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Prices are rising and maybe that’s not so bad

Life is getting more expensive and many will look to cut costs and reduce prices where possible – but in the channel it might be OK to do the reverse

If you’re looking for a word to sum up 2022, you couldn’t do much better than “permacrisis”. Collins Dictionary defines this as “an extended period of instability and insecurity, especially one resulting from a series of catastrophic events”, which is probably why it has chosen permacrisis as its word of the year. It helps that it’s an ugly, ungainly, unwieldy construct that manages to sound less elegant than just using the two words – permanent crisis – it is intended to replace. Which, when you think about it, is so on brand for 2022.

Nevertheless, there is very little dispute that 2022 is living up to the meaning of permacrisis, so much so that Collins Dictionary could probably just replace the existing definition with “2022”.

In the case of the UK, the extended period of instability is not confined to 2022 and can be traced back at least until a certain event in 2016, if not further. In fact, you could legitimately argue that the period between 2016 and 2022 has been one of permacrisis for many countries, including the UK and the US.

But here we are in the latest manifestation of instability, one that seems to stretch across governance, politics, the economy, the environment, the legal system, the health system, other institutions and pretty much everything else in between. On the economic side, there is a consensus that many countries face the prospect of recession very soon, if it hasn’t arrived already. Higher interest rates, high inflation, soaring energy prices are all making recession an economic certainty.

In times of recession, the temptation for many companies in all sectors is to cut costs and reduce prices. But that may not be the optimum route to take. For the IT industry, in particular, there may be more leeway to maintain or even increase pricing.

One major reason why technology may escape relatively unscathed is that businesses are still planning to spend money on IT, irrespective of the prevailing economic conditions. The CNBC Technology Executive Council survey in June found that more than three-quarters of senior tech leaders expected their organisation to spend more on technology investments in 2022 – and none intended to spend less.

According to the survey, technology is viewed as a means to help navigate changing market conditions, as opposed to an area ripe for cuts. Many were anxious not to wait too long to make those technology investments because of the likelihood of rising prices due to inflation. The survey found that 57% were already paying higher software prices and about half that number reported an increase in hardware prices.

CNBC highlighted one member of the CFO Council who reported an increase of more than 8% in the annual renewal from a key service provider. Is that trend likely to change? Possibly not when spending on technology is often seen as deflationary in nature because it can increase productivity and reduce labour costs, for example.

Separately, PwC’s second Pulse survey, undertaken in August, found that about half of business leaders were planning to increase investments in digital transformation, IT, cyber security and privacy, and customer experience in 2022. It also found that 53% believed new technology would have the biggest impact on their companies’ success, adding: “The leading category for additional spending is technology modernisation, with 73% of leaders planning to spend more.”

Increased spending on technology

Increased spending on technology was also highlighted in Bain & Company’s third annual global Technology report, which found that 77% of companies were expected to either increase their technology budgets in 2023, or keep them the same. The report said: “Despite the current economic climate, technology will remain a critical investment and as a central source of productivity across global businesses.”

David Crawford, leader of Bain & Company’s Global Technology practice, said CIOs and CTOs were increasing their tech spending because business leaders viewed technology “as an investment in driving productivity, speed and competitiveness, even in difficult budget environments”.

So, in some ways, technology companies are blessed to be where they are, in an industry that appears to be almost impervious to the effects of recession. As IBM CEO Arvind Krishna said when the company published its second-quarter results in July: “There is every reason to believe technology spending in the market will continue to surpass GDP growth. Demand for solutions remains strong.”

He also made the point that technology was viewed as “deflationary”, acting as “a counterbalance to all of the inflation and labour demographics people are facing all over the globe”.

“Price rises have been good for the channel. You make more money if prices are high than if prices are low”
Steve Brazier, Canalys

That also puts technology businesses, including channel companies, in a stronger position when it comes to trying to push through price increases. At XChange Best of Breed 2022 in October, HPE boss Antonio Neri gave a one-word reply to the question of whether channel partners should raise prices: “Yes.”

Neri said HPE was delivering a level of performance and profitability because it had “raised prices consistently”, adding: “We are the first always to raise prices.” He described the company as “the market leader of raising prices”, declaring: “You have to. Theres no way round it.”

In the same month, Canalys CEO Steve Brazier told attendees at the Canalys EMEA Channel Forum that inflation partners had been dealing with products rising in price for the first time rather than decreasing. “Price rises have been good for the channel,” he said. “You make more money if prices are high than if prices are low.” He added that price rises were one of the reasons margins had gone up during the pandemic and through the first half of 2022.

Given that background, there appears to be a general acceptance that prices could rise rather than fall. Katie Clouse, vice-president for managed service provider (MSP) sales at JumpCloud, says the high level of inflation across the board means “there is a lot of resignation to costs going up”. She adds: “For businesses, they are looking at their own prices going up for their customers, so they understand that other companies have to look at their prices.” But she says a bigger issue is “where those rises might be out of line with the rest of the market”.

Philip Maguire, CEO at Auxilion, says: There is no escaping that fact that customers are going to be hit with higher costs as channel partners wont be in a position to absorb these increases.”

Increase in salaries and costs

An increase in salaries and costs due to inflation will serve to exacerbate the situation, says Maguire, but he believes that in good partnerships, tough conversations can become “a two-way transparent discussion which, at the end of the day, will – and should – make sense to all parties”.

That is potentially the most difficult part, of course – having the confidence to push through price rises and the conviction to persuade customers to agree to them. Clouse adds: “It is important to get into conversations with customers about why those price rises are taking place, and why they are necessary.”

She highlights two factors to focus on: “The first is to talk about the team that supports those customers, and how they are being supported. The second is to look at your product and any tiering you have in place. If you supply multiple services in a bundle, you may be able to look at the overall price and number of services that you include. By adding more functionality, you can maintain a price level and enable customers to consolidate their product licences, helping them save overall.”

“It is important to get into conversations with customers about why those price rises are taking place, and why they are necessary”
Katie Clouse, JumpCloud

Tiering was one of the recommendations made in an article published by the Harvard Business Review in October 2019, entitled Why you shouldn’t slash prices in the next recession. Written by Shihwan Chung, Ron Kermisch and Mark Burton from Bain & Company, the article began: “As sure as the tides rise and fall, the next recession will spur many companies to cut their prices indiscriminately. During the last recession, producer prices fell by nearly 8% and took nearly two years to recover.”

They blamed that fall on the assumption by executives that slashing prices and profit margins was “the only way to keep their customers and market share”, adding: “That perspective is short-sighted. Across-the-board price cuts can permanently erode a companys profitability and strategic position.”

One of their suggestions was for businesses to “price through a segmented, value-based approach”. They explained: “Different customer segments have different price sensitivity and value different elements of an offering. Pricing should reflect these variations in perceived value through a tiered offering, with each tier addressing a progressively higher willingness to pay for additional features.”

By understanding each customers preferences, a company could “devise attractive bundles of products and services so that even if overall unit volumes drop during a recession, the company still can maintain or increase its market share with customers”, they said.

Help from vendors

Clouse suggests partners might need help from vendors when trying to convince customers, especially small and medium-sized enterprises (SMEs), of the justification for price increases. “Vendors and partners have to collaborate on how to deliver this message, because it is a sensitive topic,” she says.

There is also a danger that businesses in areas such as security, which know customers cant stop their spend, take their service for granted or assume “that they can raise prices automatically”, says Clouse. Whatever happens in the next few months will have consequences later on, she warns: “Customers have long memories.”

But how do channel partners convince customers to pay more? For Maguire, it’s really about being as direct and clear as you can. “Dont attempt to underestimate these costs or sugar-coat their impact as they [customers] need to make real business decisions based on your figures,” he says. “The strongest partnerships are built on honest conversations, allowing your customers to make the most informed decisions.”

“The strongest partnerships are built on honest conversations, allowing your customers to make the most informed decisions”
Philip Maguire, Auxilion

In the end, although Maguire doesn’t say it directly, it’s about sticking closely to the role of solution provider, but in a slightly different context. “The focus must be on finding a solution, and sometimes a compromise or sometimes a reduction of service or a solution to take cost out,” he says. “It is not one size fits all.” It never is.

As Clouse notes, “price is a complex discussion” – its not just about a simple transaction. For example, could the channel partner help the customer to consolidate and save money on another licence it holds separately? “It requires real understanding of the challenges that customers face, and how they can save on costs with smarter purchasing and procurement,” she says.

Neri may well believe that “there’s no way round” price increases, but what do channel partners do if their customers refuse to accept them? “If customers really cant afford to pay more, then you will have to look at what services can be cut or reduced,” says Clouse. Are there products that are not being used at all or to the full?

“Carrying out an audit with your customers can help them find opportunities to change their approach and reduce their spend,” she says. This may lead to a reduction in licence costs, but helps to maintain services revenues.

A different discussion

Ashley Ross, UK sales manager at Flex It Distribution, believes resistance to price increases could open the door to a different discussion. “We are talking to our partners about bringing the circular alternative to the attention of their customers, which – as during lockdown – is becoming a much more attractive proposition for a number of reasons, including the significant cost savings that companies can make,” he says.

Ross says circular products are in abundant supply, like-for-like specs come in around 20% cheaper, and the sustainability factor is increasingly prominent in the IT industry and in general. “When faced with a price hike, people are now relaxing their insistence to buy brand new, and our partners are well placed to maintain a strong relationship with them by offering an alternative rather than just passing on the increases,” he says.

If customers won’t, or can’t, pay more, the other option is for partners to modify their service to match rising costs, says Clouse. “If you haven’t tiered your service levels before, then looking at your SLAs [service-level agreements] and services can help,” she suggests. “What can you bundle together, and what can you offer to help at lower costs?”

For example, partners could offer to change in-person service delivery to customers to a remote service option as “a more efficient option that can be priced lower”, says Clouse. “For partners, moving over to free remote assist services, rather than paid options, can help reduce operating costs while maintaining services.”

At XChange Best of Breed 2022 in October, IBM’s Krishna agreed that partners should raise prices, but with rising labour costs and inflation, the issue was “how much to pass on and in what time?”. The gist of his reply was: “Not all in one go.”

Nevertheless, price rises will have to take place. Channel partners can’t afford not to increase prices, especially when everyone else is raising theirs. “From our conversations with clients, I would tell you that nobody loves it, but they all understand, because most of our clients are doing the same out to their clients.”

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