Can connectivity grow margin in 2021?
Highlight Ltd. | 10/11/2020
Network commoditisation is an ongoing reality and connectivity is increasingly “taken for granted”. The outcomes for service providers is an inability to differentiate themselves, while their customers shop around and squeeze them on margins. Diversification is one way providers have reacted, and branching out into new service is certainly part of the solution for MSPs — but is it the only way? Is there anything you can do to differentiate yourself within a commodity market?
There are interesting glimmers of a different future. For example, a Service Leadership Index research report calculated that while the average profit margin for an MSP is 8%, market leaders pull off 18%. Of note, telecommunication equipment sales generally have higher margins than services — 12.5% vs 4.3% respectively.
Fundamentally, 2020 has been a year of disruption. With new remote working challenges and escalating reliance on communications tools, it’s a great time to reconsider questions about network commoditisation and how service providers fit into the equation. This is our vision to increase margin growth in 2021 and beyond.
Step 1: Accept Commoditisation
Fighting margin erosion doesn’t mean pretending network connectivity isn’t being commoditised. Commoditisation is an inevitable outcome of market and technological maturity. Standards get high enough that customers assume the outcome will be good enough — and they just start looking for the cheapest provider.
You can see examples of this everywhere. Computer chips, household appliances, auto parts and healthcare products are all examples of industries that have undergone elements of commoditisation. But that doesn’t mean that there isn’t market differentiation or price categories that dominate purchasing choices.
A lesson about smartphones
Smartphones are an interesting example of commoditisation that links into the consumer end of the MSP value chain.
The vast majority of the smartphone market is dominated by low-cost suppliers, and the budget end of companies like Huawei, Xiaomi, OPPO and Samsung. The budget smartphone market is brand agnostic, and you can get fully-functional phones for less than £150.
Yet, flagship devices fly off the shelves for over £1,000, with profit margins above 60%. Apple captures 87% of smartphone profits with only 18% of the sales. What is going on here? Arguably, elements of the smartphone market are very commoditised, but the ability to make a phone call is not the only thing for sale.
Step 2: Create Experiences
If you want to differentiate a commodity, you can’t simply sell a commodity. You need to sell something more — something in addition to and wrapped around that commodity. For consumer goods, that might be something like prestige — as is partially the case with smartphones. In back-end B2B technology, this has less traction.
What matters in both B2C and B2B is user experience. For phones, that might be the operating system, razor-thin bezels, or better speakers or camera. For a commercial communications network, it’s how the customer engages with that connectivity. Elements of a positive experience include:
- Flawless delivery: Commodity products are expected to work.
- Predictable and controllable costs: By providing cost control and cost projection tools — for example, with a dashboard — you integrate yourself into the customer’s workflow and create a value-added experience that is tied to your product.
- Easy status reports: The same applies to communicating network analysis results — status alerts, speed performance, capacity, usage, etc.
- Simple scaling: Customers want to know when they need to expand, and for the growth experience to be seamless.
- Predictive maintenance: Customers don’t want to maintain their systems, that’s why they work with an MSP. And they want you to resolve problems before they occur. But they also want information about changes that need to be made.
- Value-added advice: Integrating consulting advice into your network service provision is a good way to improve your overall margins — something we’ll come back to.
- A trusted partner: Customers really want you to act as a trusted, virtual member of their IT team — delivering transparency, responsiveness and expertise with straightforward communication and quality outcomes.
Creating an entire framework around how a customer engages with your services allows you to sell something far more than the product. The experience of using your product can be differentiated, even if the product is not. So can the outcome you provide, even if the components are commodities. Providing analysis and review tools to your customer puts you front and centre within critical business processes, and makes it possible to become a trusted part of their team.
Step 3: Understand your Customer
To create the right experiences, you need to understand your customers. We’ve set out the critical priorities for the average business IT services client. But it’s important to accommodate any idiosyncrasies of your specific customers. Consider:
- What’s important to them?
- How do they operate?
- What are their challenges?
- Where do you add the most value?
Fundamentally, you need to take a customer-centric approach to sales. That means focusing on your customer’s problems, and offering solutions and outcomes rather than bits of technology and price points. To deliver any of this requires visibility of your customers’ systems — understanding how they’re being used, and how they’re performing. However, it’s just as important to focus on how that information is presented. You need to provide people with access to insights that they will actually be able to understand and put to use.
Keeping afloat in a sea of data
Big data keeps getting bigger. But, by itself, data isn’t useful. It’s only by focusing on the right information at the right time, and then taking action, that data can be transformed into positive outcomes and commercial growth.
Traditional monitoring tools get you part of the way. They can deliver the network data needed to ensure the smooth delivery of connectivity — but only to someone with the right level of technical expertise. And it’s time-consuming because most of the heavy lifting required to turn that data into insights is left up to you.
In order to effectively understand your customers, you need to focus on analytics as much as data collection, and build processes able to help you get that job done. You need to do the same when it comes to communicating with clients and delivering the kind of experience that will differentiate your service.
Step 4: Repurpose Information
The information you collect to create positive customer experiences has additional commercial value to your business. It can be repurposed as a sales tool and used to improve engagement and close more deals.
If you can provide clear and targeted information about clients to sales teams, you create three substantial opportunities:
- Consultative selling: Sales teams that understand how services are being used are able to add real value. It’s possible to demonstrate knowledge regarding customer applications and shadow IT. Consultative updates can be used to kickstart sales conversations, and then information about network performance can be used to drive sales outcomes.
- Targeted upselling: Again, armed with tailored insights, sales teams can pick the right topics of conversations, and substantiate their suggestions with facts. For example, showing a client that they need to expand their network capacity over the next six-months or risk stalled connections.
- Prioritised conversations: Quick insights about clients lets you pick the right conversations to have. This not only means targeting the right upsell and coming armed with the right advice, it means picking the right clients to speak with — and timing those engagements.
The outcome is improved customer relationships, more opportunities to upsell, and better customer experiences. All three of these results will help you command larger margins and drive commercial success.
Note: Key to using network data to drive sales conversations is how you present that information to sales teams. You need custom dashboards that show only relevant information and help sales teams build decisive relationships rather than crunch numbers.
Becoming a consultant
Data-driven consulting should be part of your sales process. But it can become a product in and of itself. You could look to selling this service outside of your existing customer base. However, a great place to start is by developing consulting services as an “upsell option”. This also makes it easy to use consultative selling as a proof-point for the value of the paid service. A healthy consulting business is capable of 50% margin — helping drive up your total profits without generating much cost.
Step 5: Use the Right Technology
The right tools are essential to effectively execute the plan we’ve set out. Without automation, you will end up spending all your time crunching numbers — potentially driving up overheads without ever transforming data into outcomes.
Either by combining tools, building in-house software, or purchasing the right platform, you need a system able to:
- Capture the relevant information: Data capture is critical. You need in-depth information about how networks are performing and being used.
- Present that information simply: Information presentation is just as important as data capture. You need an interface able to present high-level insights — focusing you on the right things — that can then easily switch to detailed analysis.
- Create customised views: A service manager, sales manager, and customer success manager all need different information and have different levels of technical expertise. What takes the simple presentation of information to the next level is the ability to create customised dashboards that only surface the relevant information to the relevant people. This keeps your teams focused and driving outcomes.
- Communicate better with clients: Your technology should also improve customer communication. Ideally, that means customised views that you can provide to clients, allowing greater collaboration and embedding you within their workflows. By expanding these views to include cost control and planning tools, you create a positive and visible experience for customers using your services that increases your value as a partner.
- Deliver value-added experience: The tools you select should all help you add value to your customers. From the data you capture, to how it’s presented internally and to customers, the whole goal is to create a differentiated experience. This is done by adding value, simplifying communication and improving outcomes. Keep this in mind at every stage.
There isn’t just one way to build a “technology stack” able to deliver these outcomes. But there are easier and harder ways to get the job done. Driving margin growth with connectivity is an important topic for us because it has been the central challenge we’ve spent the last decade working with MSPs to overcome.
Our own platform — Highlight — has been engineered to facilitate the process we’ve described here. It’s a commercial-orientated analytics tool with native monitoring capabilities that can integrate with other monitoring software. Check out our website if you want to learn more.
In Summary: Find New Ways to Demonstrate Value
You cannot differentiate a commodity. But you can differentiate the process and outcome of using a commodity. The strategy we’ve set out here is pretty simple: use data, analytics and communication tools to create positive customer experiences that differentiate you as a provider — rather than trying to differentiate what you provide.
Going out and doing this, of course, is easier said than done. We can help, and have platforms and specialists able to facilitate everything we’ve described here. However, none of that is a replacement for your own expertise. You need to use your real-life experiences with customers to think of new ways to demonstrate your value, stay visible while adding value, and transform that into commercial success.
Marginal gains theory
Dave Brailsford’s marginal gains theory (developed to improve cycling, and later adopted for business) states that if you break down “everything you can think of … and then improve it by 1%, you will get a significant increase when you put [it] all back together.”
By creating a differentiated experience and demonstrating value at every stage of the process, you can grow margins incrementally and deliver significant commercial outcomes long-term. The right technology can help you deliver these outcomes. But the number of unique ways this marginal breakdown will impact your business is nearly endless. Once you have the right framework in place, the sky-is-the-limit in terms of your possibilities. To be honest, this is what we find interesting — and we hope you do too.