Bundling Services for Value and Margin
Real numbers are hard to come by, but evidence suggests managed services are their own best catalyst for growing managed services. According to research firm Techaisle, nearly two-thirds of managed services providers deliver at least two different managed services to their customers. Previous studies by other groups have shown that end users are more likely to adopt additional managed services from the same provider once they gain experience with the first service.
End users’ propensity to buy managed services, though, isn’t a guarantee of profitability or sustained success for providers. In fact, offering individual services can often reveal too much about your pricing. Savvy customers could use that information to either pressure for concessions or shop for alternative, lower-cost providers.
The key to preserving margins is bundling your services. By creating product bundles with varying value levels, you’re able to protect margins by combining lower margin offerings with high-value services.
The Value of Bundling
Consider this example: An end user wants you to monitor and manage their 10 servers. Your price is $25 per month for each server, or $250 per month. Your cost is $15, leaving you with a gross profit of $10 per device. Not bad. But end users never just need server management. Adding backup to the equation at the cost of $35 and a margin of $20 per node will bring your unit ASP to $60 and margin to $30. And what about security? Yeah, that’s needed too, so throw it in at $30 per server with a margin of $15.
All in, the total manifest is $90 per server with a gross margin of $45 each, or an effective 50 percent margin. In this example of 10 servers, the MSP will net $450 per month profit.
Bundling is good for two reasons. First, it makes offerings easier to understand and less complex for the buyer. What you see is a series of related services that you’ll be delivering in concert. What the buyer sees is a comprehensive package that looks and feels like one service. To make bundling work on this level requires more than just stitching together services; it requires branding. You want to call it “XYZ Technologies Total Server Care” or something like that, to reinforce the importance of purchasing the complete package.
The Branding Factor
Branding a bundle also helps protect against price and profit erosion. When prices are itemized, customers have the opportunity to question and push back. Many MSPs are reluctant to stand pat on price and risk losing a sale, so they compromise – which means reducing prices or removing services from the deal. By bundling and doing flat-fee pricing, MSPs take information out of the hands of the customer and allow negotiations to happen based on value, not individual costs.
Nothing says that MSPs have to simply aggregate prices and margins when bundling. In the hypothetical example above, the prices and margins are stacked. An MSP could just as easily create the bundle, and up the aggregated price another 20 to 30 percent to enhance the margin and give them flexibility in negotiations. If the conversation is about value and the price/margin is elevated, the MSP has latitude for granting concessions while still preserving the margins.anding a bundle also helps protect against price and profit erosion. When prices are itemized, customers have the opportunity to question and push back. Many MSPs are reluctant to stand pat on price and risk losing a sale, so they compromise – which means reducing prices or removing services from the deal. By bundling and doing flat-fee pricing, MSPs take information out of the hands of the customer and allow negotiations to happen based on value, not individual costs.
Better still is extending the concept of bundling to selling business value at the application level. For example, you can target a vertical market such health care and bundle IT managed services with high value business process automation. As a result, you can lead with a value proposition to health care prospects that includes messaging like:
- Learn how XYZ can deliver user-friendly EHR and practice management solutions for your practice or specialty
- See how our solutions help you bill more accurately, get reimbursed more quickly and increase your cash flow
- Find out how our solutions can dramatically reduce paperwork and administration, saving you time and money
- See how XYZ’s easy-to-use solutions can simplify and automate your everyday tasks
Bundling services should be part of every MSP’s go-to-market strategy because it simplifies marketing and customer communications and pricing, while ensuring and enhancing profitability. MSPs will see marked improvements in their operational and revenue performance if they adopt a bundle-first approach rather than selling managed services a la carte.
Steve Ricketts, VP of Marketing, Continuum, which provides an end-to-end intelligent remote monitoring and management solution, 24 x 7 Service Desk, and business continuity platform offering – all integrated with a 24/7 Network Operations Center (NOC) that enables MSPs to profitably backup, monitor, troubleshoot and maintain IT environments.