Are you in a managed services price war?
There is a lot of talk and concern about the economy these days, particularly the impact of inflation on every day goods and services on our daily lives. We have already seen oil prices beginning to increase which seems to have had an impact on airline fares and fuel prices at the gas pump. We are all worried about rising prices but if other areas of our lives are on the rise then why are some MSPs slashing their prices? Let's examine some possible reasons why.
First, if MSPs are subject to the same laws of economics as the rest of us then a rise in inflation should have a corresponding increase in the price of managed services. Electricity, bandwidth, labor, health care, insurance, and other business fundamentals all contribute to how much a MSP business must charge for its services in order to generate a profit. For the past few months, many of these key items have seen definite increases in their prices.
Second, if managed services offerings are destined to increase then we should see this increase across all MSPs in the geographic area impacted by the inflation. Then why is it that we are seeing some MSPs drop their pricing at a time when inflation, increased demand for managed services, and other market indicators suggest that these prices should actually be increasing?
One explanation for MSPs who are dropping their pricing is how they view their managed services offerings. For a while now I’ve witnessed more than a few MSPs who view their own offerings as mere commodities; services that have minimal value because they can be obtained from any MSP. Naturally, many MSPs would take objection to this view since it tends to cheapen the value of MSPs in general and it hurts the MSP who does it specifically. It is for this exact reason mature MSPs have always tried to steer away from looking at their service offerings as a commodity. Instead, a good MSP views its offering as a professional service.
Jeffrey Nelson, CEO of Anexio, a Sarasota based MSP, has seen some MSPs drop their prices in an effort to win new clients but notes that this strategy is not sustainable in the long term. “As with any industry that has commoditized itself we are seeing a lot of pricing pressures,” Nelson said. “In fact just this week we have met with three clients that have received up to 5 different proposals for services and the pricing options they received were drastically different. So much so that our consumers are completely baffled and unsure of what they are getting.” Nelson has not seen any impact on pricing due to inflation.
Other MSPs are coming up with innovative methods for dealing with pricing pressure without engaging in price dropping. ClearPointe, an Arkansas based MSP, has not lowered its prices but is creating additional service level agreements to accommodate clients that are sensitive to cost. According to Bob Longo, ClearPointe’s vice president of business development, the company is seeing price pressure but not from domestic MSPs. “We are seeing competitive pressures but it is mainly due to people reselling managed services that are being delivered from out of the US.” The downside to this approach, says Longo, is that clients tend to have a very low opinion of “managed services” and need to be re-educated about what the true value is to their organization.
The end result seems to be that inflationary pressures are not driving higher managed services prices. If anything, the threat to MSPs today comes from other MSPs intent on driving pricing down. From the perspective of a financial services focused MSP, HEIT has not yet seen inflationary price increases but has seen smaller and more broad spectrum MSPs falling victim to price wars.
"I recommend not falling into the trap of pricing wars, because it will decrease the value of your MSP and the industry," said Dan Holt, CEO of HEIT. "Continuous innovation of new solutions around MSP’s also helps avoid pricing wars, because apples are different than oranges."
MSPs must have a plan to deal with competitors who use price as a sales weapon. To remain competitive while also remaining profitable is a crucial capability all MSPs need to master in order to survive difficult economic times.
"At the end of the day, we (MSP’s) have to work on the innovation component both externally with new solutions that add value as well as improving our processes internally," said Holt. "At the end of the day, scale matters tremendously for innovation and efficiency."