Higher profit margins and steadier income are real possibilities for companies selling recurring revenue solutions and services. To achieve this goal, you’ll need to plan ahead for business process changes.
Based on years of interviewing VARs and MSPs (managed services providers) and asking business owners about their challenges and successes, I can confidently say that one of the biggest mistakes resellers make with regard to selling services is approaching it like they are selling new hardware. With a new piece of hardware, you can share a few highlights with your sales team and technicians, let them figure out the rest for themselves, and things may work out just fine. Taking this approach with managed services, however, will prove disastrous every time.
While Business Solutions has highlighted several examples over the years of VARs that have successfully made the move to selling managed services, it’s important to keep in mind that many of these companies that are successful MSPs today struggled for years trying to figure out how to make this new business model work. As a retail VAR considering the managed services sales model for your business, it’s important to know up front that there’s a learning curve involved that lasts up to five years for some businesses (see “What’s Delaying Your Transition To Managed Services” in the February 2013 issue of Business Solutions magazine).
One way you can shorten your managed services sales learning curve is to learn from the mistakes of others. Following are four common pitfalls VARs can fall into when selling managed services, as well as advice from those who’ve been there, done that, and learned how not to do that again.
1. Don’t Make Your Transition Too Abrupt
After investigating the managed services model, some VARs become so enamored with the possibility of running a more profitable business with predictable revenue streams that they go “all in” and try to convert every sale into a subscription-based one. If you’re considering this kind of radical move, I’d strongly suggest against it for several reasons. First, not every one of your customers is ready to make this transition right now. Some of them prefer the CAPEX (capital expenditure) business model for tax purposes. Some business owners just don’t want to pay a monthly bill no matter how good the opportunity may be.
Second, your sales team needs a lot more training than you might think. In fact, according to Gartner’s research, only a third of your current sales force has the capacity to be trained to sell managed services, which means that you’re going to have to hire more salespeople with different skillsets to sell managed services, and you know that’s not going to happen overnight.
Third, your business needs time to build cash flow. Even though the long-term results of selling subscription- based IT solutions and services can yield higher revenue and greater profitability, many new MSPs experience flat or even reduced monthly revenues for the first year or two. You’ll need to come up with a migration strategy so that you don’t turn off the traditional project-based implementations too prematurely and harm your revenue stream in the process.
2. Your Sales Compensation Model Needs To Change
One of the primary culprits for managed services failures is the fact that salespeople just don’t sell it. Consider this example that Jason Bystrak, Ingram Micro’s director of sales, shared with me recently, using the comparison of selling a 100-seat on-site Exchange server to a 100-seat hosted Exchange server sold as a subscription. “When most salespeople contrast the lump-sum commission they could earn from an on-premise Exchange server sale, which in this example would be about $200, with a $40-permonth recurring commission they would earn selling Exchange in the cloud, they’re going to select the immediate payoff every time.”
You can invest time trying to convince salespeople that after five months their commissions will actually start to surpass what they would have earned on the old model, but that usually won’t move the motivation needle very much. What Bystrak suggests you need to do — and I can’t disagree with — is change your sales compensation model.
Here’s where you, the business owner, need to be focused on the long-term benefits of recurring revenue. If you’re really committed to capturing recurring revenue, here’s a compensation model I’ve heard works well: When your salesperson sells a subscription-based solution, pay your salesperson 12 months’ worth of monthly recurring revenue commissions up front, but don’t pay them on the annuity. They’ll earn more than twice the commission they would have earned selling the old way, and you’ll earn more than six times as much profit over a three-year period. Now, that’s a reward you and your salespeople should feel very motivated to strive for.
3. Develop A Winning Managed Services Pricing Strategy
Coming up with a pricing strategy for managed services is the bane of many MSPs’ existence. In an attempt to get a few customers to give the subscription model a try, new MSPs will often lower their pricing during the first year of the service with the intention of raising their prices after that. This strategy inevitably backfires, leaving MSPs and customers feeling bad about the whole experience. MSPs should instead charge the right price from the beginning by helping customers understand the value of what’s included. One of the best companies at conveying this message is CharTec, a master MSP that specializes in training other MSPs on how to sell managed services. Alex Rogers, CEO of CharTec, advises MSPs to employ what he calls a “reduce to ridiculous” strategy when it comes to pricing managed services. “Reduce to ridiculous simplifies the price of a managed service contract down to an hourly wage,” says Rogers. “For example, a salesperson could say, ‘We can offer our flat rate IT services and everything that we’ve discussed in our presentation up to this point for a rate that will be just a little more than what you pay your janitor, $15.50 per hour. Plus, you won’t be paying us for sick time, vacation time, lunch, worker’s comp, insurance, or any other expenses you pay your employees.’”
It’s important for you to get the customer to think in these terms because that’s where the real value of managed services lies for the customer: outsourcing its technology rather than hiring a full-time employee — who will cost much more than the customer’s lowest paid employees. You can use this same pricing example on any service you sell.
4. Take A Firm Stand Against Itemization
One of the biggest challenges VARs and MSPs face is walking the fine line between being flexible and being firm. The former entails being accommodating, whereas the latter usually entails telling a customer “No.” Selling managed services will quickly put your salespeople in this uncomfortable predicament when customers ask to break apart your bundled offering and only purchase one or two components. “Not only will customers end up buying fewer services, but this discussion also leads you down a slippery slope where clients will try to nickel and dime the price of each service lower and lower,” warns Rogers. “MSPs can reduce this problem significantly by not revealing things such as, ‘It costs $200 a month for our data backup and recovery services, $100 a month for us to manage your servers, and $30 a month for our managed antivirus [AV] services.’ Instead, the sales conversation should begin with, ‘Here’s what we recommend’ and end with the total price of the offering.”
Ben Barber is the healthcare account manager at ProTech, an MSP that addressed this business challenge six months ago after attending CharTec’s training academy. “Like many MSPs, we offer various bundled solutions, which typically include BDR [backup and disaster recovery], email archiving, spam filtering, and antivirus,” he says. “Sometimes a customer will try to get us to itemize our offering, so they can pick and choose certain components they want.” In the past, ProTech would often give in to such requests, but over time the company came to regret those exceptions. “What typically happens is that the customer forgets to renew the antivirus licenses that it wanted to manage itself and then picks up a virus that causes all sorts of problems that the customer then expects us to resolve at no extra charge,” says Barber.
When ProTech decided to put a stop to itemized selling, Barber recalls that some customers were initially taken aback. “They would say things like, ‘Are you saying that you don’t want our business?’” says Barber. “I’d say, ‘Yes, we want your business, but if you don’t purchase our complete solution, you’re not going to get what you need, and we won’t be able to monitor and service you as effectively.’” Barber admits that the decision not to itemize did cause ProTech to walk away from some business opportunities. However, more than half of those clients who initially walked away came back within three months — usually after experiencing an IT problem that caused several hours of downtime.
Not every client comes back after you tell them “No” to their request. But, if you help them realize that you’re making a decision that’s in their best interest — not just yours — it will work out in your favor more often than not. And, for those that still don’t want to work with your company, chances are that they are the same ones that would have been the neediest and least profitable anyway.