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Pricing Managed Services the Right Way

Posted November 1, 2016by Tim Busa

Pricing Managed Services the Right Way.jpg

Developing an effective and complete marketing strategy for your business is never a simple task. The first place to start is with the Marketing Mix, otherwise known as The Four P’s of Marketing: Product, Promotion, Place and Price.

As the term "mix" would suggest, these elements are meant to work in concert with one another, however, most marketers spend very little time thinking about the price of their products and services. Fewer than 5 percent of Fortune 500 companies have a full-time function dedicated to pricing, according to data from the Professional Pricing Society, the world’s largest organization dedicated to pricing. McKinsey & Company has estimated that fewer than 15 percent of companies do systematic research on this subject [source].

So this means that you are spending hours developing and fine-tuning your product offering. You are coming up with innovative and creative promotions in order to drive demand. You’ve carefully selected your location and are taking advantage of all of your local channels and connections. But what about your price? How did you come up with it? Have you ever revisited what you’re charging?

Here are a few considerations when pricing managed IT services:

Revenue & Profit

When considering the elements of the Marketing Mix, price is the only element that can directly offset costs and grow revenue. While the product you’ve created, the promotion you’re running, and the place where you're selling it are all incredibly important, price has a direct impact on profit. The other three Ps can be flawlessly executed, but if the price is set incorrectly, there will be no positive impact on your top and bottom line metrics. This may seem obvious, but given the lack of attention and care that marketers and business owners devote to their pricing structure, it deserves to be called out.

Perceived Value

When consumers make a purchase, price serves as a signal of quality and value. When a product has a price tag that is higher than client expectations, there is an inherent perception of quality and luxury. On the other hand, when a marketer or business owner sets their price below these expectations, there is a perception of convenience and in some cases, lower-quality. So always keep in mind that your price is sending a signal of quality and value to your potential customers – what signal do you want to send?

Company Strategy 

The price of your products and services is an integral factor in the success of your company – and it’s of paramount importance that the price is a function of your overall company strategy. Let’s look at two examples. In these examples, let’s imagine that you have just started a brand-new MSP business entering a relatively competitive market.

Strategy 1: We want to build a big book of business.  

If your overall company strategy is to attract as many clients as possible, Price Penetration may be the most attractive pricing strategy. Price Penetration is a pricing strategy where the price of the product is initially set low to rapidly attract market share. By setting your prices lower than the competition, you position yourself as a low-cost alternative and will likely attract new clients in volume. Since your prices are low, you depend on volume for this to be a viable option for growth. Your product or service needs to be centered around highly repeatable processes and the place you are selling must have a large enough pool of available clients. 

Strategy 2: We only need a few clients. 

If your overall company strategy is to keep a small book of business with just a few, high-paying clients, Price Skimming may be an attractive pricing strategy to consider. Price Skimming is a pricing strategy where the price of the product is initially set higher than the competition to capture excess demand not currently satisfied by lower-priced competitors. By doing this, you are attracting higher-quality clients because they are less price sensitive – however, your products and services must be worth this higher price tag. For example, it would include customizable features, 24x7x365 customer service, or other premium options.

Setting Prices the Right Way

In our recent webinar, The Price is Right – Showcasing Managed IT Services Pricing Strategies That Maximize Your Margins, we examine the right and wrong way to price your IT services. When combined, all of the pricing factors explored above yield higher profitability. It's when MSPs set prices based solely on their costs, perceived value or competition that they run into trouble. As is the case with the other three Ps in the Marketing Mix, all pricing decisions must align with your target market's needs. To more effectively monetize these preferences and implement value-based pricing, you must establish and quantify buyer personas. Not sure what a buyer persona is or how to build one? We walk you through the whole concept in our webinar, available for download below. 


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Tim Busa is the Director of Demand Generation at Continuum. He brings 10 years of experience in the software/SAAS industry and has spent his entire career working with small businesses and the partners who support them. Tim tries to get down to Cape Cod as often as possible, is a painfully inconsistent golfer, and has an Australian Shepherd named Frankenstein.

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