Cut-price services could hamper MSP growth

Market watcher claims MSPs are pricing services far too low in the face of competitive pressure

The managed services market could fail to reach its full potential as providers forfeit high margins and slash prices to undercut the competition.

That is the view of market watcher The 2112 Group in its recent Countering Artificial Commoditisation and Poor Pricing Practices in Managed Services report.

It states that misreading the competitive landscape is one of the three most common mistakes MSPs make when deciding what to charge for their services.

"Adoption is rising, but there are tens of millions of businesses that have yet to subscribe to their first managed service," the report states.

"This means that two MSPs could literally operate side by side and never compete for the same account."

However, when one provider drops their prices, others often follow suit, which The 2112 Group claims is contributing to the "self-imposed, self-directed lowering of prices and profits" within the managed services community.

"Most MSPs mistake a peer for a competitor, and therefore make poor business decisions based on what [their] peers are doing," the report continues. "Peers are not competitors, and what they do in their business is not always the best reason to follow suit."

The other common mistakes MSPs make include using legacy hardware and software pricing models to determine what they should charge, and failing to place high enough value on specialist services.

"Value is not derived from technology, but rather what the service provider gives the customer in terms of business enablement and return on investment," it says.

"Value-based MSPs do not present themselves as a technology service; instead they are financial services or energy, telecommunications or government specialists."

As a result, the report goes on to warn that the market could struggle to reach its full potential, as MSPs may not make enough money to re-invest in expanding their services portfolios.

"Uninformed MSPs will struggle in business performance [as] they collectively drive down managed services' value and, most of all, impede the ability for the managed services market to advance into the next generation," the report concludes. "The antidote is proper price modelling and price integrity in sales."