By Rayanne M. Buchianico, EA, ABC Solutions, LLC and ASCII Group Member Since 2016
When a new MSP opens, the owner has a list of tasks to conquer: business licensing, insurance, sales appointments, marketing, and cash flow. With the excitement of new customers and the flurry of activity, how to price the services is the furthest thing from conscious thought.
So, you invent a price, charge the customer, and get on with running your business. You’re making some money, so pricing doesn’t come to the forefront again until you are wondering why you aren’t making more money. One reason for this could be your pricing models, if you have them. Here are five common mistakes MSPs make with pricing their services, as well as ways to correct them.
- Offering various levels of service without a pricing formula. If your tiered services offer a set number of hours of onsite/remote work each month plus other bundled services, you can easily calculate the hourly rate. However, if you are offering all-you-can-eat (AYCE) services without a limit to calls or hours, pricing is not so easy. Here are some tips:
- Calculate your costs of the AYCE services you offer. Be sure to include vendor costs, RMM costs, and the technicians’ costs. Those technician costs should include the full company burden such as taxes, insurance, and benefits. For simplicity, let’s assume total costs of $1,000 per month for the customer.
- How much money do you want to make? For services, let’s say you want a gross profit of 65 percent. Your divisor will be 0.35 (1.00 - .65 = 0.35).
- Take the total costs of $1,000, divide by the divisor of 0.35, and your pricing to the client should be approximately $2,850 (rounded). This allows for the 35 cents on each dollar to cover costs and still provide a gross profit of $1,850 to cover your administrative costs and take-home pay.
- Not understanding the full scope of the work. Customers have a tendency to downplay the amount of work they need done. They may say, “We have one server and 10 desktops. We don’t have any problems, we just want someone to test backups and install patches.” You sign them on with basic services and later realize they are running Windows XP with 32-bit hardware and they won’t upgrade because it will cost too much. They call constantly with virus issues, connection drops, and latency problems. Before taking on any new client, put together a customer audit checklist. Review each segment of their network and be sure to charge them for it as an onboarding cost.
- Not raising rates — ever. Once you begin charging an hourly rate, you are not married to it the rest of your career. With experience, you become more proficient and can get the same work done in less time and should not be compensated less as a result. Each year, some rate of some service in your business should go up. You do not have to raise all rates every year. Feel free to stagger them so they are on a schedule.
- Charging what the market will bear. “I can’t compete with others in the area if my rates are 20 percent higher than theirs,” is something we’ve all said, but it’s wrong. You must price your services commensurate with your offerings. Do not apologize for being more expensive than the competition. Your services are worth more because you use professional tools; stay connected with the community; are always learning the latest technology; are certified; etc. There are a million reasons why your prices are different than theirs, choose as many as you’d like.
- Skipping the annual review. Be sure to review your contracts each year at renewal time. Ensure the contract is still earning your company profits. If not, determine why and make appropriate adjustments. Talk to your customer about their technology needs at least once a year. For new customers, I do this after the first three months to confirm I priced the services correctly (see item two above).
You will find small changes in your pricing schedule will make a large impact on your earnings. Consider spot checking some of your customers and service offerings to see where your pricing falls in line with your profitability goals. Often, small adjustments in your fees will go unnoticed by customers unless they are on a flat monthly fee. To raise those, a phone call or visit to the customer is usually in order. It sends a message that you value their business as well as yours.