Two months ago, at the first WHD.usa event, I joined a panel talk called “Value-added services: How the Cloud will boost sales (for service providers)”, moderated by Liam Eagle from 451 Research. As another big service provider show is happening in the US starting this Monday, HostingCon San Diego, I’m curious to see if the same topic will be covered again.
Selling cloud services by service providers has been the central point of discussion in related industry events across the globe during recent years. What I find surprising is how little the message from cloud vendors to service providers has changed: “The cloud is here. Automatically provision and bill cloud services to end-clients. Bundle your offering with complimentary cloud services to increase ARPU. Jump on the moving train or cease to exist.” And my favorite: “Join your industry leaders and become a client today.”
Questions that arise: “Are service providers not understanding the message that requires yearly repetition or is the message incomplete?” I’d put my money on that last bit. Also, “Is automation and service bundling the answer to all your problems?“ I doubt it. Are these bad suggestions? To the contrary, these are great suggestions! But let’s take a few steps back to understand the situation better by looking at two trends of the last decade or so affecting the service provider market. With service providers I am mainly referring to (shared) web hosting providers and on a second place access providers/telcos also servicing SMBs.
Understand the changing competitive environment
This industry has seen tremendous growth in the 90s and 00s. In the last 5 to 10 years however, the industry has matured with high levels of competition, declining margins, increased consolidation activity, and commoditization of services.
In times that sales grow by themselves, support is there to help the ‘silly end-client’ understand the solution, and company focus is with delivering stable services. Truly understanding client needs, building consultative and trust-based client relations is not required for booking success. Diversification and innovation are also no priority considering great margins and a market so big that focusing on the base service provisioning is all that was needed for a great living.
So where did the SMBs get all their non-service provider related IT services? VARs for a large part, combined with a section of the SMB market that would buy directly from rising cloud service providers such as e.g. Dropbox et al.
Let’s revert back to this in the concluding remarks. First, let’s look at another obvious change in recent years.
Understand disruptive technological change
The cloud is a disruptive technological change from the last decade. As most service providers are highly technical organizations, they were among the early adopters of the cloud. The cloud facilitated increased efficiency, flexibility, and diversity in the existing (infrastructure) product portfolio with hybrid products and periphery services outsourced to specialized cloud service vendors.
Finally, yes: the cloud also became an opportunity for diversifying revenue. After all, having heard so much about adopting the cloud to build a cloud marketplace servicing the SMBs and taking a piece of the related multibillion service market seemed a great idea. How hard can it be and how different is it from investing in a few servers and selling shared web hosting combined with domain names in the 90s?
Very different, and very hard.
So which pieces of the puzzle aren’t frequently enough discussed?
Combining the above, I agree that service providers that manage to adopt the cloud have an opportunity to diversify their product offering and add numerous cloud services around their core (web hosting/ access) services. Do they die off if they don’t? I doubt it, again. Web hosting and access provisioning remains a huge market where, also for the smaller and less diversified companies, market share exists. If you went with this strategy, I believe focusing on a better product/ support/ service at more competitive rates than competition can still be a very attractive positioning.
When adopting the cloud marketplace strategy, I believe there are a few things that service providers need to do differently from how they were used to do business in order to be amongst the most successful cloud marketplace vendors in the industry:
- Add value
You are in fact starting to compete with VARs. VAR stands for VALUE ADDED RESELLER. In other words, to be competitive you need to add more value. You can’t expect sales to happen by themselves, as your core services may be sold in the past.
- Understand the SMBs you are selling to
The SMB market is huge, and again, very diverse. In order to add value, you need to understand the specific SMB market you want to reach with your cloud marketplace offering.
- Create tailored product bundles
Only once you understand the SMBs you want to sell to, can you create tailored product bundles that fit exactly the requirements of the specific SMBs you are targeting. This is (back to the first point) how you start adding value.
- Build a trust based relationship with your final customer
SMBs are used to buy through VARs. VARs understand and regularly talk to their customers. When consulting and advising the customer about a number of suitable products, the customer trusts the VARs expertise and will be more inclined to buy further suggested products. THAT’s the relationship you need to start building with your customers.
- Create interaction and stickiness
Doing all the above, starting from a relationship that isn’t personal, is a major challenge. If your existing client base is with you because they ‘needed a domain name, a web hosting plan, internet access, and DNS services at an affordable price with acceptable speed and quality of service’, you have little basis to develop this personal relationship. Support can be a starting point to develop closer client relationships and take a more consulting approach on understanding client needs and offering related value-adding services.
Inevitably, you need to invest in sales. Nearly all the above points require a sales team that can take the end-client by the hand and truly pick the best services out of your marketplace offering which fit the client’s needs. Once the first purchase is in, give the end-client a reason to come back through e.g. a voucher system such as Telecom Italia implemented (discounting additional purchases) and build service platforms (e.g. truly great hosted email offering) that bring the customer back to your environment on a daily basis.
Bottom line, the cloud trend and opportunities are huge. We have industries (VAR/ service provider) which traditionally operated in parallel, and are currently more and more merging whilst competing for the SMB relationship. When you can find the key to make your end-customer think of you first when they have a new IT requirement, I believe you are well-positioned for successfully riding this wave!
I’d love to see more discussion and best practice cases around the points above that will truly help service providers reap the benefits from the cloud services opportunity. Please feel free to share your opinion in the comment section below – we are interested in hearing your take on the topic!