling confidence.

For the past three years, 2112 has tracked managed services profitability, and we’re in the final stages of our annual Channel Forecast study, which will allow us to update our numbers. Managed services was once the bedrock of solution provider profitability. That’s increasingly not the case.

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The average solution provider earns one-half to two-thirds of its revenue from some form of service – predominantly managed services. And for a while, managed services generated gross margins of up to 60 percent. Managed services profitability, however, is falling; in 2014, it slipped to between 30 percent and 40 percent. Preliminary data from the Channel Forecast study indicates that trend continued in 2015 – with average profitability falling below 30 percent.

Kaseya is likely correct that MSPs charging more are better at conveying value to their customers, but it’s not the pricing that leads to growth; it’s the confidence in what they’re selling.

Managed services – which increasingly includes the management of cloud-based assets – has tremendous value to the subscribing customer. By adopting managed services, a business is deferring IT tasks and functions to a third-party, often with a greater degree of operational effectiveness and cost efficiency. MSPs selling on the operational value and better outcomes can charge more.

A problem endemic in the channel – inclusive of the managed services community – is a lack of business acumen that drives operations and growth. Only 50 percent of solution providers set annual growth goals. An equal number have sales goals and plans, but among those, as many as one-half aren’t following their own guidelines and are settling for lower returns.

[ctt tweet=”A problem endemic in the #itchannel is lack of business acumen that drives operations & #growth.” coverup=”DU97d”]

Evidence of how MSPs short themselves was found in a 2014 managed services study that 2112 conducted, in which we found that many MSPs are using their common services as loss leaders. At least one in 10 MSPs are giving away network, e-mail, security, backup, storage, and unified communications services.

As for pricing, the 2112 managed services study found that 55 percent of MSPs anticipated pricing to remain neutral or decline through 2015. Another 51 percent expected profits to fall during the same period.

While pricing is important, sales and marketing are even more so. The Kaseya survey adds more evidence to the case for greater price integrity and less emphasis on the functionality of technology. But raising prices isn’t enough. Vendors need to help partners recognize the value of what they deliver in goods and services through training and support. MSPs need to recognize when it’s OK to walk away from a sales opportunity to preserve their pricing integrity and value proposition. And all solution providers – especially MSPs – need to focus more attention on establishing strategic and operational business plans and executing against goals.

2112 offers a number of services and resources for vendors that want to help partners recognize their value and build better, stronger businesses. For more information about how 2112 can help elevate partner value propositions, e-mail info@the2112group.com.

Larry Walsh, The 2112 GroupLarry Walsh is the founder, CEO and chief analyst of The 2112 Group. Follow him on social media channels: Twitter, Facebook, LinkedIn.