Pricing is a HUGE topic for managed IT services providers. There are many different models you can use to price your services, but which makes the most sense for you business? On this episode of MSPradio, I chat with Ray Vrabel, Director of Technical Account Management at Continuum and Frank Bauer, Senior Account Manager at Continuum, to talk about MSP pricing models, what's happening in the market, and how you can effectively price your services.
Here are few more resources for effectively pricing your services:
- Managed Services Pricing Strategies for 2014
- How Do I Price My Services?
- Pricing Models for Managed Services Providers
We'd love to hear your feedback on the show. Tweet us @FollowContinuum or use #MSPradio to let us know what you think.
Nate: I'm here live at MSPRadio for our third episode. We've had some great feedback on the show so far. We're really excited to bring you another episode or use the hash tag MSPRadio. We'd love to hear what you guys have to say about the show and keep any ideas for future episodes coming. I also wanted to mention that Continuum is having it's first ever user conference this year. It's called Navigate 2014. We've got a really exciting lineup of speakers, including key notes Peter Isler who is the two time Americans Cup winner and Paul Chisolm who is the former CEO of Mineshift and a ton of other great speakers who are available to the people there so I'd love to see you all at Navigate 2014. So today we're talking pricing. I think this is going to be a great episode. Pricing is a really big topic for manage IT service providers. It's tough to really put a number on your services. How do you really value your services? We brought in two pricing experts today. Their names are Ray Vrabel, who is the Director of Technical Account Management here at Continuum and Frank Bauer, who is a Sr. Account Manager here at Continuum. Ray and Frank, can you guys hear me?
Ray: Yes we can. Thank you Nate.
Frank: Thanks Nate.
Nate: Thanks for joining me. I mentioned we're talking about pricing today. Ray I guess we'll start with you. Can you just outline some basic pricing strategies, some of the basic strategies that MSP's are using these days?
Ray: Absolutely and thanks again Nate for having us on today. So I wanted to [unintelligible] mainly 4 or 5 pricing strategies out there. Most commonly one used is known as the tiered cake approach or the tiered pricing model. Really what you see there is the gold, silver and bronze. That's usually almost where every MSP starts out. It's probably the most traditional model out there and then there's the ala carte model where really you pick what you want to eat, what you're going to serve to that client. Another one is per user and per device. Those are two different things. They kind of come lumped together. Per user being one of the fastest growing pricing models out there and flat rate where it's really all in. I would mention that before you get into any pricing discussions period, you really need to look internally first at your staff, your cost, your tools, what it costs you to roll a truck and deliver that service. I call it the total service delivery cost or total cost of delivery, however you want to spin it, but that's really important to know where you stand and what you can deliver on before you go promising a price which is not profitable for you. It's unattainable SLA's etc. You'll just end up losing that client and probably killing your rep in the long run.
Nate: You know it's hard to really tack on a revenue amount
Frank: As Ray mentioned tier pricing has probably been around the longest. As he mentioned, there's silver, bronze and gold packages and those rates for those levels are usually tied to the service level rate meaning that bronze is the most entry level with gold being your VIP treatment if you will. That's really started to fall by the way side though. Many partners started there and it's still the most traditional, but the fastest growing by far is the per user pricing which Ray had mentioned. A lot of MSP's out there are familiar with Gary Pica. We're not hiding anything there. He's been a huge proponent of the per user model. In short he likes to say sell the cake and not use the ingredients. We've see this within our manage service provider community being rapidly adopted. Once you understand the clients environment and your back end cost structure, it becomes incredibly easy to position. You're just providing a single per user price whether that's $100 per user, $125, $150 and it's going to include everything within that client's environment from the servers to the PCs and all of the network devices so it's very easy to calculate that price and also position it with an end client.
Ray: Also opts for some flexibility. They had two staff members, simply add two per user charges. If they reduce by two, simply reduce your pricing to that incline by two.
Frank: The ala carte for the savvy MSP's it really can be used as a foot in the door. We don't typically recommend this methodology unless your sales process is very defined and you know what your process and how you're going to up sell that client in the future because again it is very, very low margin. If you don't have those [unintelligible] in place, going in with just certain features like just BER or just patch management, it's just going to result in a lower overall margin and lower overall revenue for your organization.
Ray: Yeah it's a lower perceived value. If I'm only coming in with only one product, it's great to get your foot in the door, but you're not going to stay there very long if another partner were to walk in that door and offer one of those all inclusive packages we just talked about, which includes the [unintelligible] which we were doing.
Frank: You've got to be careful with ala carte. Another package that MSP's have used for ala carte just anecdotally is working with in conjunction with existing IT staff so they may break out a specific feature set or function of their manage service package to augment that existing IT staff, but again it's typically going to be much lower margin.
Nate: It sounds like we're kind of talking about the benefits and drawbacks of all these different approaches. Is there one in particular that you're finding to be the most effective for MSP's?
Ray: Right now it's more so the per user or flat rate than anything. I've heard it referred to as the holy grail of pricing. It's tough to get there Nate. It's not something that usually happens overnight and it doesn't work in every area for every company, but once your staffed and you're using the right back end process and you're operationally sound and can deliver, it makes the most sense. Why? Because you're sell cycles are shorter. If I walk into your Nate MSP or a doctor's office or whatnot and I see what the competitor is doing, I can simply undercut if they're just using one of the other models and undercut pricing is really becoming commoditized where that flat fee all in model, I just continue to add value in so I can cover your mobile devices. I can offer you disaster recovery and back up as Frank mentioned, past management, asset management and the list goes on and on and on and I still show them that value, but I bundle it into one price that makes it easy to swallow, easy to understand and still get probably the best margins.
Nate: So what about different industries? Are different pricing models better suited for say you're an MSP that services health care providers or doctor's offices or maybe you're better suited for a law office, are there different pricing structures that tend to work better for different verticals?
Ray: Yes, what you're really talking about there is the SLA based approach and you've heard this from some other people in the industry. Frank mentioned Gary Pica.
Frank: Charles Weaver.
Ray: Yes, Charles Weaver and we've talked about these approaches out there. The SLA based approach really comes down to what is that client's need? As I mentioned before a manufacturing or pharmaceutical company can't afford to go down so therefore I need more eyes on those servers. A hospital, I need more eyes on those servers and desk tops. I need to make sure they're up 24/7. When they go down, I probably need more immediate response time than someone who is not coming into the office until 8:00 am the next day. Therefore I'm taking on more risk and because of the shift of risk, the shift of responsibility, ergo I can put that into my pricing and probably charge more for that, most likely charge more and at the same time make more margins, but it's more for an insurance based model because the more of those I do and the more that I offer across my client base, especially if I'm targeting vertical I can kind of standardize that and make up for it.
Frank: Sure and counterpoint on that Ray, you're running a cupcake boutique in NYC or a small chain of cupcake boutiques, you could afford to be down for a day or two perhaps. As long as your ovens are working, you're still producing your product and still delivering it. You can still do those entries manually at a later date. You don't necessarily need to have the same up time as the health care organization or the 24 hour veterinarian's office. We're seeing a lot of those come in from our MSP partners.
Ray: With the SLA based pricing you're going to tailor it to the client's needs. If you need more up time, you're going to charge accordingly. If they can withstand some downtime, you're going to lower your cost. You're going to trust their RPOs and plan your pricing accordingly.
Frank: Did that help answer that question Nate?
Paul: I think we've got it covered. We're going to go to a commercial here and we'll be right back with some more of this conversation right after some words from our sponsors.
Paul: We want to let you know that Continuum is having the first ever user conference this September? We know it can be tough to ahead in the manage service industry, which is why we're launching Navigate 2014. This is a user conference dedicated to helping MSP's find their path to success in manage services. For this event we pulled together an information package and speakers from all over the country including keynote speakers Paul Chisum, former CEO of Mindshift Technologies and Peter Isler, a two-time winner of the American Cup. This is the event to attend for MSP's in 2014. So join us this fall in Boston from September 21-23 for Navigate 2014 and if you sign up before May 1, you'll receive a $200 discount on tickets so why wait. Simply visit continuumnavigate.com. All right guys. Let's pick up where we left off here. Nate's coming in and out of the conversation here. He's coming to us via Skype today and I think he's back so Nate take it away.
Nate: We're here talking to Ray and Frank, pricing for MSP's. So Ray, when we started the broadcast you mentioned that you really have to look internally before you start talking about your pricing model as an MSP. Can you start or kind of elaborate on that a little bit and tell us a bit of a step-by-step process and how you really got started in that?
Ray: That's a great point on the looking internally first because you've got to know what you can deliver on. Don't start looking at your competitor's pricing to see what they're doing. They may have a different structure, different tool set, different back end than you and maybe even different expertise. You've really got to look at what you have first so the first thing I would do is evaluate my employees' skill set, start looking at my time to resolution, the amount of alerts and tickets that I can handle. Utilization is a big piece there. How many desktops and servers am I handling? Are my guys burnt out? Are they working overtime and weekend shifts to carry the load that I have today? What happens if I sign on a new client? There's the whole variable cost of IT so if one day I have an antivirus or a virus attack and I'm cleaning up that and the next day I'm cleaning up patches and the next day I'm on boarding a new client, plan ahead. Look at what you currently have today. Look at your tool set and what it can do and make sure you're utilizing your tool set to the fullest to 100%. Don't just use 10% of it. Make sure you're leveraging scripts and automation and network operations back ends and that's when you're going to scale your business and really take advantage of those things. You turn around and look at that and say, "All right. This is what I can offer my clients. This is what it costs me to do business. This is my total cost of delivery and here's what I can charge for it and make decent margins without pricing myself out of it.
Nate: Should you be using different pricing models for different clients? You obviously want to be able to provide a custom and customize your solution to different client needs, but is it worth it mixing up your pricing models based on the client?
Frank: When you start to mix up the pricing models, it's not bad by client if you're in a certain type. I've heard of hybrid approaches so if you're running all SLA's you might have different pricing steps, even different per user fees. When we say per user it doesn't mean that every user is $150 across all my clients. Some clients I might be adding in backup for mobile device management so I would say stick with a silo of pricing, but you're really going to have to tailor that pricing to the client's needs if that helps answer the question.
Ray: I think that you don't want to get too mixed up because it also extends your sales cycle and gives clients too many options. You need to do your homework upfront. One internally and then two grab something and really hold onto it and [unintelligible] the whole way down your sales organization.
Nate: Frank we actually spoke before the show and you told me an interesting story about one of your accounts, one of your partners. Do you mind going through that case study for us and telling us about it?
Frank: Sure, not a problem. We talked about a partner that I had in Florida and he recently had closed a [unintelligible] and continued managed opportunities with his end client. That opportunity turned out to be $18,000 a month for the manage service provider. The end client was a medical facility that had 19 servers under both managed services and again [unintelligible]. When I worked through this with the partner what we said I understand what you're collecting from the client is and he went flat fee. He said alright, it's costing your organization this from an IT personnel perspective and he went with a flat fee. That's how he got to that $18,000 but when we started slicing and dicing it, it basically came down to about $400 per server and that correlates very, very closely to what we see our partners charging in the per device instance. Again partner in Florida, medical client, $18,000 a month covering 19 servers under manage services and [unintelligible] our backup and disaster recovery solution. That broke down to $400 per server, per device so let's look at this as a per device perspective quickly. That $400 breaks down to $200 per server for managed services and $200 per server for a backup and disaster recovery and that's very much in line with what we see our successful partners, triple underline successful, our successful partners charging. Keep in mind this is a conversation so you need to do a little bit of painting a mental picture as we walk through this and I hope it's coming across appropriately.
Ray: Yeah, I mean when you to think about what Frank's talking about, you take your services and value base pricing in that way and see if you can get a lot more per server than you would normally charge. If I just went in and said I could do it for $150 per server, I'm probably doing myself an injustice. They were probably paying way more to deliver it themselves or pay someone else to do it. Here I come in with a price like $18,000 a month, I can deliver it for these 19 servers and that breaks down to $400 per month which is double what I was going to charge them anyway.
Frank: Absolutely right and that flat fee, that $18,000 I can take care of all the stuff and then your competition comes in and now makes it a little more difficult for them to shop you, to price against you because they don't necessarily know all the detail that's going into that fixed fee of $18,000 a month. As we talk about this, it's also important to note Nate and Ray why this partner was successful in this opportunity. He stays away from [unintelligible] and fees and perhaps this is a conversation for a later date. He doesn't talk about the [unintelligible] and fees and all of the things that as technical people we are oriented towards. He goes in and talks about what are your paying points, he finds those out upfront during his initial conversation in this initial assessment, and then when he comes back, he does the presentation, talks about eliminating those paying points from the end client. This [unintelligible] why the pricing is fantastic and he's very profitable and very happy on this deal. It was his approach that made him successful. I know that's a little bit of a tangent from the pricing conversation that we had today, but I felt it was important of how he went in and won this deal. Not [unintelligible] and fees, but elimination of paying points.
Paul: Okay, I think that's going to wrap it up for today. Any final thoughts here?
Ray: I would just like to add I drive home make sure you look entirely first, find out what you can deliver on, pick one that's profitable for you and drive home the value. As Frank said, the value is in delivery. It doesn't really matter what pricing model you use. Find the one that works for you and consistently show your value to your clients and show them the value upfront and bundle that in. That's the easiest thing.
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