A growing number of managed services providers (MSPs) are offering bundled IT services to their clients rather than listing them separately. Some MSPs have concerns with this approach, however bundling your services can make it easier for both yourselves and for your clients (for example, including remote monitoring, backup and disaster recovery and mobile device management all for one fixed monthly price). While most of the talk about bundled services revolves around customer value, there’s another huge benefit to bundled services as well: better protection for your profit margins. While customer value is of course a high priority, sustainable profit margins are essential to staying in business.
Why Bundling Benefits Your Business
Some MSPs need advice on pricing their services. For simplicity purposes, let’s say that instead of selling IT solutions, you’re selling sandwiches. You have two options for making your menu:
- Option 1: Create your own sandwiches to sell (toppings included), each at a fixed price
- Let’s say $7.50 per sandwich
- Option 2: Let customers build their own sandwiches at varied prices
- Let’s say $5 base + $0.50 per topping
Sure, customers may like the option of building their own sandwich, but what’s better for your business?
In option 1, you’re guaranteed to collect $7.50 per sandwich every time. Even if customers choose to remove a topping they don’t like (e.g. no pickles), they still pay $7.50 for the sandwich because they know it’s a preset, packaged deal. If it costs you $5 to make each sandwich, you profit $2.50 off of every sandwich sold. Let’s also say that you need to earn $2,500 each month to pay for rent, salaries etc., then you know you need to sell 1000 sandwiches each month to break even. These are simple calculations that make it very easy to set goals for your business.
In option 2, the price for each sandwich varies based on what the customer orders. For example, one customer gets a sandwich with 3 toppings, which costs them $6.50. Again, if it costs you $5 to make each sandwich, you profit $1.50. Some customers may order 4 toppings (profit = $2), some may just order 1 topping (profit = $0.50), which makes it difficult for you to plan on how many sandwiches you need to sell each month. Sure, you may have a customer who orders 7 toppings, where you profit $3.50 (much higher than in option 1), but how often will a customer order more than 5 toppings? In more cases than not, people will order less than 5, instead of more than 5 (people usually like to find ways to save money, rather than find ways to spend more).
Clearly, pricing option 1 makes it much easier from a business perspective, because your revenues and profits are more predictable.
However, it may also be beneficial to customers as well.
People buy sandwiches all the time and for the most part, they know what they like. However, when it comes to IT Solutions, they have no idea what they want and/or need. Bundling your services makes it much easier for them to understand what they’re getting, rather than evaluating each component to see if it’s worth paying for that service. It’s still important to have a variety of packages that fit different client needs, but providing some pre-canned options makes it easier for the buyer to decide, and also speeds up the buying process. People like buying a packaged solution, not putting the pieces together themselves.
The Downside to Pricing a La Carte – Pricing Vulnerabilities
Listing your prices a la carte may inadvertently lead to pricing vulnerabilities, especially if you also provide bundled packages of your services. Going back to our sandwich analogy, if you offer both option 1 and option 2 to your customers, they have direct insight into how much you’re charging for each item. Let’s say they wanted one of your “fixed-price” sandwiches but with no pickles and no onions. They know each additional topping costs them $0.50, so wouldn’t they have a problem paying extra for that sandwich? What’s stopping them from just building the sandwich themselves and saving $1?
Some MSPs think that the more choices they provide, the better it is for their customers. Sure, you want to provide some options and room for customization, but there’s a threshold for how many options you can provide.
Bundling your services helps make the buying process easier for you customer, while at the same time, protecting your own margins.
Adding Value In the Minds of Your Customers
Not only are bundled services easier to sell, but bundling services adds greater value in the minds of your customers too. People like to see “what’s included” in their price, but not the individual cost of each component. When you break down the pricing, people look for ways to cut costs, and evaluate how much they need each component, rather than look at the package as a whole. When packaged as a deal, those services that seemed too expensive and too numerous separately, look like nice features that are included with something you’ll already be paying for.
Every successful MSP realizes that internal stability and growth depends not just on closing new customers, but in maintaining an ongoing, evolving relationship with those customers too. Bundling services is one simple way you can deliver more value and more comprehensive offerings, making them easeir to sell, while at the same time, protecting your profit margins.
What are some pricing techniques you’ve used to help your customers understand your service offering?
By Carlos Borges
By Ray Vrabel