Okay team, we're continuing the managed IT services season with Continuum Coach's Corner, an educational video series designed to teach MSPs the business strategies and best practices needed to succeed in the ever-changing IT world. Huddle up with host, Coach Raymond Vrabel, Director of Technical Account Management at Continuum, as he maps out play-by-plays to increase your revenue and profitability. In this episode, Coach Ray lays out strategies and tips on how to develop the perfect pricing plans to scale your business.
Pricing strategies are a hot topic right now among managed service providers, and for good reason: right now the industry offers enough flexibility to provide a number of different pricing models. What's the average MSP pricing model? Which one is right for you? Coach Ray is here to help clear the fog.
Below you'll find a still of today's whiteboard with a transcription of the lesson:
Welcome everyone, my name is Raymond Vrabel, Director of Technical Account Management here at Continuum. And today I want to talk to you about a very hot topic: Managed Services pricing strategies and tips.
Pricing strategies are a hot topic right now among Managed Service providers and for very good reason. Right now the industry still offers enough flexibility that there are number of different models out there for MSPs. However it's important for you to be aware of each of the benefits and drawbacks for these. So which pricing model is best for you?
Well let's first start on how to choose the right pricing model. There really is no right answer right now when it comes to MSP pricing models, as the industry isn’t moving quickly one way or the the other, or there isn’t a unified standard out there. The important thing to do when it comes to figuring out your pricing is do your homework and understand your costs. Things like cost of delivery, which is the tools you use, the time spent by your technicians, the cost of your tools, how much you pay for your RMM, your antivirus, your malware, etc. Add all those up. The cost of your tech’s time. How much time does it take for them to analyze, troubleshoot, and remediate an issue? The time it takes for them to answer service desk calls, or the time it takes them to setup and maintain and administer a server, or provision a server.
There are lot of costs that go into setting up, fulfilling, and maintaining your services, so make sure you understand all of these costs, break them down and evaluate all of your options to minimize these costs. Let’s look at cost of selling. What does it cost to close a new customer? Your salespeople’s salaries, their commissions, marketing expenses…how long is a typical sales cycle? Time is money. The longer it takes you to sell, the more it’s costing you in the end. And then what are your outsourcing considerations? Is it more effective to outsource that option, that business process? Try to determine an average cost per customer or average cost for different service levels that you offer. Once you have these baselines it will be much easier to choose and standardize on a pricing model for you. In order to be profitable you must first understand your cost and then mark up your services from there.
Before we discuss the new pricing models, let's go over the old standards. In the early days of managed IT services, pricing models fell into one of two categories. There was your tiered pricing model, which provided customers with an option for service levels that best suited their needs. Gold, silver, bronze, are some the tiers you’d hear this referred to as the tiered-cake model. These tiers are structures as a price point that meets the necessary profit margins from an MSP standpoint, while still giving clients the choice of a few different packages.
And then there was the a-la-carte model. This allowed customers to pick and choose the specific offerings that works best for them, and design and customized package for those services. MSPs will take these and typically assign a markup value to each one of them just to ensure they make a profit. While many MSPs still use these pricing models today, there are some definitive drawbacks.
In tiered and a-la-carte pricing the customer has to choose from several individual options which can be confusing without the proper guidance from the MSP. One thing this surely leads to is extended sales cycles. Remember, time is money. It makes it harder for people to sell and close new business. Additionally, the majority of customers will tend to always lean towards the cheapest item on the menu instead of the most appropriate and effective combination. There are also a number of other issues with a-la-carte pricing that MSPs should be aware of, especially when you can get undercut on each one of those line items in the a-la-carte pricing model.
So now I bring you to some the new pricing models. More MSPs are trending towards these different pricing models and strategies right now. Market data from MSPMentor shows that the most popular pricing model currently is a combination of a per user and per device pricing approach. 44% of the MSPs, in fact, use a blended approach. Per devicing, right now, remains very popular, although it's uncertain how long this will be the case since so many individual users work on multiple devices. I think the average is 2.7 devices per user right now. A per device model might become a turnoff if the clients in the future tend to use more devices and you’re supporting more devices for one price.
Per user pricing is becoming more popular as the pricing model helps simplify your SLAs, or service level agreements. They can be adjusted to compensate for multiple devices in the future. And then there’s flat rate pricing which is another option for MSPs. Gary Pica, the CEO of TruMethods, jokingly calls this the chocolate cake pricing model. Rather than selling the metaphorical sugar, flour, and eggs all as separate components. You can just sell a whole cake is a single experience for your clients.
There are other pricing models out there. Some can be much more complex, such as the value based pricing model, SLA-based pricing model, but the key is understanding what you can deliver on while maintaining profitability. It can be a tricky balance to find the right pricing model that is profitable and easy to understand and also customizable enough for your clients. This is why a number of MSPs are adopting a hybrid-type model and frequently bundling their services in to protect the profit margins. The bottom line is if you understand all of your costs, and work with your clients to understand what models are best for them, you’ll be able to find pricing success, making it easier for you to grow your business.
Thank you for tuning in to Continuum Coach's Corner. If you have any tips to share, or pricing models to share, log on to Collaborate, which is our online community, and share them with your peers. Also be sure to subscribe to our blog to stay up to date with the latest business practices and find new ways to help you improve your business.
We'll see you next time. Thanks for tuning in.
Looking for more business best practices guidance?
By Brandon Garcin
By Gretchen Hoffman