If you are Managed Service Provider, what do you sell to your customers ? What is the fulcrum of your Offerings? More often than not, the answer is knowledge, earned either through decades of experience or through extensive research or by simply having the best people in your payroll. Essentially the offering is what your people can do, what processes you bring to the table and how efficiently you manage the service.
So, how do you price such a managed service offering? The first answer that you get is always - cost / profit based pricing. Common questions you ask yourself : How much does it cost for my MSP to deliver the services within the stated bounds of the Offering ? How much margin do I need to keep in order to maintain a healthy EBITDA? What is my organisation's strategic direction - am I a startup looking to acquire logos even at low margin? am I an established player looking to expand margin? Am I looking for low churn? Finally, you ask the big question, who are my competitors? What is the market I am playing in (your actual target market is defined by your capacity, growth and elasticity and not your TAM ). Now that you have the answers, you can set a price. But wait, is this the number you should go to market with? If you do, you will sell Offerings at much lower price than your list price OR you will end up losing competitive bids and even see higher churn. Let us apply a modified version of Porter's forces on this price, within the bounds of IT Managed Service Industry.
1. Competition in the industry : Very-High (Niche Players, Mid-Market Players, Geography-centric players & GSIs). You can somewhat limit the competition for each offering by building different offerings for different markets.
2. Potential of new entrants into the industry : Mostly saturated (Medium to Low)
3. Power of suppliers/partners : Depends on your Offerings. What percentage of your offering's value, cost and GTM depend on partner products? Are you diversified in your partnerships? Is your partner a channel driven business who depends on you? Thumb rule: If you are a small MSP, the power of partners is Very High. If you are a big Global MSP, then the power of partner is low.
4. Power of customers : Very High (There are too many choices in the market. For the customer, cost is a bigger differentiator than quality. Beyond a certain level, quality of service DO NOT increase the willingness to pay). In the real daily life, you may only be willing to pay $500 for a toaster, may be $800. Even if a company brings in a talking top class fancy toaster for $2000, you will not buy it.
We can talk about gauging a customer's willingness to pay in another article. There is a world of difference between gauging WTP in a B2C structure and gauging WTP in a B2B structure. Negotiating with Procurements is an art in itself.
5. Threat of Attrition / Rise in people cost : Very-High (This directly impacts pricing if you are in a cost-based model)
Essentially, all these forces will work on your price and each will take their own pound of flesh. As per independent market analysis, you will probably end up selling your services at a much lower margin. In a general ballpark calculation, if you intend to get a margin of 60%-70% on your IT Managed service offerings, market forces will bring that margin down. When the EBITDA finally gets calculated, it will probably be 10%-20% of your revenue. If EBITDA
is at 10%-20%, at your net you are barely running your firm around the break-even.
What will happen if the people cost rise further? You must increase price to realise margin. You cannot increase your prices to meet your cost. It works for essentials like oil or utilities, not in a saturated market with options. You will start losing customers if you increase price. If you don't, you will be losing margin. You will gradually start losing your best people to a high paying market. So you will be stranded with mediocre offerings (without your best people) at very high price (very-high in terms of the customer's willingness to pay in your market). So how do you retain price?
Shifting the fulcrum of your offerings from People to Product is the only way forward. Opening up your managed services to the world of AiOps is critical. It is important to do a build vs buy analysis and establish a comprehensive fleet of quality products for your offerings which can be supplemented by quality man-power.
If you are building in-house, you need to invest and run fast. The speed of releases must be lightning fast. Yes, that means you need to invest. These products are your differentiators in the market. In the near future, your capability as an organisation will no longer be judged by the degrees or certificates of your people, but by the number of patents you hold or by the number of academic/corporate partnerships you foster. Beyond a certain level of quality, capabilities of your people will not push up the customer's willingness to pay. The quality of your products will however, help you retain your prices and expand your margin. You need to look at pricing models from the market point of view through the prism of a customer's willingness to pay. Looking at pricing purely from the cost angle is risky at best and catastrophic at the worst.
If you are already late to the party, build orchestrators. Make partnerships or buy necessary licenses and put them on your OWN branded platforms. Build your own assets around existing products in the market. Even there also, diversify your partners if technically feasible.
This price war with all its paradoxes will unfold very fast, right before our eyes. It is high time to shift gear !!
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