Editor's note: This is the second of a two-part series on managing a profitable cloud services business. In case you missed part one, "Pricing Strategies to Profitability Grow Your Managed Services and Cloud Business," you can find it here.
Cloud Profitability Hacks: How You Can Increase Your ROI
When determining your pricing model, make sure you are fully aware of all your costs, both hard and soft. Simply adding a 30 percent markup on cloud services could leave you just barely breaking even. While you absolutely must make sure you cover your variable costs, here’s how to make sure you make double-digit margins.
Step 1: Calculate Operational Costs
This should include anything you need internally, excluding technology services you resell, in order to deliver managed services, which can include but is not limited to:
- Office space (monthly rent + utilities)
- Employees (salaries + benefits + contractor fees)
- Subscription-based services (PSA, RMM, accounting or productivity tools, etc.)
- Sales and marketing initiatives (paid ad placement, event sponsorship, platforms, etc.)
- Training and certifications
Bonus Tip: As your operational contracts end, whether it be for internal Internet services or by way of a tenured employee exiting the organization, consider reviewing how much you’re shelling out for those services, and examine if it makes sense to choose a less expensive and more reliable Internet Service Provider (ISP) or streamline your processes and training so you can simply hire a less experienced individual to backfill the open position.
Step 2: Continuously Improve Your Processes
If you want to improve operational efficiency, it is important to streamline operations so they are repeatable. This will enable you to improve your cost structure by reducing inefficiencies and variability that drive costs up and customer satisfaction down.
Your business processes and cost structure also need to be considered when setting prices. Whether you want to hire a dedicated dispatcher or simply send your marketing team to an upcoming tradeshow, these items come at a cost—and they need to be considered when setting pricing. Aim high, test your market to see what it’s willing to sustain, and let your team know that when pricing is cut these are the items that will go along with it:
- Net new position(s)
- Promotions and raises
- Infrastructure improvements
- Incentive trip(s)
- Expanded office space
- Technology upgrades (new laptops, better business automation platforms, etc.)
Step 3: Compare Cloud Services Vendors (Pricing and Ease of Business)
By embracing processes that improve ease of business, you can reduce operational friction, which, in turn, will lead to reduced costs and more responsive service.
Sometimes the easiest way to get the margins you’re after is to select a mix of emerging technology vendors that offer better margin opportunities. Once you know how much your current and future operational needs will cost, as well as what your local market can bear, you can begin to anticipate a target pricing range for solutions.
According to CompTIA, 35 percent of channel firms are currently looking for new technology vendors because they’re dissatisfied with their current lineup. Just as with car insurance, it’s wise to re-evaluate the cost of your cloud services on a regular basis. With so many new cloud services vendors popping up left and right, there’s certain to be less expensive and more flexible options than what you’re currently offering.
While price matters when shopping for the right vendor and product mix, just shopping on price is dangerous and short-sighted. Make sure to find the balance that is right for your business and the customers you serve.
Step 4: Set a Competitive Margin
Focus on targeting a market leading 15 percent+ earnings before interest, tax, depreciation and amortization (EBITDA) margin, and then work backwards when setting prices. Factor in the variable cost of service and then the more fixed types of costs outlined above. When all said and done, the price method and amount should support an industry-leading margin target and have room for adjustment along the way.
For example, an MSP with an average of 50 customers who have about 50 users each could achieve a market leading 15 percent EBITDA by charging $160 per-user per-month. Work backwards by calculating an average of $80 in wage costs (burdened with benefits, training, management, etc.) and 35 percent in sales, marketing, and general administrative costs.
Step 5: Protect Your Price
This is a price your sales team is not allowed to sell below because doing so will erode your existing revenue and diminish returns in the long run. It is important to protect the floor and not compromise profitability by constantly dropping your price. There may be reasons to competitively match to get a shot at new business, but remember to guard your price integrity.
Regardless of whether you hit the top or bottom of the established margin range, you’ll still be considered a top-notch MSP by Gary Pica’s standard.
Putting It All Together
By following these five simple steps, you are building an effective strategy to greatly improve business processes that can ultimately help your business become more profitable in the long run.
Bonus Tip: A recent IDC study found that resellers who package their offerings as Intellectual Property (IP)—rather just services they’re reselling—can command margins as high as 70 percent.
Feeling ready to diversify your current portfolio of services with cloud-based solutions that capture double-digit margins? Find a cloud-focused distributor to help you create a path of success so that your business will soar with cloud.