Magazine Article | January 17, 2012

Avoid The Managed Services Commodity Trap

By Jay McCall, Business Solutions magazine.

If your managed services are suffering from shrinking margins, seek out the training you need to put the ‘value-added’ back in reselling.

Selling BDR (backup and disaster recovery), RMM (remote monitoring and management), and even HaaS (hardware as a service) has become a regular practice for many VARs and MSPs (managed services providers). Over the past few years, however, many resellers have witnessed a steady decline in their profit margins as they find themselves in the same price bidding wars traditionally experienced by hardware resellers. According to Alex Rogers, CEO of HaaS and BDR provider CharTec, there are a few common reasons VARs end up in this predicament. More importantly, there are a few simple steps VARs can take to change their situation.

Here’s a common scenario you might recognize. You have a customer whose networking equipment is four to six years old and can’t support a new BDR, RMM, or virtualization service it wants to buy from you. So, you present a recommended hardware upgrade, highlighting storage capacity, CPU speed, RAM, and other features, hoping to convince the customer of the value of replacing its legacy hardware. But, your demonstration doesn’t lead to a sale; rather, it leads to the client doing online price comparisons and eventually requesting a significant discount if you want to earn its business. “The big mistake is focusing on equipment speeds and feeds,” says Rogers. “You need to shift the discussion to how you’re going to solve your customers’ business problems. For example, customers care about how quickly you can back up their data and how quickly their data can be retrieved in the event of a disaster, but they don’t care about how much RAM you have in your storage appliances.” Rogers has also seen this same selling mistake with other services such as help desk support. “If your customer runs an 8 to 5 business, don’t oversell them on the fact that someone is available at 2 a.m. for help desk support,” he advises. “Highlighting services a customer doesn’t want or need can cause your customer to scale back your service offering and discount your price accordingly.”

Don’t Sell Hardware Services The Hard Way
So, the first thing VARs need to do in order to successfully sell services is to understand their customers’ challenges and then articulate how they can help solve those business problems. On the surface, this may sound simple. But, using your next customer to practice this new technique could prove very costly, says Rogers. “The average managed services agreement is $2,000 per month for a 36-month period. Every deal you lose while trying to figure out your new sales approach is costing you $72,000.” Rogers says he’s seen some MSPs make the same mistakes month after month trying to figure things out on their own. “Even more common is MSPs will leave money on the table. They’ll settle for $2,000 per month, when they could easily be earning $3,000 to $4,000 a month from that same customer, if they just had a little deeper understanding of their customers’ business needs.”

There are several organizations that offer sales and marketing services for VARs at a fraction of the cost of a lost sale. According to Rogers, VARs should keep a couple of things in mind when looking for a partner:

Choose a partner that’s actively involved in selling managed services. “If there’s one constant in managed services, it’s change,” says Rogers. “Within six months of getting out of the managed services business, a company loses touch with important changes in the marketplace.”

Choose a partner that can help with the financial burden of selling managed services. For example, if you want to avoid buying and reselling hardware, does your vendor partner have a program where you can upsell a rental agreement without having to pay for equipment up front? On the other hand, if you’re looking to purchase networking equipment, does your vendor partner offer low interest and flexible payment options that help alleviate the burden of outlaying a lot of capital at one time? According to Rogers, these kinds of opportunities are available to VARs. And, making the effort to get the proper training and finding a vendor that can help you financially can get your business out of the commodity trap.