6 Methods To Consider When Pricing Managed Services

By Joseph Tavano, Continuum Managed IT Services

Let’s face it: pricing is a hot topic for managed IT service providers (MSPs), and with good reason. It’s 2016, and there are still heated debates on the best pricing model to choose. Many MSPs are unsure what is the right model for their business, and without the proper due diligence into the topic, there can remain the nagging fear that some detail has been missed and potentially greater profit margins are slipping away.

Since the channel has shifted away from break/fix in recent years, pricing models have become increasingly more varied and complex. It’s not always about having the lowest price in your regional market; depending on the costs associated with running your MSP practice, your price model can vary dramatically from your competition, and tweaking it to make it right depends on well-researched, proven, formula-driven pricing models, as well as a carefully considered array of services that will set you apart from the other options available on Main Street.

If you’ve never considered your approach to pricing or haven’t given it much thought in a while, this is also a perfect opportunity to do so, as early Q1 is a time to update, refresh, and retarget your business goals.

It can be surprising for some to hear that even today, there is no unified standard pricing for managed IT services. This provides an exciting opportunity for MSPs to apply a degree of flexibility and creativity to their pricing model. MSPs are able to offer products and services that accomplish the dual objectives of satisfying their clients’ demand for managed IT services as well as achieving profit margins that don’t just keep the lights on, but also allow the business to grow and scale. Understandably, with this opportunity, there comes risk as well. Discussing pricing at this level is theoretical; it has to be executed properly in order to be profitable. There are a few factors to take into account. Some include the following:

• Do you know the total cost of delivery for providing services to your clients? It is essential in order to be profitable when talking to new clients.
• Is your pricing model one that works for your target client base?
• Is the technology that you use in sync with the pricing that you offer, or does it work against the goals you want to achieve?
• Will your pricing model still be profitable for you as your business scales?
• How does your pricing model distinguish your service offering in the competitive landscape?

With this in mind, let’s look at some of the pricing models in use today for managed services.

1. The Monitoring-Only Pricing Model — This is an inexpensive, bare-minimum option. You’ll only monitor specific parts of a client’s IT infrastructure and alert clients should issues arise. The solutions support could require extra fees or remain the responsibility of your client to remediate. In some ways, this is a modified break/fix model, and there is no proactive resolution or added value to this service offering.
2. Tiered Pricing Model — Choice is the deciding factor here. Your clients are presented with multiple package tiers that you design based on cost and resources. Each tier has a set price point that should offer you a profit margin while fulfilling necessary, pre-defined services to your clients. It’s sound reasoning, and it affords the client a sense of empowerment as well, but there’s a flip side. What if these tiers stall a prospective client acquisition due to indecision? What if prospects, instead of focusing on the best service possible, only look for the cheapest tier possible? This pricing model can take the expertise of the MSP out of the equation and drive down services to the bare minimum, so proceed with caution.
3. A La Carte Pricing Model — Flexibility. Customization. Adaptability. This is what offering a la carte managed IT services offers. It’s the big box of Legos that you can use to create a customized, optimized package for each of your clients. With a la carte, each of your services will come with a requisite markup in order to create a profit margin. There is a trade-off for the freedom of a la carte services, though. It’s possible for your SMB clients to become easily confused with complicated IT scenarios they have no expertise in, leading to insufficiently designed packages that may not meet the basic needs of the client. Closing sales becomes more difficult as well due to the lengthy discussions and explanations needed to offer each service a la carte.
4. Value-Based (Flat-Fee) Pricing Model — Otherwise known as the “chocolate cake” approach, this pricing model is the opposite of a la carte. Instead of selling the individual components of a managed IT services offering (or cake ingredients, such as flour, eggs, butter, sugar), clients are presented a complete host of services for one flat-fee price, regardless of usage. It’s about selling the experience of managed IT services—just as diners pay to just eat the complete chocolate cake, not the constituent ingredients. Increasingly, this is becoming a more popular and viable offering in recent years. Essentially, by offering a flat-fee solution, you become your client’s outsourced IT solution. Pricing will vary from client to client, and the margins are complex; arriving at a bottom-line client price involves determining the total cost of delivery per user. Costs for individual services are typically not disclosed, because the service is presented as a single and complete package. This does allow for a great deal of profitability while also providing a complete suite of services to clients, but it requires confidence when selling. The sales process may be longer, but the reward and sustainability of a flat-fee model can be well worth it for many MSPs.
5. Per-Device Pricing Model — An offshoot of the “chocolate cake” pricing model, this scenario is often the simplest to understand and easiest to adopt. In essence, your client pays a flat fee each billing cycle for each device supported by an MSP. Prices will vary depending on the type of device on the managed network. Per-device pricing is easy to understand, easy to quote and highly flexible for both parties — a large portion of MSPs use this model for just this reason. However, there are drawbacks that may not be as apparent. Per-device pricing often lacks the specificity to determine a true total cost of service delivery for the client, leading to meager profits — or none at all in the worst of cases. Additionally, as computing devices proliferate the business world today, the number of devices that need to be managed may be cost-prohibitive for the client.
6. Per-User Pricing Model — This is another offshoot of the chocolate cake pricing model. Here, the number of users requiring managed IT services on the client network is measured against the number of devices on the network. For clients with networks where each user has multiple devices that they use, this may be the more cost-effective solution. Per-user pricing is especially flexible and easy to understand, keeping SLAs simplified and adjustable for the client and for the MSP. To adopt this pricing model, you’d first have to come up with an “all-in seat price” that defines the total cost to provide every service to just one user. Once this is set, it’s easy to know your break-even number and adjust accordingly to reach profit.

Remember, there’s no right or wrong way to price your managed IT service offering. What works for you may not work for your competition, and what works great in New York City may not be profitable in Billings, MT. You may find that after careful consideration, a blend of these pricing models works best or experiment with another way of pricing not listed. However, it’s important to always keep an eye on costs, because if your vendors, labor, or customer needs shift, you may have to shift with them to meet the needs of your clients while staying profitable year over year.

As senior copywriter, Joe Tavano comes to Continuum with over a decade of experience in copywriting and editorial. Born and raised in the Boston area, he holds a bachelor’s in English and history from Suffolk University and lives with his wife and cat in Salem, MA. In his spare time, he runs a pop-culture website, where he writes and podcasts about all things geeky, studies martial arts, and plays the drums.