Bundling strategy increases value and stickiness
The message is clear, small and medium businesses are very interested in bundled services. A recent newsletter from AMI-Partners, I-Signal*, which reports findings from their research programs, indicates that SMBs are 3 to 4 times more interested in bundled services than in single services. They gain more value from bundled services and are loath to switch service providers unless they can do so without disrupting their existing business. The strong interest in bundled services supports the notion that SMBs are indeed more interested in value than price, despite their insistence to the contrary.
The 2014 Kaseya MSP Pricing Survey results clearly show that faster growing MSPs are both bundling their services and limiting their bundles to a small number of tiers. The ideal scenario is to interest prospects to a basic level of service and then quickly upsell them to a comprehensive service bundle. The rationale is simple. To be most effective MSPs need to be able to monitor and manage as many aspects of a customer’s IT infrastructure as possible. When there are large gaps in coverage or when there are several service providers involved, finger pointing becomes inevitable and diagnosing who did what when becomes a major portion of the support work. When an MSP can take primary responsibility for the production infrastructure and is able to monitor it from a single IT management solution, cause and effect are much easier to identify, and process improvements can more easily be put in place to reduce the volume of disruptions and the subsequent unplanned remediation work. The chart below compares higher and lower growth companies. From the survey results less than 15% of higher-growth MSPs now offer a la cart pricing, most succeeding by offering a small number of bundled services.
By offering a comprehensive service bundle and discussing the value of having a single service provider, the MSP also avoids the challenge of being “nickeled and dimed” by customers trying to get a better deal. That is by picking apart the bundle and trying to get a lower price for several bundle components. Higher growth MSPs will even turn prospects away if they are not willing to buy a complete service or if they are not willing to accept the MSPs standardized approaches. The cost of supporting one-offs is simply too high.
High growth MSPs achieve higher fees
The chart below shows the prices that MSPs are achieving for their most frequently sold service offering and indicates that by bundling service capabilities together a greater portion of higher growth companies are obtaining higher fees than those growing at less than 10%.
Profitable growth means gaining more customers and upselling existing ones. MSPs that focus primarily on selling to smaller firms (and thus obtaining lower monthly fees) often have a hard time growing their businesses quickly and meeting profitability goals. By carefully standardizing offerings and pricing inexpensively, but profitably, to attract smaller businesses it is, of course, possible to maintain a viable business. But with smaller deals the cost of customer acquisition can be more than the revenue to be earned in a single year and small customers are less able to afford, and have less need for, additional services. Plus smaller businesses have limited budgets. This means their primary focus when procuring products or services is price. Because of this they are also harder to retain as customers over time.
Customer retention generally improves as the number of services provided increases due to the “stickiness” of bundled services and the increasing level of interaction between client and service provider. When only a single commodity service is provided there is little to prevent clients from shopping for cheaper alternatives during their budget cycles. In consequence, it’s beneficial for MSPs to increase the average size of their customers together with their average deal size over time, consistently improving both their technical and sales and marketing efficiencies as they grow.
Another mistake that smaller MSPs often make when bidding for larger contracts is to underprice. Their justification is that the larger number of devices to be managed creates an expectation that the unit price should be lower. In reality, the larger the infrastructure, the more challenging it is to manage. So rather than charging a lower price, MSPs should recognize the greater value they can deliver and actually determine their pricing based on the increased complexity they will be handling; the more complex the infrastructure the greater value in having a managed service provider take responsibility.
The 2014 Kaseya MSP Pricing Survey results clearly indicate that faster growing MSPs are able to achieve higher prices. They also offer more services via comprehensive service bundling and focus their sales efforts on attractively sized deals.