My seasoned business coach once explained that there are three levers a company can pull to positively impact the bottom line: Increase sales, lower costs, or raise prices. Too bad that pulling levers is not always as easy as it sounds. But did you know there’s one thing that IT services providers can (and should) do that will make pulling all three levers much easier?
By developing and adopting a strong market position, managed services providers are more likely to successfully steady or grow revenue, to incur lower cost of sales, and to command higher prices for their services.
Three levers to improve profitability
Most managed services CEOs spend more time on sales than any other issue. They hire and train sales teams, implement quotas, crack the whip and dangle the carrot. They have their teams smile and dial, attend networking events, and they invest heavily in trade shows. Sales are the lifeblood of successful MSPs, especially those seeking growth. Sales, obviously, impact profitability. If we assume a 20 percent profit margin, increasing sales by a million bucks puts an additional $200K to the bottom line.
As MSPs mature — and it’s true for some companies starting out — there is a tendency to take on expenses related to news tools or tactics without a corresponding effort to “clean out” old subscriptions or other recurring costs. There’s often more friction related to dropping an old dependency than on adopting a new one, and these lingering dependencies on tools or services make it aggravatingly difficult to trim expenses. As a result, sometimes paying the piper and cutting these costs can yield substantial gains.
Of the three levers, raising prices is by far my favorite because it is not only arguably the easiest, it’s arguably the most profitable. Raising prices is the only lever a business can pull that not only immediately impacts profitability, but does so proportionally. That is, if your competitor were to successfully increase their prices by 10 percent, they would simultaneously and immediately benefit from a 10 percent increase in profitability. Compare that with a 10 percent increase in sales. Not only is such an increase a tall order — and one which might take months to achieve — only 20 percent of that increase, assuming our aforementioned 20 percent profit margin, will find its way the bottom line.
Pulling levers sounds so simple. So why isn’t it?
Now don’t for a minute think I haven’t heard pushback on the “raise prices” argument. Increasing sales and cutting costs are both hard enough, but how on earth can an MSP raise prices when the success of its sales team depends on the firm’s ability to compete on price? And to that question I would answer, “it can’t!”.
The power of a strong position
That’s why the most profitable of MSPs do not compete on price. They seek out and find, rather, a position in the market that lends them a real and distinct advantage, one that gives them power to attract better leads, close a higher percentage of deals, and charge a higher price than others who may be competing for the same business. In other words, they differentiate themselves.
The most profitable of MSPs do not compete on price. They seek out and find, rather, a position in the market that lends them a real and distinct advantage.
There are few initiatives that a firm can undertake which simultaneously lead to increased revenue, lower costs and higher prices. This is the power of positioning.
The benefits of a strong position
Marketing campaigns of effectively-positioned MSPs are highly targeted toward buyers who share similar attributes and who are more likely to benefit from an MSP’s specific set of services. Since well-positioned MSPs attract better prospects and are seen as unique, they don’t have to invest as much in making a sale. They are quicker to qualify a prospect, wasting less time on prospects that don’t fit. They win a higher percentage of the deals they decide to pursue since they encounter less competition. Finally, because of the real and perceived added value of working with an effectively-positioned IT services provider, customers are willing to pay a higher price. Customers that are willing to pay more are usually better customers, and more profitable deals means MSPs can do even better work while investing more in improving internal capabilities.
Why do so few firms adequately address positioning? Why do so many swim in a sea of sameness and mediocrity characterized by low-win-percentage sales efforts and grueling responses to RFPs that have only a slim chance of even getting an MSP in front of a decision maker?
There are probably lots of reasons, not the least of which are likely the level of difficulty involved, the crazy amount of dedication and dogged persistence required, and the perceived risk of change. But for the brave, and dare I say savvy, the rewards are great. Want to learn more about how to develop a strong position for your firm? Contact Digett to learn more.
Photo: nvphoto / Shutterstock.