Have you expanded your products and services offering and are now wondering which pricing strategies to employ? Let's say, for instance, that you've added backup and disaster recovery (BDR) to your line card. Adding BDR is an easy and quick way to start out, and it’s also one of the most widely adopted and required services offered by today’s MSPs. Aside from the actual add-on, you have to know how to price your newly enhanced technology stack so that it generates high margins on an ongoing basis. Consider these points:
1. Types of Pricing Packages
Before you do anything else – even the physical work of the add-on – you need to map out your business strategy. What are you looking to offer, and what are the main goals to be achieved? Do you want to drive additional revenue with existing customers? Simply fulfill current client needs? Attract new clients? Whatever your needs, it’s best to narrow down your managed IT services pricing strategy.
- “Tiered Cake" or “Tiered Pricing" Model: This is the most commonly used strategy, and it’s been proven to work. It’s about the Gold, Silver and Bronze levels of services. Many MSPs have found this approach successful, especially when starting out.
- À La Carte Model: If you are not looking to offer the full menu of services, you can take the à la carte approach — pick and choose what you want to serve to a specific client.
- Per User/Per Device: While these are two different beasts, they are often lumped together because of the way they are priced. Per user is actually one of the fastest-growing models available, as more MSPs just want to offer a flat-rate service where the client is billed the same amount each month.
2. Choosing a Pricing Package
Look first internally at your staff, cost and tools. Figure what the total cost of delivery will be, before anything else. Are you adding business continuity to your technology stack? Think about how much BDR will cost in total, including staffing, equipment and time. Be honest with your staff – and yourself – about where you stand and what you can deliver before making any promises to customers on price. While you want to keep your customers happy, and attract new ones, you also want to ensure that pricing makes sense for your business as well. Issue a service level agreement (SLA) that ends up being unattainable, and you risk losing clients and harming your reputation in the long run. So, it’s important to ensure that you are realistic about pricing from the beginning.
As mentioned earlier, the tiered approach is the most popular in the IT channel space as those rates are usually tied to the service-level rate. Many MSPs begin there because it’s the safest path, and it often makes the most sense based on client needs and budget.
If you are looking to stray from tradition, consider the price-per-user/device model. This is becoming more widely adopted and is known loosely as “selling the cake and not using the ingredients," a term coined by managed services trainer Gary Pica of TruMethods. While we have seen this within the MSP community, it’s best used only once you understand your client’s environment as well as your back-end cost structure. Once that’s in place, the service will be easier to position and sell. With this model, there is also room for flexibility. For instance, if a client adds two staff members, you simply add two per-user charges. If they reduce by two, you simply cut your pricing commensurately.
À la carte pricing can be a foot in the door for MSPs; however, because this strategy tends to be very low margin, you have to be exact. I don’t typically recommend this method unless your sales process is fully defined, and you know how you are going to upsell that client in the future. If you don’t have those items in place, especially when offering a single solution like BDR, it’s a lower perceived value. While it may be a great way to start out, you are not going to stay in that position very long if an MSP competitor were to approach your client offering one of the other packages we discussed, like per user/device and/or the tiered approach.
3. Ensuring Seamless Product Integration
Whatever pricing package you choose, it should fit into your existing model so clients fully understand what they are paying for and the ROI they are receiving. This also helps with cross-selling/upselling in the future, once you decide to offer additional products, for instance, beyond BDR. Look at the big picture, and find out what you can deliver — pick a package that’s profitable for you and will also drive home revenue. The value is in the delivery, and at the end of the day, the pricing model you use will be the one that works best for you and will consistently show up-front value to your clients.
The bottom line is that pricing is critical to the success of your value proposition and longevity with your clients. The key is making sure that you take all areas of your business into consideration so that you choose the pricing package that is best for you and your clients in both the short- and long-term.
By Tonya Barnett
By Susan Perez