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The industry is quickly moving beyond the traditional approach to managed service pricing, fueled by cloud solutions. However, many MSPs remain focused on a legacy pricing and customer value model that is not well-aligned to the new customer consumption requirements. Maintaining reasonable margins require that MSPs proactively modify their existing customer relationship model.
February 19, 2013
3 Min Read
By 4-Profit Guest Blog 1
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The industry is quickly moving beyond the traditional approach to managed service pricing, fueled by cloud solutions. However, many MSPs remain focused on a legacy pricing and customer value model that is not well-aligned to the new customer consumption requirements. Maintaining reasonable margins require that MSPs proactively modify their existing customer relationship model.There is a clear trend influencing how successful MSPs address the business model evolution. MSPs need to move toward being valued by customers for the technology “business” advice as opposed to lifecycle management and support. Some attributes that indicate customers value the business aspects of the relationship include:
The customer request the MSP’s involvement in business workflow discussions and assistance in deriving meaningful information from existing systems;
The MSP proactively initiates discussions regarding new core application directions in the cloud; and
The customer regularly invites the MSP to speak with senior management or at board meetings to discuss how technology will significantly affect revenue and profit improvements.
Experience proves that achieving this level of customer relationship is driven by a strong virtual chief information officer (VCIO) function clearly aligned to the customer’s information objectives. The VCIO is a key enabler of ensuring a customer values the relationship far more than mere maintenance and support, and will pay for this expertise as the underlying technology platform evolves.
Those whose relationships remain tied to devices and mostly maintenance will likely experience revenue and margin erosion. Consider the following example of an average MSP customer with 30 desktops, two servers and one location (size and pricing have been generalized):
Current pricing: $250/month/server, $60/month/desktop = $2,300/month service fee (excluding other attached services).
Over the next three to five years the average customer is likely adopt some public cloud solution and increase its unmanaged devices. The result could be: one server and 15 managed desktops, but still 30 users. In the absence of a fundamental shift in how customers perceive the value, a likely impact could be a 50 percent reduction, or $1,150/month!
Many cloud-based solutions are truly aligned to basic customer needs with the primary margin opportunity shifting to the cloud provider over time. MSPs should offset the impact of this trend by increasing their business value to customers and ensure the pricing model reflects the true value received.
To address this objective, MSPs should address a few key areas, including:.
Do an honest risk assessment of each customer including likelihood of fit with public cloud offerings, possible impact to MRR (+/- percent of current) and ranking of the customer’s actual perceived value as business or technical.
Stratify the list into sub-components, such as customers who likely don’t need us much post-cloud conversion, customers that need us less and customers that will need their services than ever.
Assess the current and future plans for the VCIO function in the MSP company as a business adviser. Industry benchmarks are available to assist with this process.
Determine if the MSP’s vision, unique value proposition, marketing strategy, target market, one-year plans and current quarter priorities align to grow a likely revised target market comprised of customers that will need the MSP services significantly more.
It is important that the overall strategic planning process address the market trends, opportunities and threats the current market trends indicate. These should be proactively addressed in the MSP’s business model from all levels and likely will separate the next round of market winners. There is no question that value-added managed service providers have a growing role in the market, but only those who aspire to achieve margins aligned to a higher customer value likely will persevere at attractive margins.
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Scott Goemmel has worked with many IT service providers, distributors, and technology manufacturers over the past 20+ years. He is focused on coaching organizations to be healthy and profitable. Working with 4-Profit, Scott helps customers build a more predictable revenue base and strategic plan. He is active in the channel as a speaker for various industry shows and teaches instruction-based seminars on business growth.You May Also Like
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