It is pretty much a constant that the cloud changes all things. It has completely transformed entire industries since its inception years ago. However, as is so often on technical blogs (such as this one) we get mired into the weeds about how the cloud changes the technical side of the equation, and we stop there. Today I want to discuss the cloud from a slightly different angle. In this article, I’ll be talking about how the cloud (and the CSP Model) changes things for sales teams.
Let’s dive right in.
1. Recurring Cloud Services Revenue vs Large Hardware Projects
For years large hardware projects were the bread and butter of many an MSP. Even a simple “two hosts and a SAN” hardware project could easily net a budding MSP 6 figures in invoiceable revenue. When you factor in 20% – 25% in hardware margin, and ideally 40% in margin on labour, many MSPs did VERY well for themselves in regular hardware project work. Factor in the fact that years ago it was customary to do a hardware refresh every 3 to 5 years and an MSP could very well sustain themselves on this practice for some time given a deep enough customer base.
Today, that story has changed. The cloud has transformed the ecosystem in such a way that many more organizations are able to get by without the need for highly available clusters on-prem due to cloud technologies and ever more cost-effective replication technologies. Wherein a customer would have previously spent $100k+ on hardware every 3 to 5 years, those same companies are now only spending a fraction of that. Pair that with tighter hardware margins, and what may have previously been a staple of your monthly income is now a footnote on your monthly ledger.
Sure, you could likely try to renegotiate hardware margin with your suppliers, but I’ve found in the past it’s a constant uphill battle with non-consistent returns for that level of effort.
While switching to MRR (Monthly Recurring Revenue) focused cloud services may not net you overly larger profit margins, you can provide more volume with the same staffing typically, and there are many opportunities for bundling services on top of that. In the CSP space, you can generally expect a 15% – 20% margin on monthly cloud services. You can typically addon management and optimization services on top of that for an extra 5 to 10 points. That said, even if you did nothing else for the client that month (unlikely), you’re still guaranteed that amount month over month.
It’s tough to lose in that situation, and many MSPs quickly realize the power behind offering monthly cloud services as a result.
2. Changes in Commission Structure
With the above said, the change from regular on-prem hardware projects can often bring a shift to commission structure as well. As many traditional sales folks from the “on-prem project work side” of the house will be used to the large lump sum commissions, the shift the CSP model brings in commission may be something of a shock. The recurring revenue to cloud model provides more of a slow build in commission as opposed to larger lump sum commission payouts. Changing this mentality in your sales-staff could be a struggle.
For example, let’s say Bob, a sales executive from the MSP XYZ corp. sells $130k in hardware and services to a company and receives 8% commission on that sale. Bob would get $10,400 in commission. 3 years later that same customer decides they’re going to move many of those same services into the cloud and will only need a single host onsite. The new single host comes out to $25k with another $2400/month being added in cloud services. Bob gets the same 8% commission on this sale. The first month Bob gets $2192 in commission with an additional $192 month over month afterwards, totalling $9104 over the same 36 month period.
The second option seems like a lot less on the surface. However, consider this. After the initial sales cycle, the month over month work needed to manage that customer spend should decrease. Large capital projects take a lot of time to scope, lots of client communication and a lot of up-front verification work. Cloud services don’t typically require that level of scrutiny (due to cloud flexibility) and as a result, Bob will be able to take on more customers over time.
That said, be sure to do a commission exercise with your sales staff once you start committing to the CSP model.
3. New Sales Should Look to Provide ONLY What is Needed
The first sales model example above dangles the large lump sum commission in front of the account manager. Pair that with the fact that when companies are buying lump sum IT gear (and projects) that are designed to be spread out over 3 to 5 years it made sense to address the immediate IT needs of the business and those needs that were likely to come up within that time frame as well if possible. This led to potential situations where a solution was being sold and implemented that may have not been a 100% fit for the need.
The beauty of the cloud is that it’s to both the client and the CSPs benefit to only consume and use what is absolutely needed. This is largely due to the flexibility of the cloud. Not only does it save the client money, but it also helps you be seen as the trusted advisor to your client in that you’re looking out for their best interests AND their wallet.
4. Initial Sales Cycle Can Be Longer
This item is really a temporary item that I could see going away at some point due to more and more companies adopting cloud services as time goes on. The point here is many organizations that have not yet adopted some sort of cloud service are not familiar with how it works. There is a learning curve not only with the consumption of the service but also with the billing, operation, and the maintenance….etc…etc. It’s very much a whole new world for the client in every way/shape/form and as such making the sale and managing the process are likely to take much more time.
As such, when you start looking at pivoting to a more cloud-first approach, be sure to take this fact into account with your planning and initial turn around times.
5. Rate of Change and Micro-Improvements
We kind of covered this one a bit organically, but in case you’re not reading through each bullet point in its entirety, it’s worth mentioning again because it does contribute to the mental (and operational) shift you need to make with your sales team when pushing more cloud services. It’s no secret that cloud services have increased the rate of adoption of new technologies. Due to this, while the initial sales cycle may be longer, subsequent cycles could be MUCH shorter. Reason being the cloud lends itself well to micro-improvements for your client base and this helps spur the adoption of rapidly changing features and functions.
Also worth mentioning is that once your customers are on the operational expenditure model that the cloud provides instead of larger lump sum purchases, they’re more likely to have those more frequent conversations about additional services and improvements in their toolset. Because of this, your sales staff needs to be ready to provide more regular touchpoints and ongoing communication with your clients as opposed to monthly or quarterly touchpoints.
This is a pretty extensive topic, and we could discuss additional points for quite some time. However, to go any further would likely start entering whitepaper and eBook territory. If you’re interested in more information around this topic, we recently hosted a webinar about how to pivot from being a traditional MSP to a Cloud Solution Provider instead. That webinar can be found below.
What about you? Have you made the switch from traditional MSP services to the CSP approach? Did you struggle to get your sales team through some of these changes? Were there struggles not listed above that you found yourself dealing with? Let us know in the comments section below! We’d love to hear!
Thanks for reading!
Get a 30-day trial of Altaro VM Backup for MSPs
Manage all your customer VM backups from a single cloud console, on a monthly subscription. Try Altaro VM Backup for MSPs for 30 days - no strings attached!
Not a DOJO Member yet?
Join thousands of other IT pros and receive a weekly roundup email with the latest content & updates!