This week, we present Chapter 3: Looking Over the Margin Wall. This is the fourth post in a series dedicated to helping MSPs understand and adopt the recommendations of Consumption Economics–The New Rules of Tech. Chuck introduces the chapter by sharing how the content resonates with his 30+ years of industry insight.
A FEW WORDS FROM CHUCK
The technology industry was living a dream for about 30 years. Products were in high demand, they were sold at a premium, payments were made upfront, and technology companies reaped significant profits. All of this changed in 2008 when the economy spiraled out of control and cloud computing became the rage. Companies large and small evaluated their budgets and slashed spending to align with their anticipated decline in topline revenues. They also started to take advantage of cost effective cloud-based alternatives. The new reality for technology VARs and MSPs quickly became a nightmare.
Companies were operating with fewer IT staff members and required to do more with less. There was a complete shift in mindset: the notions of “good enough technology” and “pay-as-you-go” feverishly took hold. Technology VARs and MSPs could no longer dictate the cost of maintenance agreements, sell expensive premise-based equipment or justify the benefits of the latest and greatest software. Gone were the days of collecting large upfront payments.
The economic collapse and cloud computing have permanently altered how companies purchase technology services from their technology vendors. For the technology VARs and MSPs serving the SMB market, these changes have destroyed their business model. Finding profitable recurring revenues and trusted partners are paramount to recovering from these shifts and adapting to the new reality.
AN EXCERPT FROM Consumption Economics—The New Rules of Tech
Chapter 3: Looking Over the Margin Wall
Tech is not immune to commoditization – it’s just harder to spot. The phenomenon occurs when one product becomes close enough to its competition that customers start to buy on price alone. Since tech products are usually complex and feature rich, it is hard for the company that makes them to imagine that they would ever reach such a lowly state. Yet more and more product categories-hardware, software, even advanced products like medical devices-seem to be feeling the pinch of price competition and customers who seem increasingly indifferent to our latest attempts at differentiation.
There is a point where the company just can’t afford to continue with the product. The prices are getting too low. Yes, even tech products-entire categories-can hit the Margin Wall.
The Margin Wall
You’ll know your product is at the Margin Wall when your cost of goods on the equipment plus your sales, marketing, and service costs on the deal add up to more than the customer paid for the system. Once you get there, it doesn’t seem to matter what you do to the product, how many new things it can do, customers just won’t pay a premium. It is frustrating to the tech company and its engineers because they know that the product can do some very cool things better than the competition. Maybe it can do something that the competitor’s product can’t do at all! But the Consumption Gap, the evil enemy of differentiation and margin, has set in.
Despite all your exciting features, the customer is still just going to use the product to do the basics. They know how to do them, but that’s all they know how to do. So when they go to buy the next product, they choose the one that can do those basics at the lowest price. When that happens, the whole product category crashes into the Margin Wall. Commoditization in tech is real, maybe more real than we have admitted.
Every company that plays in markets near or past the Margin Wall needs to start thinking about a Consumption Model. Even as good as Apple’s initial forays are into the world of driving consumption, they are only at the beginning of what’s possible. Their model works, but it is costly and hard to scale. Opening stores and putting thousands of people in them to work with customers is not an option for many tech companies. The Consumption Model that the cloud enables will create some very exciting new opportunities for you to get similar results, but to do it at scale and get paid along the way. This is not just a plea to spend more on services. For the first time, we may be able to put the entire company in service to the customer’s successful consumption of value. Not just the people in services, but the IP, the hardware, the software, the data…all of it. Want to fight commoditization and fly over the Margin Wall? Let’s start to innovate not just on what our products can do, but how we can get users to fully use them!
NEXT WEEK: Chapter 4: Learning to Love Micro-Transactions
Because D3UC is dedicated to and entrenched with the MSP community, each week a new chapter of Consumption Economics will be discussed with emphasis focused on the challenges faced by VARs and MSPs who are transforming their companies’ business models to survive and thrive in the new, Cloud-driven world.
If you would like an overview of the book Consumption Economics, you can download a copy of the “abridged” version written by the TSIA from our website.
Originally published May 23, 2015. Reviewed November 2016.