Pricing has become a very big topic for managed IT service providers, and for good reason. In the ever-changing IT market, there’s a real struggle in determining how to value and price your services. With so many different models and approaches, how do you know which makes the most sense for your business?
I know lemonade and managed IT services don’t really go hand in hand, but let’s get nostalgic for a moment here. Back in the day, around this time of year, you were probably setting up shop at the end of your driveway selling cups of lemonade for 50 cents… or maybe even $1 if you were feeling bold. What you didn’t know back then, was that finding the best price point for your lemonade would actually be a similar struggle to pricing your managed IT services! Ok, maybe that one’s a stretch. But in order to identify the right price for your service offering, you should check off this next item on our MSP Summer BuckIT List: familiarize yourself with the pros and cons of today’s pricing strategies.
First Step: Calculate and Evaluate
Whether you’re just transitioning from break/fix services, or you’re re-evaluating your business’s service offerings, your first step should always be to calculate and evaluate your own costs. As an MSP, setting pricing for your services may seem daunting, but the simplest way to start is by working out what it actually costs to deliver your services and make an acceptable profit. Everyone knows that you shouldn’t be selling lemonade for 50 cents when it costs you 75 cents to make!
In this first step, you don’t want to start by looking at your competitor’s pricing to see what they’re offering. It’s likely that they may have a different structure, different tool set, and maybe even different expertise than you. What you should do is look internally first. You need to do your homework and understand your total cost of delivery, which includes the tools you use, the time spent by your technicians, how much you pay for your RMM, your antivirus, your malware, etc. Add all of these up and keep that figure in mind. It’s important to know where you stand and what you can deliver on before you go promising a price that is not profitable for you. Once you have a detailed idea of your total cost of delivery for your services, you can then apply a profitable price tag, which should fit within one of the usual pricing models.
What Are The Usual Pricing Models?
There are numerous pricing structures out there, but it’s all about finding the one that makes the most sense to your business. Ultimately, your pricing should achieve two things: First, it must provide your clients with a service-based offering that gives them peace of mind. Second, it must allow you to make a healthy profit after covering the cost of delivery. Before discussing the newer pricing models, let’s go over some of the old classics.
In the early days of managed IT services, pricing models usually fell into two categories. The most traditional approach was the tiered cake or tiered pricing model. Really what you saw here was providing customers with the option of either a gold, silver, or bronze service level. Each tier had a specific price point that met the profit margins for the MSP, while also giving clients the choice over their packaging options. The second category was known as the a-la-carte model. This was basically where a client could pick and choose what they wanted to eat, and create a customized option that worked best for them. While many MSPs still use both of these pricing models, there are some drawbacks. By giving the client an option to choose between several options, it can get very confusing assigning a value to each individual offering, which can also lead to longer sales cycles.
Today, the pricing models you usually see are per-device and per-user. These often get lumped together, but they are actually two very different approaches. With the per-device model, you would charge your client a monthly fee by simply taking their number of PCs and servers and multiplying them by your per-unit price. However, a major disadvantage to this model is that it forces you to commodify your services. If a client knows the per-unit pricing, they expect their fee to be marked up or down by that exact unit price. Let’s take this back to lemonade for an example. Say a client wants two fresh cups of lemonade at $1 each for a total of $2. If you’re using the per-device (or per-cup in this case) model, and they decide to remove a cup after you’ve made the batch, they’ll now expect to only pay $1. But after spending your resources on making the batch of lemonade, $1 may no longer be a profitable price for providing them with only one of the cups of lemonade. If you were using the per-user model, then you could have charged your client a flat fee that covered support for all the devices, or cups of lemonade, they used.
Why Per-User Works
Per-user pricing is the fastest growing model used by MSPs. With this approach, your total pricing fee will be determined by the price tag you calculated in the first step, divided by your client’s total number of users. Pricing your IT services using this model will make business less complicated, but it doesn’t just happen overnight. You have to fully understand your cost to deliver your services to your clients, and also make sure that you’re using the right back end process. But once you get a good handle on this, you’ll end up having more recurring revenue. Charging your services per-user is also an attractive model for clients, because you’re giving them a predictable all-in-one pricing that they won’t feel nickeled and dimed over.
At the end of the day, your price offering is only one part of your MSP business, so don’t neglect the others. Just like your batch of lemonade, your pricing must be mixed with a good management/monitoring tool, a solid marketing plan, and an overall positive experience in order to create the perfect balance that your clients will love!
By Courtney Swift
By Scott Wittstock