Moving to the managed services model increasingly appears to be a natural progression for VARs or any IT service provider operating a break-fix business. We’ve highlighted the benefits of making the move. Outlined the steps along the road to a successful transition. Now we address the hard part. It’s time to single out the challenges and learn how to knock them out of your way. Hold onto your hats because there is a lot to tackle!
1. Choosing the Right MSP Pricing Model
Any provider accustomed to making money from selling products and one-off professional services will need to transition to an MSP-friendly pricing model. It’s often a matter of going from charging by the project or hour to monthly billing cycles – but if it were only that simple. Deciding on a pricing model is challenging because there are so many options to choose from. Common MSP pricing models include:
Monitoring-Only: This pricing model is suitable for resellers that plan to start out with bare essentials like monitoring and updates. In this arrangement the service provider is usually only responsible for watching, updating, and patching IT systems. The advantage a monitoring-only model offers is leverage that allows VARs to continually charge managed services customers to fix problems as they arise.
Per Device: The per device pricing model is the most common structure – mainly because it’s piece-of-cake simple. This plan simply calls for the provider to establish a flat fee for each device it supports. For example, $50 per desktop, $100 per server, and so forth. The per device model gives MSPs the ability to present prospects with accurate quotes as well as opportunities to increase recurring revenue as clients add additional devices to their network down the road.
Per User: The per user approach is similar to the per device model. Rather than structuring price based on the number of devices in the network, fees are structured by the number of users. Though not as common as the first two models, this method is quickly catching on with IT professionals who need around the clock access to networked devices.
Some experts view the per user model as a more ideal alternative to the per device method, which has been criticized for its tendency to force MSPs into having to commoditize their solutions. “When presenting value to the client, we can now tell them we don’t care how many devices they have, it’s just one fixed fee,” says Vince Tinnirello of Anchor Network Solutions. “It’s a win-win proposition and one that you can apply to your MSP practice and take into the future without fear of losing revenue due to disappearing on-premise hardware.”
Tiered: The tiered pricing model is another popular choice among MSPs. This is also the most flexible model considering that it can be structured in a wide variety of ways with differing levels of priority and support. For instance, you might have a Tier-1 package that includes malware removal and patch management with phone and email for support. Tier-2 might include those same services with onsite visits added for a higher price. The biggest challenge in a tiered system is illustrating value and justifying price differences between levels so it all makes sense to both the client and the provider.
All You Can Eat: The All You Can Eat or “A La Carte” model is widely considered the most challenging pricing strategy to implement. This structure is basically designed to allow the client to select the managed services they want from a large menu of individually priced options. With that luxury comes the risk of overwhelming clients to the point of confusion, or worse – where they start thinking more about cost than value. While not exactly held in the highest of esteem, the all-you-can-eat pricing model manages to appeal to clients in need of a solution that accommodates evolving needs as they continue to grow.
Each of the aforementioned pricing models have merits and demerits that should be carefully considered at the drawing board. Your payment structure is that fine little detail that demands near perfect alignment in order to move forward with business.
2. Bringing Break-Fix Clients Along for the Ride
Some IT service providers have opted to wash their hands entirely of the break-fix model – and their existing clients. “Eventually, we decided that any clients who didn’t want to be proactive and have things managed regularly wouldn’t be people we want to work with,” said Guy Baroan of Baroan Technologies when asked about how his company handled current clients while in transition. “The ones we couldn’t convince went away to a company we know who was still ok with offering break-fix—we didn’t leave them hanging. After that, we only had clients that were willing to be proactive and it was just so much better.”
VARs will benefit greatly from being able to identify trusted clients who are willing to tag along as you journey towards this promising new model. You’ll likely be challenged in getting those clients settled in since paying for managed services is a whole new world for them as well. It can be a slow, grueling process with small gains seen initially, but one that blossoms into something special and prosperous over time.
3. Selling Value to Would-be Clients
We’ve touched on it throughout this series, and I think it’s fair to say that selling value is one of, if not the biggest mountain to climb. Customers want to realize benefits beyond the need to outsource their obvious IT hassles. Operating a managed services model can be a complex endeavor, but like in any arena, it all boils down to the USP – your unique selling proposition. Every MSP more or less has access to the same technology. Competitors thrive by differentiating their business and standing out from the pack. It’s how one MSP is able to comfortably charge a higher price and another can enjoy margins in the 30 to 35 percent range.
Defining what makes your business unique is one of the most effective ways to drive value home to prospective clients. It can be as simple as enforcing standardization across the business. From delegating roles for internal IT processes to defining the countless details that affect the client, it pays to come up with a set of standard processes that just about anyone can follow and produce the same results. Take the initiative to define what success looks like from every conceivable angle. In doing so it will be much easier to see when customers and staff align (or don’t) with the standards you have put in place.
4. Funding and Financing
Many firms in transition have no choice other than to micromanage every single element of money management. Decision makers must anticipate upfront costs and carefully evaluate each project that comes along to determine what they can realistically afford to support. MSPs with thinner budgets need to be proficient at factoring setup fees, that first monthly payment, and subsequent payments into the cost of services, hardware, and day-to-day network maintenance. Combined with an attractive service menu and the right pricing model, sound money management is critically important to reaping healthy returns sooner than later.
This transition should ultimately be treated like any other key business investment. Prospective MSPs need funds to get the initiative off the ground and enough cash flow to keep the ball rolling. At the same time, the lack of capital isn’t necessarily an absolute show stopper. In fact, rolling the cost of core technologies into long-term debt that is easy to afford in smaller payments is an example of how new MSPs can get their margins right and eventually start funding everything from their own bank account.
5. Balancing Both Models
In promoting managed services as the enlightened path to profitability, supporters often send the not-so-subtle suggestion to abandon the break-fix model forever. We closed out part two of the series by emphasizing that you don’t need to ditch break-fix altogether to make recurring revenue a reality. There are several reasons to keep this model intact, none more compelling than the profit potential. The fact of the matter is that not all companies are ready to go managed, so there is still some value in offering IT solutions for needy customers who call in crisis mode.
Having a portfolio stocked with products, professional services, and managed services is a challenge in and of itself. Effectively delivering two different service models essentially means juggling two different business strategies. As a result, it may require two different marketing messages. Two separate sales structures. Two sets of KPIs. Consider it a monumental challenge, but not an impossible feat by any means. A combination of solid business practices and business management is the key to successfully delivering a robust hybrid solution that maximizes profit margins and growth.
There is no such thing as a completely smooth transition. However, identifying and preparing for known challenges will make for a much smoother ride when those roadblocks are encountered along the way. Informed and cautious, yet deliberate in their approach, the ambitious VAR is now ready to enter the lucrative MSP space!