“You never want to win on price, you want to win on the value of your product." Diane Greene, CEO of Google Cloud said this about cloud computing, but this belief also holds true for managed services. You could say this is especially important for managed services providers.
For many years, MSPs have struggled with how to respond to competitive pressures centered around price. Now, we will be offering some solutions on how MSPs should deal with the sales and marketing aspects of pricing pressures. For this article, we will focus on the high level organizational and leadership view and how MSP executives should approach pricing within their company.
Services Pricing vs. Everything else
Among the first things all MSPs should do is evaluate their pricing methodology for their managed services catalog. If you sell anything else besides managed services (project work, hardware, software, etc.), you must look at your managed services pricing very differently.
When pricing hardware or projects, a somewhat simple calculus can work for a majority of MSPs. Factor your cost of goods sold, the cost of the item you are reselling (for projects that would probably be the COGS) and add a reasonable margin for profit. Pretty simple.
For a long time, MSP execs approached pricing their managed services in the same way they priced everything else they sold and delivered through their company. This model had a few problems: 1) it frequently failed to calculate an accurate cost of goods sold due to a lack of visibility into the costs of delivering the services, and 2) the managed services pricing was vulnerable to attack by other MSPs and customers because it was treated similarly to a hardware or software widget.
I believe many factors contributed to this mindset, but, whatever the reason it left MSPs vulnerable to competing solely or predominantly on price. This is what Google Cloud's CEO meant when she said not to win on price. Winning on price is almost always a temporary victory. The next time that customer won't respect you and will pressure you again on price. Your competition will get wind that you are vulnerable on price and will attack you there. What is more disconcerting is that your team will get used to responding to pricing concerns (more on this topic in future articles).
If you can't defend the value of your managed services you either a) have an offering which is not valued (or not valuable) by your customers, or b) your sales team does not know how to articulate the value of your services. Either of these deficiencies can be devastating to a managed services practice and your reputation as an organization.
