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Combatting MSP Margin Erosion

Fueled by cloud solutions, the time is now for MSPs to move beyond legacy pricing models and proactively modify their existing client relationship model.

managed service pricing

There is a clear trend influencing how successful MSPs address the business model evolution. MSPs need to move towards being valued by clients for their technology business advice as opposed to lifecycle management and support. Some attributes that indicate clients value the business aspects of the MSP relationship include:

• Requests for MSP involvement in business workflow discussions and help in getting meaningful information from existing systems;
• Proactive discussions with the MSP regarding new core application directions in the cloud;
• Recurring invitations to senior management or board meetings to discuss how technology will significantly affect revenue and profit improvements.

Experience proves that achieving this level of client relationship is driven by a strong virtual chief information officer (VCIO) function clearly aligned to the client's information objectives. The VCIO is a key enabler of ensuring a client values the relationship far more than mere maintenance and support, and will pay for this expertise as the underlying technology platform evolves.

[Related: Managed Services: Two Sales Forces May Be Better Than One ]

Those whose relationships remain tied to devices and maintenance will likely experience revenue and margin erosion. Consider the example of an average MSP client with 30 desktops, two servers, and one location with current pricing at $250/month/server and $60/month/desktop for a $2,300 monthly service fee, excluding other attached services. Over the next three to five years, the average client will likely adopt some public cloud solution and increase unmanaged devices. The result could be one server and 15 managed desktops, but still 30 users. In the absence of a fundamental shift in how customers perceive the value, the pricing impact could be a 50 percent reduction or $1,150/month.

Many cloud-based solutions are truly aligned to basic client needs with the primary margin opportunity shifting to the cloud provider over time. MSPs should offset the impact of this trend by increasing their business value to clients and ensure the pricing model reflects the true value received.

To address this objective, an honest risk assessment is required, with the gaps in both target market and staff competency evolution included in three-year, one-year, and 100-day planning objectives. Beginning this shift today is essential for continued prosperity as an MSP of the future.

Scott Goemmel serves as a business advisor at 4-Profit, which specializes in helping IT resellers and service providers strategically address the key issues and opportunities affecting their ability to grow revenues and/or profits.


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