I’m starting to hear from multiple managed service providers, who say some MSPs are under-pricing their work and hurting overall industry margins. Other critics worry that rapid starter programs for MSPs will saturate the market with poorly trained service providers who charge pennies on the dollar.
I’m not ready to press a panic button. But it is time for the industry to carefully consider pricing strategies. Here are some of the pricing myths — and realities — facing today’s MSPs. Please weigh in with your thoughts.
Understanding the Problem
Todd McKendrick, one of the MSP industry’s strongest voices, describes current pricing concerns as a “race to the bottom.” Translation: As more MSPs enter the market and undercut each other on price, everyone will suffer. McKendrick accurately points out that savvy MSPs should instead focus on a “race to stay on top.”
I don’t want to speak for McKendrick. But I think we’re on the same page. Ultimately, I think MSPs have to learn the difference between pricing myths and realities. Here are a few.
Myth 1: Managed services will become a low-cost commodity with little profit margin for solutions providers.
Reality: When you deploy a managed services platform, that’s the beginning — not the end — of your strategy. Imagine if you were a Microsoft solutions provider that only put in Windows Server (the platform) but didn’t bother to master any applications (Exchange Server, SQL Server, SharePoint, CRM, etc.).
The situation is similar in the managed services space. Yes, basic managed services (remote monitoring) will facing pricing pressure. But you need to continually add value to your platform. MSPs gain a direct connection into your customer networks. Why wouldn’t you use that pipe to offer more and more services — and generate more and more revenue?
Myth 2: Low-cost MSPs will ruin the party for everyone.
Reality: Some of today’s MSPs are pretenders — break-fix folks who hope to make an easy buck charging for a managed services. But as small businesses get more sophisticated, they will demand high-end solutions like hosted Microsoft Dynamics for CRM, managed video surveillance, unified communications, and a lengthy list of other options. The MSP “pretenders” won’t be able to deliver those services. Savvy MSPs that build out their service offerings will be sitting pretty.
Myth 3: You need to lower your MSP prices as more rivals surface.
Reality: My dad, a real estate veteran, always said “you can lower your prices, but you can’t raise them.” Whether you’re setting the price for a physical asset (your house, your office) or a virtual asset (your managed service), hold firm and start high. Have a single, easy-to-follow sales sheet that explains the value of your services. And don’t be afraid to walk away from the negotiating table if you can’t agree on price.
Yes, in some cases, you’ll need to lower your prices. But if your unique selling proposition is nothing more than a low price, you’re heading for trouble. The MSP pretenders that introduce low prices won’t be around long. And if they do survive, they won’t be wise enough to move up the food chain to offer hosted applications or software as a service.
Myth 4: Low-cost or free MSP starter programs destroy overall industry margins.
Reality: I disagree fully. Let me use Apple’s iPod marketing to explain my reasoning. I purchased a $99 iPod Shuffle and got hooked on it about two years ago. Did I destroy Apple’s overall iPod margins by opting for their lowest-cost device? Absolutely not. I wound up giving the iPod Shuffle to my oldest son, then I purchased an iPod Nano for my wife, and ultimately spoiled myself with an iPhone.
Apple got me into the iPod market with a low-cost offer. But that initial $99 price tag turned into $1,000 in new Apple revenue — plus the monthly service fees AT&T gets for my iPhone cell service.
Now, apply that example to the MSP market. There are plenty of low-cost and even free starter programs. N-able just announced a free program for Microsoft’s North American partners. And Autotask has a $99 starter program called Go! (If you’re aware of additional starter programs, let me know.)
Some MSPs will give these starter programs a try. A few MSPs could be fully satisfied with them. But ultimately, the savvy MSPs will move up their food chain, and they’ll also move their customers up the food chain. Like Apple with the iPod, we need to get people into the MSP market, and then up-sell them.
The Bottom Line
I’m not suggesting everything is perfect in MSP land. Managed service providers will certainly face more pricing pressure as new rivals enter the market. But instead of cutting prices for your current services, you should seek to offer additional services that complement your MSP platform.
Am I over-simplifying a complex problem? Are MSPs doomed to destroy their own margins? I’m open to your opinions and feedback.
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This is an interesting and insightful article; Managed Services is just getting wide spread media coverage despite being around for a few years, so it is the flavour of the month right now.
Naturally a lot of technology contractors and consultants are going to gravitate to Managed Services, some will find that it adds value to their bottom line and to their customers’ businesses others will not. There will always be those that try to fit s square peg into a round hole – these are the guys/gals with no business processes and really with no interest in improving their customers businesses by leveraging technology.
I believe one of the fundamental questions besides you or your business making money is how much interest do you have in seeing your customers’ businesses improve and grow? Your answer to that will determine your comitment to this space and to the IT consultant/contractor space over all.
Joe I love this topic.
If Todd gets to claim “a race to the bottom” as his – please can I claim “It’s not about the price it’s about the value”.
I have lived in the remote backup service world since 2001(granted in the UK – so my world is full of polite negotiation and contracts signed over a cup of tea).
I could and will write a book but our market has gone like this:
2001 Brilliant Idea,Simon
2002 Still a brilliant idea, Simon – have you made it work yet ?
2003 You said you got it working and I believed you but I cant backup or restore my SQL/Mail
2004 You said you got mail working but I cant restore my mails – please help
2005 I dont want your service even though you are getting there and I do like you – because Joe Bloggs can do it for 50% cheaper
2006 How are you ? Have you got mail backup working yet because Joe Bloggs sucks
2007 My bills are creeping up where is the value, Simon ?
2008 In Preparation
I may have missed out some bits. But its sort of a full summary.
There are 100+ remote backup service providers in the UK. My guess is 500+ in the US. They are not all the same. I use as my engine a software product called Asigra. It is amazing. 8 weeks ago 15 Asigra backup service providers (4 UK, 11 US) took time out (self-organised) in Miami to talk about stuff. The agenda was 2 days of the best and informative gossip imaginable. No vendors came or were needed save for 2 storage drinks providers. It was incredible to be a part of – and oh how like minded we all are. If I was to summarise our meet it would be that its not about the price its about the value (or about the SLA some would say)
My gang all live in a relatively mature market where imho the only way to make money is to offer value. Offer a credible service. Let your customer bask in the glory of being able to afford a higher end offering. Make sure you restore their data when they want it back. And most of all don’t ever compete on price.
But that is really really hard to resist. Your business model shows your breakeven point is after 30 months. Your cash/Your friends and family’s cash/Your investors cash/your inheritance has already been (pretty much)fully invested in a good infrastructure and the tools to offer the service. You need a payback and you need it now.
That spreadsheet (and esp the line that says monthly loss) looks better with anything on the revenue line. When you face a monthly black hole there is no such thing as margin – all that exists is generating revenue by any means possible.
So whenever we lose a deal on price (which is a lot) my consolation is that sometime soon that customer will be looking for a new provider because the old one hasn’t delivered or doesn’t exist anymore.
Simon: Thanks for taking the time to paint such a vivid picture, showing many new readers how this market has evolved.
I don’t think the issues you discuss are unique to managed services. In any industry, you need to put a price tag on the value of your services. As soon as you start discounting that value, you’re setting a dangerous precedent and setting yourself up for a downward spiral.
I know I am over-simplifying things. I know the temptation to generate revenue — even at a discounted margin — is present.
But we should all learn from the hardware days. As hardware margins disappeared, the channel moved into new service areas. The same will happen in the managed services market: As some basic services become commodities, MSPs will be force to intro new services.
Standing still isn’t an option.
I am, however, wondering two key things:
1. Will Master MSPs start setting up franchise models to ensure their MSP partners have specific territories without a rival franchise across the street?
2. Does it really take 30 months for ROI? I do hear good things about the Master MSP model, where VARs can use a hosted Managed Service and generate a quick return.
Thoughts, Anyone?
-jp
Albert Einstein said “Insanity: doing the same thing over and over again and expecting different results.”
How do you fundamentally change the technology industry to align itself with the interest of the MSP and the end customers? Certainly something must change.
I challenge you to look for a business model and solutions package that delivers significant value to your customer with an eye toward a long term relationship through which you can profit. This approach makes total sense in a service business (where the value of your business is recognized as the “lifetime” value of your customer) but not for traditional technology vendors or transaction based VAR.
To survive and thrive, I believe the MSP community requires vendors that understand this basic concept. They must provide you as the MSP the necessary technical tools on a business model or platform that is consistent with a long term relationship business. While monitoring tools such as Level Platforms and CRM solutions such as Autotask have quickly evolved to fit this need, you still lack the traditional technology/networking tools on the proper business model to complete your service offering.
Do your current vendors offer you the tools AND the business model to build a relationship/service based business? If not, maybe the MSP community still has gaps in its solution bag!
To improve the “team” [for the customer], you can change the coach or the players…. in this case… you can change your vendors or the channel….[because the end customers are always there!] …. your choice! I trust you don’t want to change the channel.
Calyptix Security is a new network/security vendor in the market with comprehensive networking and security tools AND a business model designed specifically for MSPs. Invest five minutes and take a look. You might just find something that makes sense for you AND your customers.
Ben Yarbrough
CEO, Calyptix Security
I want to be know as the guy that said:
“The best is yet to come” -Todd McKendrick 4/16/2008
Everyone should tell 10 people about MSPMentor so that this becomes the site where good ideas and insightful thoughts are shared. The sand box is giant and I really want to learn more about who, what, why, people are doing certain things in there business.
Let people race to the bottom. It makes it that much more likely that a firm that doesn’t do it will survive and be successful in the long term.
Why?
Because you can’t hide the impact of low prices on your service levels to clients. Low prices =
1. Lower quality people on staff
2. Less staff
3. Slower response times
4. Longer resolution times
The list goes on. Clients will only put up with this for so long before they look for a better option. It’s the exact same reason why some hourly service providers can provide desktop support at $135/hour when other firms are offering it for $85/hour.
Mike Cooch
http://www.smbitpros.com
http://www.everonit.com
I find that most of the information here has real merit… But I believe Price is never the problem. Knowing how to sell YOUR managed service to the RIGHT customers. This is the real problem. Walking away from the wrong clients is very hard to do, But must be done to succeed at YOUR MSP model. Whatever it is.
Go read up on http://gettingreal.37signals.com these guys are spreading the right message.
Why is Dell coming to the channel? Hunting for MSP’s. They can’t reach those customers. The channel and MSP reach the clients that Dell cannot. We need to be asking WHY we reach them.
To grab market share the larger companies are going to give it away for free just to get the market share. If they do not perform they will lose the customer… but at a big cost to the smaller MSP models and at great damage to the market space. Greed is killer of us all… both customer and MSP.
One (of many ways to attack this) is to roll up more services… keep adding more and more into your top end product, you get this big bloated service that is hard to deliver. Or get real and just do less. Instead of half way(half ass) just do half as much. But oh what a great half it is… be the best in the world at one or two things. People pay for the best when it matters.
Doug Mcleod
http://www.clearfocus.net
(caveat: These are late night ravings so they maybe way off base, and may only apply to a tiny corner of the world, aaah make that… my world *grin*)
Reply to #6: Mike, you raise some timely points. The only one I would add is this: MSPs must also be willing to have patience.
Let’s compare the current MSP situation to the dot-com bubble. When the dot-com bubble burst, only the most committed people stuck around to sort things out and build out Web 2.0.
I am not suggesting that we’re in an MSP bubble. But I would concede that we are reaching a point where a lot of non-MSPs are calling themselves MSPs. The truly talented, patient MSPs will continue investing in people, processes and technology — and they will find a way to solidify their brands.
Equally important: The best MSPs will exercise patience and take a long-term view of the market. So that if we ever enter an MSP bubble, they won’t be the ones that pop.
I’m not in your business but as far as I can tell, the break/fix isn’t managed services and that troubleshooter isn’t an MSP. A service to be managed is why clients pay a monthly fee for it. A service of troubleshooting is a service only managed by the client’s breakdown of their system and when they decide it needs to be fixed. That doesnt sound managed to me, thats mis-managed service.
Every industry has these issues. In mine there’s always someone cheaper but few independents like me (and fewer big boys too) have tech financing specific programs that match or beat CIT and work with the wide ranging credits that I can.
The WSJ reported about 2 weeks ago that the Dell/CIT JV to finance Dell’s customers was in big financial trouble leaving Dell potentially on the hook for $455MM in loans they made. I bet they wish they stuck to selling hardware and left financing to the financing people. The expertise is what allows us to sell on value both in mine and the MSP industries.
See the WSJ story reprinted on my blog if interested at http://southernlendingsolutions.blogspot.com
Stu
I am curious what MSPs see as the right industry parallels for the MSP industry to thrive in the long run. Price competition will always exist – but as long as the MSP or any service provider has meaningful market differentiation other than price, then the provider you can move the customer off of price and do well. However, monopolistic profits will always eventually bring competition. I believe much can be learned by looking “outside the box.” So what do you think is the right model? Is it:
(1) the traditional technology vendor – distributor – VAR model;
(2) some sort of franchise model;
(3) the construction industry model (with the MSP serving as the general contractor under its own brand);
(4) a new vendor – manufacturer/MSP distribution & service mode;
(5) something else?
We are listening.
Thanks
Ben
@Ben: My answer would be (5) something else.
I expect most small integrators to leverage a third-party service provider. We’re a seven person shop. Building a NOC won’t be an option for us. Even if we had the money i don’t think it would be well spent on a noc.
Something akin to the “master msp” model described on this site a few weeks ago appears wiser, at least for us. Or something similar to Ingram Seismic, where small integrators can pay a monthly fee for an online service, brand it as their own, and offer it to their customers at a reasonable premium.
I guess this could be similar to item (4) on your list, but it still sounds like (5) “something else” to me.
This “race to the bottom” has nothing to do with the application, tools, or propogation of such tools into the market. The race to the bottom in the IT channel, as it relates to price and margin, is simply the result of our collective inability to sell VALUE and enable our customers to differentiate us from the competition. With no way to differentiate on value or value-proposition, customer have no choice but to focus on price.
Don’t believe me? Read this and let me know if it changes your mind.
http://ingrammicroseismic.wordpress.com/2008/03/19/commoditization-has-nothing-to-do-with-commodities/
If I had to sum up “the race to the bottom,” it would focus on novices bidding down their prices vs. experts promoting their value-added services. As the novices run into cash flow problems, the experts will rise to the top … and continue that race to the top, as Todd McKendrick and others have described on this site.