Mastering Managed Services Pricing

Mastering Managed Services Pricing

TSIA Research Journeys are our initiative to solve today's top problems plaguing the tech industry. Join us as we launch discovery research, develop practical theories, and deliver industry-validated, board-ready insights designed to guide and empower every tech company.

In managed services, pricing plays a crucial role in shaping business outcomes. It’s essential to strike the right balance between competitiveness, profitability, and customer satisfaction. With numerous pricing methodologies available, it becomes imperative for organizations to assess their effectiveness and determine which approaches are worth incorporating into future pricing strategies.

This blog aims to shed light on pricing within managed services, paying particular attention to the methodologies currently at work in our Pricing Managed Services TSIA Research Journey. By delving into these approaches, we can gain valuable insights into their strengths, weaknesses, and the outcomes they generate. Armed with this knowledge, we can turn our attention to the cutting-edge methodologies that hold promise for the future.

Through our research, we strive to answer two pivotal questions:

  1. What are the most prominent pricing methodologies employed today in managed services?
  2. Which of these methodologies shows the most promise and success in transforming portfolios for the future?

Join us as we navigate the intricacies of managed services pricing methodologies and discover innovative strategies to propel businesses forward, empower customers, and fuel sustainable growth.

So jump in with us as we:

  • Define the Problem: We can start tackling the business challenge by clearly identifying it.
  • Launch Discovery: With polls, surveys, and interviews, here’s where we dig deep into the facts and contributing factors.
  • Develop the Theory: With data in hand, our researchers and analysts can start developing and/or enhancing frameworks.
  • Guide the Industry: Correlations with financial results lead to conclusions that will help your organization reach profitable SaaS.

By participating in our Research Journeys, you become part of a vibrant community that seeks to push the boundaries of what's possible in the tech industry. Together, we can navigate the challenges that SaaS companies face as they work toward profitability, uncover hidden opportunities, and pave the way for success.

This blog will continually update our findings as we work through each step of this research journey. By subscribing to this journey, you can stay updated on each step, participate in finding solutions, and view our results as we work toward what it takes to achieve SaaS profitability. Together, let's unlock the potential of managed services pricing within the SaaS industry and pave the way for a prosperous future.

Define the Problem: Pricing Managed Services

Currently, the managed services industry predominantly relies on cost-plus pricing methodologies or setting a price by adding a fixed amount or percentage to the cost of a product or service. While some organizations may argue that their pricing strategies differ from cost-plus, a closer examination often reveals that they ultimately determine their cost base through resource management and then build their pricing strategy.

This widespread approach raises an important question: Are there more profitable ways to price managed services offerings that align with market demands, drive growth, and deliver the desired bottom line?

The challenge in the industry is that relying solely on a cost-plus methodology for pricing managed service solutions leads to two significant problems:

  1. It often results in absorbing uncontrolled costs or overlooking poor cost management within the business. This can have detrimental effects on profitability and operational efficiency.
  2. It is often forced to absorb unrealistic margin expectations by executive leadership that does not fall within the context of the offer.

Combined, these two factors create a pricing profile that’s not market tolerant and ultimately fails to generate the desired growth and profitability.

Our Research Journey aims to explore alternative pricing methodologies that address these challenges head-on. We seek pricing strategies that effectively control costs while ensuring reasonable profit margins. By doing so, we aim to create a market-relevant pricing approach that fosters growth and achieves the desired bottom line.

We will investigate various pricing options, analyzing their ability to overcome the pitfalls of a cost-plus approach. We will examine methodologies that strike a balance between cost control and profit expectations, ultimately identifying pricing strategies that are more sustainable and conducive to success.

This journey's key objective is to uncover pricing methodologies that solve the problems inherent in a cost-plus approach and provide a framework for increased profitability and growth.

Accelerating Profitable Growth in the SaaS Industry through Optimized Managed Services Pricing

Let’s delve into why this research on pricing methodologies for managed services holds immense significance within the current landscape of the SaaS industry. As the industry shifts from growth tolerance to a heightened focus on profitability, it has become crucial to identify strategies that can drive sustainable financial success.

Based on our benchmarking research, we recognize that integrating managed service solutions with software and application offerings is one of the most influential factors in the industry. These solutions, specifically those built on SaaS products, have proven to be the most profitable within the industry.

Understanding the profitability of managed service solutions built on SaaS products presents a direct opportunity to accelerate your profitable SaaS journey. By leveraging this knowledge and incorporating effective pricing methodologies, we can tap into the potential of these high-profit solutions and drive accelerated growth and financial returns.

We hope that throughout this Research Journey, we will validate and substantiate this belief. By delving deeper into the correlation between pricing strategies, managed service solutions, and the profitability of SaaS products, we hope to provide evidence that optimizing pricing methodologies for managed services, particularly those built on top of SaaS solutions, can serve as a direct lever to propel your journey toward profitability.

Stay tuned for upcoming findings and results, where we will delve into real-world case studies, analyze pricing models, and provide actionable insights that can guide your pricing transformation.

Unveiling the Research Journey: Uncovering Insights for Optimized Managed Services Pricing

For this Research Journey, we have outlined a comprehensive research plan. Four key areas will serve as our research vehicles, paving the way for valuable insights and actionable findings:

  • Harnessing the power of benchmarking: At TSIA, we adopt a holistic approach. Our extensive data collection is a solid foundation for continuing our Research Journey. Leveraging this wealth of information, we’ll analyze existing pricing methodologies, identify trends, and explore correlations to further our understanding.
  • Gaining landscape perspectives through quick polls: To gain a broader perspective on the current pricing landscape, we recently launched a quick poll using targeted questions to validate the positions we have discussed thus far. Additionally, this poll provides insights into various pricing methodologies and their observed results, guiding us as we refine our research focus and set the stage for deeper exploration.
  • Delving deeper with comprehensive surveys: We'll launch an extensive survey based on the insights gained from benchmarking and quick polls. This multi-question survey will delve into the implementation of pricing methodologies, revealing real-world data correlations. We’ll explore portfolio rationalization practices, uncover hidden considerations, and dive into the nuances of various pricing strategies. This will serve as a critical source of information, consolidating industry knowledge.
  • Presenting conclusions in a research paper and conference presentation: We’ll draw relevant findings once we have collected and analyzed the data from benchmarking quick polls and our comprehensive surveys. A thorough research paper will share this practical culmination, providing in-depth results and insights.

We are committed to widely sharing this knowledge with the tech community, enabling businesses of all kinds to optimize their pricing strategies effectively. Moreover, our findings will be presented at our upcoming TSIA World Envision conference in October 2023. During this event, we will engage in a thought-provoking presentation unveiling the results of our Research Journey. Attendees can expect to gain valuable insights, understand industry trends, and discover practical approaches to pricing managed services for enhanced profitability.

As we embark on this Research Journey, we invite you to stay connected and be part of this process. Through thoughtful collaboration and intentional knowledge sharing, we can shape the future of managed services pricing together.

Timeline of This Research Journey

Define the Problem

By clearly identifying the business challenge, we can start tackling it.May 2023

Read the Blog (Above): Mastering Managed Services Pricing

In the rapidly evolving landscape of managed services, pricing plays a crucial role in shaping business outcomes. It is essential to strike the right balance between competitiveness, profitability, and customer satisfaction. With numerous pricing methodologies available, assessing their effectiveness and determining which approaches are worth incorporating into future pricing strategies is imperative.

Launch Discovery

With polls, interviews, and more, here’s where we dig deep into the facts and contributing factors.
May 2023

Read the Results from the Quick Poll: Unlocking Growth Through Managed Services Pricing Methodologies

When it comes to managed services, one of the most significant factors that stand to improve performance is which pricing strategies organizations choose to adopt. The Managed Services Pricing Methodologies quick poll recently examined how pricing models and metrics influence profitability and growth.

Develop the Theory

With data in hand, our researchers and analysts can start developing frameworks.July 2023

Listen to the Podcast, Insight from Dell: What Managed Services Means Today

Managed services is one of the fastest-growing revenue streams in the technology industry, and can be a bridge to recurring revenues.

Joined by Peter Lacoste, SVP of Managed Services at Dell, we shine a light on what it means to provide managed services in today's technology industry, and address the following questions:

  • What is managed services and how is it different from traditional outsourcing?
  • What are the best pricing approaches for managed services offers?
  • How can managed services accelerate digital transformation?
  • How have managed services sales evolved?
  • What internal relationship is most critical for managed services success?

Industry Insight Story from Dell: What Managed Services Means Today

Pricing remains a pressing question in managed services. Traditionally, managed services organizations have favored cost-plus models, but as the field matures, the benefits of more outcome-focused pricing models are becoming more apparent.

In a recent episode of TSIA’s TECHtonic podcast, Peter Lacoste, senior vice president of managed services at Dell, discussed his decades-long career at the company and his experience with managed services in particular. Over 16 years of running the managed services organization at Dell, Lacoste has watched the field mature and grow. His conversation with Thomas Lah, executive director and executive vice president at TSIA, highlighted specific changes in the industry including pricing strategies, customer needs, customization, and how managed services organizations can navigate digital transformation.

Redefining Managed Services

Lah defined a managed services provider as “a third-party guarantee company that distantly manages a customer’s information technology, IT support, and user systems.” This, he pointed out, is an extremely broad definition while noting that, in fact, managed services is often conflated with traditional outsourcing needs.

This may have to do with the history of the industry. According to Lacoste, during the so-called “outsourcing era” of the late 2000s, there was a push for companies to reduce their costs—especially where IT capabilities were concerned. Traditional outsourcing was able to absorb much of the cost of delivering IT services, as well as maintaining the necessary data centers and infrastructure.

However, there was a significant downside to outsourcing—customers lost their innovation engine. “Many customers actually lost ground while they were able to save money,” Lacoste said. Moreover, IT is now considered a critical competency for most companies, which has reduced the value in outsourcing these capabilities as time has gone on.

On the flipside, present-day managed services is much more collaborative. Organizations have more focused engagements with their customers, working together to define outcomes that allow both parties to achieve their stated objectives. It is a mutually beneficial relationship, as the client gets alignment with a strategic agenda, while the vendor gets commitment to an agreed-upon level of cost and value. Unlike traditional outsourcing, which is almost solely focused on reducing costs, this type of relationship allows for more transparency and flexibility for both parties.

Pricing Methodologies in Managed Services

Still, today’s managed services industry is not without its challenges. One of the primary issues currently facing the industry is determining a viable pricing methodology. Cost-plus pricing is‌ the most common model, as Lacoste noted that many managed services organizations have evolved from professional services or consulting capabilities. “The foundation is already established,” he said.

On the other hand, converting to other models can be a heavy lift, as organizations need to standardize their offers, develop the tools and technology needed to standardize their pricing system, and devise a way to consistently and accurately monitor these outcomes to ensure they’re meeting their goals. To further complicate the matter, customers can be understandably sensitive around discussions of increasing costs.

Managed services organizations also need to understand the amount of risk that their customers are willing to take on. Lacoste noted that as the industry has matured, customer expectations have become much more clear. They have a better understanding of the foundational infrastructure on offer and thus a better understanding of expected outcomes. While this understanding decreases the variability of what organizations can initially offer to customers, variability is re-introduced when they ask for customized solutions. This is often baked in as more customer segments are brought into the business.

Thankfully, there are steps that companies can take to mitigate all of these issues. Lacoste described Dell’s pricing strategy, which in recent years has moved away from cost-plus to a value-based model. Their services are now delivered in terms of availability, serviceability, and data center capacity; crucially, all of these capabilities are scalable. “We’ve really worked on codifying all of the elements so that as the customer varies in size, we can automatically generate those outcomes,” said Lacoste.

For Dell’s managed services organization, the key to the continued success of their value-based strategy is a comprehensive understanding of costs and risk. To control costs, Lacoste recommended that companies work to refine their serviceability and focus on continued innovation around supply chain automation. To keep demands for variability and customization from getting out of hand, he recommended developing a strong foundation of standardized offers.

Managed Services in the Digital Transformation Era

Lacoste emphasized that one of the major strengths of managed services is that it can be used to accelerate digital transformation: “The best way to help [customers] is to progress them to a modern architecture.” Customers are looking for help innovating and shifting current paradigms and getting out of technical debt. Naturally, with that comes the need for more customization and variability—which can increase costs and work against scalability.

Lacoste and Lah discussed several ways to balance these needs and aid digitization, both internally and with customers. These strategies include: leveraging industry-standard tools, incorporating specialists into the existing sales force to help grow and share knowledge, and ensuring buy-in and alignment with both senior leadership and product management as processes transform and scale. Focusing on these capabilities can help managed services organizations ‌through their own digital transformation and also ultimately ‌help more traditional product companies move away from the standard “make-sell-ship” models to multi-year contract models.

Lacoste was handed the charter to develop a managed services organization at Dell 16 years ago and has since learned that digitizing is not just an offer transformation—it is a fundamental transformation at the business level. One of the foundations of a business transformation is a shift in business models from traditional cost-plus to more outcome-based models. Overall, the value-based approach that Dell has taken is about having a good foundation that is structured on predictable cost, predictable performance, and closes the gap on customization on the front end.

If you’re interested in hearing the full podcast, you can access it here: “Insight from Dell: What Managed Services Means Today.” If you’d like to learn more about pricing models and managed services offer delivery, check out the “State of Managed Services: 2023” report.

Watch the Webinar: The Evolution of Pricing Models for Managed Services

The world of Managed Services consists of operations ranging from end-user IT support and industrial equipment to healthcare and cloud managed service operations. Even within the same markets, it is surprisingly common for different providers to offer drastically different scopes of support, leading to “apples and oranges” pricing comparisons that are often confusing to customers, as well as the providers themselves. However, at the end of the day, every Managed Services provider is faced with the same challenge: how do they most effectively design, establish, and administer the prices of their services offerings to their customers.

Join TSIA’s Jeremy Blanton, VP of Managed Services, for an interactive 45-minute webinar diving into TSIA’s The Evolution of Pricing Models for Managed Services Research Journey. Aiming to understand the most common—and most successful—approaches to Managed Services pricing models, mechanisms and practices being used today, this Research Journey will help you answer the question: How do I decide what the price of my MS offer should be?

Key topics covered include:

  • Pricing Model: The model a company uses to set the price of service offers.
  • Pricing Mechanisms: The way the company charges the customer for service offerings.
  • Pricing Practices: The processes a company executes in order to design and administer pricing.

Read the Insights from TSIA’s 2023 Evolution of Pricing in Managed Services Survey

In the field of managed services, increasing demand for outcome-based solutions has prompted a reevaluation of pricing models to align with customer expectations. The 2023 Evolution of Pricing in Managed Services survey showed that outcome-based pricing currently has the lowest adoption rate. However, nearly half of respondents reported that they are considering implementing this model in the near future. Considering the degree of interest, and the fact that customers are increasingly defining value in terms of outcomes, it is worth looking at what those who are currently implementing outcome-based pricing are doing.

Read the full insights here.

Guide the Industry

Correlations to financial results lead to conclusions. We’re ready to present our findings!October 2023

Read the Report: Managed Services Pricing Methodologies

As the world of managed services has evolved, there has been a proliferation in the diverse array of services offered, leaving the challenge of how to optimally price managed offerings increasingly difficult to overcome. This research, conducted through The Evolution of Pricing Models for Managed Services research journey, set out to uncover how managed services organizations are pricing their offers and which strategies and practices are associated with better business results.

Two separate studies were conducted around pricing methodologies that are being employed by managed services organizations—a quick poll and a more in-depth follow-up survey. The results from the two studies confirmed that the majority of managed services organizations continue to rely heavily on the traditional pricing models of cost-plus or a market-based approach to pricing their managed services offerings. Companies that have already leaned into the more forward-thinking pricing models of consumption-based and value-based pricing are seeing more positive outcomes compared to those traditional models. The emerging outcome-based pricing model is still nascent in the industry and requires the correct offer design to be a successful pricing strategy.

Further, a deeper look at the survey results revealed an association between particular best practices for pricing managed services and the improvement of key performance indicators (KPIs) around growth and profitability.

What's Next? Join Us. Be the Answer.

The transformative journey of AI is constantly unfolding. Keeping up with its pace can be daunting. With AI’s undeniable ascent, where does your company stand? Are you already surfing the AI wave or gathering insights at the shoreline?

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