Pricing is something many businesses struggle with, and MSPs are no exception. Price your offerings too high, and you might not find a great market for you. Price too low, and you might be hurting your own margins. Right now, the industry still offers enough flexibility that there are a number of different managed services pricing strategies that work. However, it’s important for MSPs to be aware of the benefits and drawbacks to each. Which pricing model is best for you? Let’s discuss.
How to Choose the Right Pricing Model
There’s really no right answer when it comes to MSP pricing models in 2014, as the industry isn’t moving quickly toward any unified standard. The important thing to do when it comes to figuring out your pricing is to first do your homework and understand all of your costs:
Cost of delivery (tools you use + time spent by technicians)
Cost of your tools – The cost you pay to use your software tools (Antivirus, RMM, Malware etc.)
Cost of your techs’ time – time it takes to analyze, troubleshoot and remediate an issue. The time it takes to answer service desk calls. The time it takes to setup, maintain and administer a server.
There are a lot of costs that go into setting up, fulfilling and maintaining your services. Make sure you understand all of these costs, break them down and evaluate all of your options to minimize these costs.
Cost of selling – what does it cost you close a new customer (Sales peoples’ salaries, commissions, marketing expenses etc.)
Typical sales cycle – (time is money! The longer it takes to sell the more it’s costing you.)
Outsourcing considerations – is it more effective to outsource?
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 a pricing model.
In order to be profitable, you must first understand your costs and then mark up your services from there.
Curious about how other MSPs price and package their services today? Check out this infographic capturing 2016 market data!
The Old Standards
In the early days of managed IT services, pricing models typically fell into one of two categories:
Tiered pricing, which provides customers with an option for the service level that best suits their needs (i.e. gold, silver, bronze). These tiers are structured at a price point that meets the necessary profit margins from an MSP standpoint, while still giving clients the choice of a few different packages.
À la carte allows customers to pick and choose the specific offerings that work best for them and design a customized package of those services. MSPs typically assign a simple mark-up to each item so they ensure that they make a profit.
While many MSPs still use these pricing models, there are some definitive drawbacks. In both tiered pricing and à la carte pricing, the customer has to choose from among several individual options, which can be confusing even with guidance from the MSP. This may also extend the sales cycle significantly and make it harder for sales people to close new business. Additionally, the majority of customers will tend toward 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.
New Pricing Models
More MSPs are trending toward different pricing models these days. Market data from MSPmentor shows that the most popular pricing model currently is a combination of per-user and per-device pricing (44% of MSPs use a blended approach).
Per-device pricing remains popular, although it’s uncertain how long this will be the case. Since so many individual users work on multiple devices, a per-device model might become a turn-off for clients in the future.
Per-user pricing is becoming more popular, as this pricing model helps simplify service level agreements (SLAs) and can be adjusted to compensate for multiple devices.
Flat rate pricing is another option for MSPs. Gary Pica, CEO of TruMethods, jokingly calls this the Chocolate Cake pricing model; rather than selling metaphorical sugar, flour and eggs as separate components, you just sell the whole cake as a single experience.
It can be a tricky balance trying to find the right pricing model that is profitable, 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 services to protect their margins.
Bottom line: if you understand all of your costs and work with your clients to understand what models are best for them, you will be able to find pricing success, making it easier for you to grow your business.