MSP pricing strategies
Because of its impact on revenues, margins, business risk and marketplace commoditization (among other factors), pricing always seems to be an interesting and much-debated topic among managed service providers (MSPs). Due to the shift away from break/fix in managed IT services, pricing models have increasingly become more varied and complex in recent years. Depending on costs associated with an MSP business, pricing can vary dramatically, and getting it right depends on well-researched, proven, formula-driven pricing models, as well as a carefully considered array of services. As well as earning a profit, a successful pricing model meets the needs of clients by understanding how much they are willing to pay. The impact of IT to a client’s business—whether due to location, industry type, regulation, or competition—will play a large factor in their willingness to pay for managed IT services, and should be factored into determining a proper pricing strategy.
Developing a pricing model
Today, the IT channel has no unified standard for pricing managed IT services, which presents an opportunity for MSPs to afford a degree of flexibility and creativity in their pricing model to offer services as they see fit with an achievable profit margin. However, along with this opportunity comes risk; there is substantial research that goes into developing an appropriate pricing model, and the success of an MSP business relies greatly on its profitability.
There are a number of factors to consider:
Scalability—It’s essential that a pricing model remains effective and profitable as a business grows. Standardization is key to scalability, and prevents stagnated growth due to hastily adopted pricing that is no longer profitable as the client list gets longer. This is not to say that there shouldn’t be changes, evolutions, and shifts in pricing; it is only natural as time goes by; however, standardizing on the pricing of a core offering is a definitive part of any pricing model. MSPs must have a fully-realized understanding of their regular costs, any additional costs or potential fees that may arise, and what vendors are providing in order to develop successful pricing. Standardization will also help shorten sales cycles, as there are streamlined options to choose from on your menu of services. By standardizing the pricing model you are going to use, it makes selling easier and repeatable, enabling you to scale your business faster.
Costs—MSPs must completely understand their total cost of delivery to clients so they don’t lose money as they sign on clients. Knowing the break-even cost of an MSP business is critical when setting up a pricing model as well as understanding operational areas to optimize and improve to drive down that cost. Focus on market rates, and calculate the difference between the costs of an in-house staff vs. your managed IT services offering. This explains costs in simple terms that are easy to understand for prospective clients, and basing price off of a customer base’s ability and/or willingness to pay, which is more relatable and less arbitrary than an appointed percentage of profit.
Target client base—The clients an MSP targets play a large role in the pricing strategy that is adopted. If specializing in a vertical that requires regulations such as a healthcare organization governed by HIPAA law, costs will be different than providing managed IT services to an SMB on Main Street. The scope and depth of services offered will vary depending on the type of businesses and verticals that are targeted.
Technology—As progress marches on, shifts in technology will undoubtedly impact MSPs and how managed IT services are priced. Understanding the costs, benefits and challenges of the current technological landscape will certainly play a role in any pricing strategy. For example, a decade ago IT professionals would likely not factor the costs and benefits associated with delivering SaaS through the cloud, and today it has become a ubiquitous component of MSP business.
Competition—It’s out there, and your competition wants to win your clients. Always keep an eye on the competitive landscape, understand its movements and shifts, and know that your pricing strategy must be able to shift to remain attractive to potential clients. Look to add to your value stack of services to make it harder to be displaced. By bundling in value, it will be harder for the next start-up MSP to simply undercut each line item on your invoice to the client.
Common MSP pricing models
Monitoring-only pricing model
Often an inexpensive option, this pricing model provides a bare minimum approach to managed services. MSPs only remotely monitor specific aspects of a client’s IT infrastructure. Clients are alerted of issues, but solutions support could require extra fees (or be the responsibility of the client). Monitoring service levels can vary from an in-house IT staff receiving basic monitoring and alerts to advanced support and incident resolution.
Tiered pricing model
It’s all about putting choice in the hands of clients with this pricing model, which provides different package tiers that correspond to defined service levels. These tiers are structured, based on cost and resources, with a specific price point that provides a profit margin for an MSP while providing necessary services to clients. However, while offering options can seem empowering to a potential client, there is a risk that indecision will stall customer acquisition, or that potential clients will flock to the cheapest option.
A la carte pricing model
This pricing model offers flexibility and customization that creates an optimized solution for each client. Products and services are sold with a marked-up price so that MSPs achieve a profit margin. While this pricing model offers the ultimate in customization and client optimized packages, there is a tradeoff for this freedom; a la carte pricing is the most difficult to sell and the most difficult to sustain profitability. Clients can become inundated with a plethora of choices that they may or may not fully understand, resulting in inappropriately designed packages that may or may not meet the needs of the SMB business. MSPs using this pricing model have often reported it led to time-consuming contract discussions with prospective clients.
Per-device pricing model
Simple and easy to adopt, this pricing model requires that users play a flat fee for each device supported by an MSP, billed on a regular schedule. Prices vary based on the type of device (e.g., desktop, server, mobile device) per network managed, and it’s easy to quote costs for prospective clients. Per-device pricing is also highly flexible. As a client’s business grows, devices can be added as needed, allowing exactly for the services that are required.
Because of its ease and relatability, 42% of MSPs used per-device pricing as of 2014.
However, per-device pricing has its drawbacks as well. MSPs offer multiples services for each device, however the flat fee lacks the granularity that may be needed to determine total cost of delivery, which could hinder profits if left uncalculated. Additionally, due to the fact that individuals each work on multiple devices these days, the cost for the client could become prohibitive under this pricing model.
Per-user pricing model
Under this model, the number of users that require managed IT services on a network is measured against the number of devices on the network. This pricing model can be more advantageous for clients that have employees using multiple devices. As of 2014, 22% of MSPs are exclusively engaged in per-user pricing.
Per-user pricing is extremely flexible for clients and easy to understand, which keeps SLAs simplified. It can adjust to account for multiple devices, and clients pay based on the number of users—all while service delivery remains constant. If a business grows from three employees to 300, the service level would remain constant. Even though there may be less ability on the MSP side to manage network complexity, for clients that are required to be connected 24/7 by multiple devices, per-user pricing is the way to go.
The first step in developing per-user pricing is to determine the “all-in-seat price,” which is the MSPs total cost, or burden, to deliver all services offered to one user. Once this is defined, it’s possible to determine a break-even price, profit, and a bottom line price.
A number of core values can be ranked to approach a final price for a prospective client, which is crucial in determining the stress on an MSP’s resources by a client. Evaluating the following provides a greater level of granularity when determining per-user pricing for managed IT services:
- Technical complexity of a network
- Client computer literacy
- Age of devices/technology
- Ease of doing business (receptive to recommendations, eager to apply an MSP’s best services)
By applying a score to these areas, it’s possible to set valuations to how they will affect the total cost of delivery. To reach a final per-user price, multiply the average score by the all-in-seat price.
Value-based (flat-fee) pricing model
This pricing model offers a flat fee for all services that are included. Sometimes known as “cake” pricing, it doesn’t sell customers individual services (or cake ingredients, such as flour, eggs, butter, sugar), but rather focuses on selling the total experience in one cost. More MSPs are increasingly turning to this model in recent years.
Because of the amount of services included, value-based pricing sets up a scenario where the MSP essentially becomes the client’s outsourced IT solution. Typically, this model is more complex, and usually involves a per-user cost when coming to a bottom-line price, but can yield greater margins as well. With value-based pricing, the costs for individual services are not disclosed, and presented to the client as a single item. Because of this scenario, prices may vary from client to client based on levels of service, vertical markets and other factors. The MSP is able to customize the price in each service agreement to achieve maximum profitability, while the client has an all-in-one solution to their IT needs in one cost.
Because MSPs are truly selling a solution with value-based pricing, it can be more difficult to sell, and requires confidence. A typical selling process for value-based pricing involves:
- Building rapport with the client—to achieve a level of trust with the prospect, so they are comfortable that the MSP is credible and will act in their best interests
- Quantifying the current cost of IT—this outlines direct and indirect costs currently associated with their present solution—including support costs and intangibles—to show the cost of lost productivity and lost revenue due to downtime or inefficient systems.
- Selling a cost saving—value-based pricing is proposed at a lower rate than the current cost valuation, presenting the eponymous value, which sets up a scenario where the client feels they are receiving a better price and the MSP is primed to exceed expectations with service delivery.
One final thing to note—there is no one pricing model or formula that works for every MSP, everywhere. What works well for one city, state, region or country may not work the same in the next, and because of this, it’s OK to experiment to a certain degree to find what works and what doesn’t. MSPs need to evaluate their pricing and vendors constantly to stay on top of shifting costs, customer needs, and industry standards. Keeping pricing models malleable enough to shift to meet new market demands is undoubtedly a key to long term success.