Are Managed Service Providers Killing Their Own Margins?

I’m starting to hear from multiple managed service providers, who say some MSPs are under-pricing their work and hurting overall industry margins. Other critics worry that rapid starter programs for MSPs will saturate the market with poorly trained service providers who charge pennies on the dollar.

I’m not ready to press a panic button. But it is time for the industry to carefully consider pricing strategies. Here are some of the pricing myths — and realities — facing today’s MSPs. Please weigh in with your thoughts.

Understanding the Problem

Todd McKendrick, one of the MSP industry’s strongest voices, describes current pricing concerns as a “race to the bottom.” Translation: As more MSPs enter the market and undercut each other on price, everyone will suffer. McKendrick accurately points out that savvy MSPs should instead focus on a “race to stay on top.”

I don’t want to speak for McKendrick. But I think we’re on the same page. Ultimately, I think MSPs have to learn the difference between pricing myths and realities. Here are a few.

Myth 1: Managed services will become a low-cost commodity with little profit margin for solutions providers.
Reality: When you deploy a managed services platform, that’s the beginning — not the end — of your strategy. Imagine if you were a Microsoft solutions provider that only put in Windows Server (the platform) but didn’t bother to master any applications (Exchange Server, SQL Server, SharePoint, CRM, etc.).

The situation is similar in the managed services space. Yes, basic managed services (remote monitoring) will facing pricing pressure. But you need to continually add value to your platform. MSPs gain a direct connection into your customer networks. Why wouldn’t you use that pipe to offer more and more services — and generate more and more revenue?

Myth 2: Low-cost MSPs will ruin the party for everyone.
Reality: Some of today’s MSPs are pretenders — break-fix folks who hope to make an easy buck charging for a managed services. But as small businesses get more sophisticated, they will demand high-end solutions like hosted Microsoft Dynamics for CRM, managed video surveillance, unified communications, and a lengthy list of other options. The MSP “pretenders” won’t be able to deliver those services. Savvy MSPs that build out their service offerings will be sitting pretty.

Myth 3: You need to lower your MSP prices as more rivals surface.
Reality: My dad, a real estate veteran, always said “you can lower your prices, but you can’t raise them.” Whether you’re setting the price for a physical asset (your house, your office) or a virtual asset (your managed service), hold firm and start high. Have a single, easy-to-follow sales sheet that explains the value of your services. And don’t be afraid to walk away from the negotiating table if you can’t agree on price.

Yes, in some cases, you’ll need to lower your prices. But if your unique selling proposition is nothing more than a low price, you’re heading for trouble. The MSP pretenders that introduce low prices won’t be around long. And if they do survive, they won’t be wise enough to move up the food chain to offer hosted applications or software as a service.

Myth 4: Low-cost or free MSP starter programs destroy overall industry margins.
Reality: I disagree fully. Let me use Apple’s iPod marketing to explain my reasoning. I purchased a $99 iPod Shuffle and got hooked on it about two years ago. Did I destroy Apple’s overall iPod margins by opting for their lowest-cost device? Absolutely not. I wound up giving the iPod Shuffle to my oldest son, then I purchased an iPod Nano for my wife, and ultimately spoiled myself with an iPhone.

Apple got me into the iPod market with a low-cost offer. But that initial $99 price tag turned into $1,000 in new Apple revenue — plus the monthly service fees AT&T gets for my iPhone cell service.

Now, apply that example to the MSP market. There are plenty of low-cost and even free starter programs. N-able just announced a free program for Microsoft’s North American partners. And Autotask has a $99 starter program called Go! (If you’re aware of additional starter programs, let me know.)

Some MSPs will give these starter programs a try. A few MSPs could be fully satisfied with them. But ultimately, the savvy MSPs will move up their food chain, and they’ll also move their customers up the food chain. Like Apple with the iPod, we need to get people into the MSP market, and then up-sell them.

The Bottom Line

I’m not suggesting everything is perfect in MSP land. Managed service providers will certainly face more pricing pressure as new rivals enter the market. But instead of cutting prices for your current services, you should seek to offer additional services that complement your MSP platform.

Am I over-simplifying a complex problem? Are MSPs doomed to destroy their own margins? I’m open to your opinions and feedback.