Setting prices for products was once an easy task for resellers. Maybe they charged what manufacturers were charging and simply pocketed the discount. Maybe they took what manufacturers charged them, added a percentage and, voila, they had a price.
Those days are long gone. Services today -- whether it is managed services, cloud services or consulting services -- make up an increasingly large part of most solution providers' overall business. Problem is, many don't have a clue about how much to charge for those services.
"Pricing is a skill that's critical for partners today," said Janet Schijns, vice president of medium business and channels for Verizon Enterprise Solutions. "The time has come now for the VARs to understand to not just look at margins and discounted pricing, but to really understand how they're going to price their services and hold the vendors accountable for how we price ours."
Schijns' comments came at the CRN Channel Chief Roundtable, held at the XChange Solution Provider 2013 conference in Orlando, Fla., in March. The need for solution providers to develop expertise in setting pricing policies for their service offerings was a constant theme throughout the discussion. Schijns said pricing was one of three critical skills that solution providers need to succeed, the other two being marketing skills and vertical industry expertise.
"It is my general feeling today that VARs have consistently undervalued -- and undercharged for -- their services," Schijns said. "It stuns me how little they charge for the value they bring."
UNDERESTIMATING CORE VALUE
The problem is all the more acute now as solution providers increasingly rely on recurring revenue streams. Solution providers that undercharge for their services aren't just losing out on profit from a single project -- they're crimping their future cash flows.
One reason solution providers frequently underprice their offerings is because they underestimate their core value to their customers. Many businesses today have IT systems composed of disparate technologies and platforms cobbled together, Schijns noted, and solution providers often know those systems better than anyone.
Solution providers who expand into services without adjusting their pricing models can lose out. "Because today it's pay me once, call me a million times," Schijns said. "So I get the money up front, but if I look at the value of that money over time, the call my customer is making to me two years from now costs me 10 percent more in human resources, more in taxes, more in facilities, more in everything I do. Two years ago I took money from them for the service and they're still calling me for free."
When a customer calls a Verizon partner to install a T1 or FiOS network, about 10 percent of the conversation may be about technology. "The other 90 percent is [customers] want it mobile, safe, and always available," Schijns said. "That's the conversations the VARs are having. That's an SLA [service level agreement] business model. That's a different thing to charge for."
PRICING FOR THE CLOUD
One obstacle solution providers frequently run into when trying to price cloud-based services is that customers often have the perception that cloud computing is cheaper computing and so service fees should be low.
"So how does a VAR shift the conversation from cloud is cheaper to cloud is more flexible?" said Richard McLeod, senior director of worldwide collaboration channel sales at Cisco Systems. His answer: "Cloud is more resilient and, therefore, cloud is of more value. Therefore, it's something that I should charge more for."
To gain experience with selling cloud services -- and knowing what to charge for them -- McLeod suggests solution providers start out offering one or two stand-alone cloud services. During the roundtable discussion, he pointed to Cisco's WebEx online meeting, Web conferencing and collaboration applications as possibilities.
HIRE A PRICING EXPERT
Many solution providers lack the in-house expertise needed to set prices for their products and services that provide the best return while remaining competitive in the marketplace. "Most of the VARs, even the billion-dollar ones, don't have a pricing expert in their business," Schijns said. "They don't have someone in their business that understands how to do real pricing strategies, as opposed to gross margin-plus, as opposed to discount-off-hardware.
"If I had one minute with every VAR, I would tell them, 'Hire someone who understands how to price your portfolio and hold your vendors accountable for the margins that you need to get,' " she said. "To really sit down and look at the ecosystem and say, 'The recurring revenue is part of it, but how do I price my services? How do I make the best margin and provide the best services to my customers and not have flat-rate, all-you-can-eat services that are going to impact [my] bottom line?' "
Such a pricing expert can also help solution providers wrestling with the question of how to pay their sales representatives as they move to a services-based, recurring revenue business model, Cisco's McLeod said.
PUBLISHED APRIL 15, 2013