The Azure Value Stick Framework

Hello friends, welcome to another edition of Interesting Stuff!

This week, I've been reflecting on conversations I've had with many resellers over the past few months about building successful Azure practices. As well as the usual discussions about individual workloads, specialisations, and funding offers, a topic that keeps coming up is how to think about pricing and selling solutions versus quantities of Azure consumption.

This is a topic I've written about from different angles before, and today I want to offer up another: the value stick framework and how it relates to the profitability of your Azure business.

The Value Stick Framework

The framework was developed by Harvard Business School Professor Felix Oberholzer-Gee to help visualise value-based pricing and understand how focusing on value creation can unlock higher profit margins. It breaks down the various parts of the pricing strategy, from the 'underlying resource costs' (e.g. your suppliers) through to the 'willingness to pay' (e.g. your customer's maximum price they'll tolerate).

If you want to dive deeper into the wider business strategy and where the value stick framework fits in, there's a great beginners guide on HBS Online I'd recommend you read.

The Value Stick for Azure

I like to think about selling Azure solutions in terms of the value stick framework. I've tried to simplify the thinking even further and align the various 'blocks' to what I see are the key parts of an Azure opportunity.

In my example, featured above, there are just three blocks to consider.

Supplier Costs

Also referred to as the underlying resource costs, in this example it refers to the cost of Azure from Microsoft (or your CSP indirect provider, if you're a 2-tier reseller). This price is set, and while you can choose to take a hit if you discount it to your end-customer, ultimately, it's a fixed cost that you can't avoid. There may be others, such as the cost of solutions from other ISVs that you wrap into your solution, etc.

Often, this is where partners focus their attention when calculating profitability, since it's on this spend that incentives and rebates are earned.

Your Costs

The next block covers all the costs you have some control over. For example, your real estate, staffing, insurances, transaction processing, accounting, and other costs all fall into this bucket. These don't directly contribute to any rebates or incentives you may get from your supplier vendors.

Your Value Creation

This is effectively the margin you apply on top of your costs, representing the value you create through your solution. How big this block is, and how close it comes to the customer's 'willingess to pay' depends on how well you communicate your value.

It's the block you have the most control over since you can set it wherever you like on the stick up the maximum. Though, setting it higher than the willingness to pay means your customers are less likely to buy your solution, and look elsewhere.

The difference between the price you charge and the willingness to pay is referred to as the 'customer delight', and is a rough way of looking at whether the customer got a good deal. From your perspective, you'll want to create, communicate, and capture as much value as possible to maximise your margin, and from your customer's perspective, they're looking to get the maximum amount of value for the minimum price.

There are ways to stimulate customer delight without necessarily squeezing your profit margin. For example, you could look at funding offers and programs to offset costs as part of the initial deal (e.g. to help with professional services, or service costs).

Ways To Create Value

IDC estimates that by 2024 (this year!), for every $1 of Microsoft revenue there would be up to $10.04 of partner ecosystem opportunity. That doesn't mean every partner can get $10.04, but it is a good number to consider when looking at the value you create, how you communicate it to customers, and how you capture it in your pricing strategy.

Providing the most basic services - those required by simply being a CSP partner - are going to result in the smallest value creation. If you're just doing the basics, it's also likely you're not very well differentiated from your competitors!

Inspiration for Creating Value

• Great digital experiences (not just a good platform). A first-class purchasing, support, and enablement experience is a great way to delight customers. Just think how you feel when interacting with suppliers in your personal life - how many times you've been frustrated by awful telephone experiences, websites that are slow and broken or don't offer the functionality you need. What's your customer journey like?
• Managed services that directly align with business outcomes, with a value proposition that speaks to non-IT folks.
• Industry specialisations that allow you to tell stories that truly resonate with your target customers rather than generic offerings.
• IP development. While not suitable for every partner, developing intellectual property that solves business challenges or helps customers unlock new opportunities for success can be amongst the most lucrative things you can do.
• Customer lifetime value management (customer success). Co-creating a roadmap of business objectives or technical outcomes that form part of a consumption plan you can work to, ensuring that customers are satisfied and reinvesting optimisations into moving further along the roadmap.

There's a whole staircase of increasing opportunity for partners to create and capture value. From simply reselling individual services (Microsoft 365, Azure, etc.) all the way to full vertical solutions augmented with ISV solutions or IP you've created yourself.

Summary

If you're currently selling Azure services to customers in a cost-plus-margin model, you might want to consider how you move to a value-based strategy.

In the long term, it is how you can unlock bigger margins, increasing your profitability, and creating a sticky and sustainable base of customers who don't just buy from you because they need to, but because they want to.

The value stick framework, as developed by Harvard Business School, I believe to be a useful way to think about the approach of a value-based strategy.

Until next time...

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