9 Pricing Considerations For Every MSP

By The Business Solutions Network

A panel of MSP veterans share their best practices for pricing services.

4By far, one of the hottest topics among new and aspiring MSPs (managed services providers) is pricing. How do I set your pricing? What is the rate I should charge? Should I raise my rates? All great questions. To get the answers to these questions and others, we created a panel of industry experts to share their advice concerning pricing.

1 — Value-Based Vs. Cost-Based Pricing

Bruce Nelson, president, Vertical Solutions: “I always prefer value-based because it incorporates not just the cost of the tools/people but also the experience the team has gained and delivered. That experience and the value of the problem you help a client solve is worth more than simply cost plus a markup.”

Dave Sobel, senior director, community and field marketing, LOGICnow: “Better” implies there’s only one answer. The “better” option is the one that makes you the most profit! Typically, value-based pricing has higher margins but is more difficult to implement.

Thomas Clancy, Jr., president, Valiant: Value-based is potentially the most profitable but tricky to get a customer to agree to and difficult to scale in small increments (because then you reveal the multipliers). You must be completely committed to the model, because as soon as any vestige of a per-anything-model gets hinted at, the customer will rapidly dissect your solution, cost compare, and get alternate bids. Personally, I prefer the per-user-model, as it’s easy to understand, justify, and stand behind.

Stanley Louissaint, president, Fluid Designs: Valuebased pricing trumps cost-based. When you are selling on value, you are selling on an intangible. You are offering a solution to solve the pains that they are feeling. There is no price that you can put on a good night’s rest, or is there?

Chris Rumpf, founder, Rumpf Computer Solutions: It’s important to make sure that costs are covered in a timeframe that’s conducive to your business, but pricing based on value is the right answer for us. Of course, to do this successfully, you have to create value (i.e., being technically minded, keeping systems running nearly 100 percent, resolving and communicating quickly, making things simpler for customers). We create that value through our internal systems, which we continue to fine-tune.

Dale Walls, president, Corsica Technologies: Valuebased, because you want to work on ways to decrease your costs wherever possible as you grow and scale, then determine if those savings affect your pricing or not, depending on the value of your MSP services. That said, a successful MSP should know what its costs are at all times to measure profitability per customer/seat.

Dave Wilkeson, CEO, MSP Advisor: I think it depends largely on what sort of MSP offering you are going to market with. Basic MSP offerings such as help desk, monitoring, etc. have to be based on cost-based pricing because you have so much competition in these products, and it’s very difficult to differentiate from your competitors in meaningful ways. In these products, price is near the top of the list with customers in terms of decision-making. I work with my clients to create bundled MSP offerings that can be priced using a value-based model because it’s much more difficult for potential customers to do an apples-to-apples price comparison on a strategically bundled offering. Bundled offerings typically include help desk with monitoring, on-site support, anti-virus, managed edge security, e-mail hosting, domain name, backups, mobile device management, etc.

2 — Per-User Vs. Per-Device Pricing

Nelson: As a rule, we use a price-per-user model. We found it cumbersome as mobile devices entered the client environments to track and separate those. End users are going to have multiple devices, and they are going to need some level of support, so we factored that into the per-user pricing. The more interesting question is how the IoT is going to impact this. We are starting to find more non-end user devices that require some level of support, impact the network, and may require some level of integration, etc.

Clancy: Per-user all the way. The devices are going away as more things move to the cloud. Getting paid per-device is a shrinking game.

Louissaint: Per user. Many users have multiple devices these days. That’s just standard. It seems that most users have an average of three devices. Tracking devices is also hard. Tracking users for your billing is a much easier situation. But to protect yourself, your per-user pricing should factor in that users do have an average of three devices.

You can make the case that selling per user is better when there are fewer users than devices. But you can also make the case that selling per device is better when there are fewer devices than users. Whatever model you choose, pick one and stick with it.

Rumpf: Per device makes more sense in the hospitality space, especially when you’re involving rental hardware in the mix. For ISVs only firing out software solutions, per user might make more sense.

Walls: Per device for managed IT services and base that on a formula understanding a typical one-user-per-client system. This allows you to price appropriately for support services, while also setting pricing for servers, managing cloud applications, and other equipment respectively. Save per-user pricing for cloud services you provide.

Wilkeson: I think that MSPs need to offer both flavors but favor per-user pricing. There are certain types of industries such as education, manufacturing, and healthcare that don’t price out favorably in a per-user model, which is my reasoning for continuing to offer per-device pricing. I think the value proposition for per-user is easier for customers to understand, which I think is why I prefer it for most opportunities.

3 — Defining Pricing For Your Company

Nelson: We used some historical data, industry types, and market rates to develop pricing tiers and services offered. Our partners were also helpful in providing feedback.

Sobel: Understand your cost of delivery first and know the margin you want to achieve. Now, price as much as you can around value pricing to a customer, delivering the most value to them at the best price that allows you to keep your margins and cover your costs.

Clancy: Industry standards dictate, and that is between $100- $200 per user per month, depending on what’s included, and the customer’s industry and required SLA (service level agreement). I learned my pricing and packaging from Gary Pica’s TruMethods. He’s got a really clear way of illustrating the model.

Louissaint: We factor in our market area, the value we bring to the client, and, of course, our company’s goals. Thinking about how much money you want to earn and working backwards is a great starting point. You can be a high-price low-volume shop or a low-price high-volume shop. I view the MSP market just like the insurance industry. You are pooling your resources and trying to make sure that everyone doesn’t put in a claim at the same time.

Wilkeson: I recommend using a spreadsheet to define your costs and expected labor costs to establish your overall cost per user/device. I also recommend revisiting that spreadsheet quarterly and feeding in your actual average labor costs to stay in touch with your profitability; adjust your new opportunity selling prices accordingly. You then calculate a selling price with a target margin of 70% and work up if you feel that you can offer better value to your customers for that offering.

4 — When To Raise Prices

Nelson: This is tough because to a certain extent we are seeing traditional on-premise managed services offerings being commoditized. If we simply raise our rates without adding more value, it can be a tough discussion.

Sobel: Every year. Establish a pattern, do a modest increase annually, and you will be able to maintain that easily over time.

Clancy: I haven’t had much luck with it, but perhaps we don’t stand hard enough on our line when it’s time to get that. We also haven’t had luck because the “industry standard” pricing mentioned above hasn’t really moved much in 3+ years, so my competition isn’t raising prices on new prospects, so how can I raise them on existing accounts? If you want a greater share of wallet, offer more services.

Louissaint: Price increases should happen on a schedule. New clients won’t know the difference as you are presenting it to them. It’s existing clients. Price increases should be built into your contracts on a yearly basis.

Rumpf: With our agreements, we’re locked in for three years on the pricing, but depending on the customer, we’ll increase the pricing at the renewal point. It’s important to keep your margins, and as costs increase from vendors each year, those costs need to be passed onto the customers to stay profitable.

Walls: Customer pricing should rise automatically as a client grows, so as a customer adds systems (or users), you can increase your revenue appropriately. Rate increasing should depend on your offering and added services to your core offering. Additionally, an MSP mindful of its costs per customer/ seat can manage profitability by raising rates as needed or as they see costs change.

Wilkeson: I recommend raising prices yearly a small amount. If you delay raising your prices for years, you have to jump a significant amount. That tends to motivate customers to shop your services.

5 — Telling Customers Prices Are Changing

Nelson: We review our level of service during the prior reporting period and review new service offerings to be added.

Sobel: Ideally, add value to your offering. Not offering something like mobile device management? Add it, while increasing pricing. By adding value, you are able to more easily convince the customer if there is resistance. Customers are often a lot less resistant than you would think!

Clancy: We let it be known that the price increase is necessary to deliver the service effectively. If they will not pay the increased price, then we cannot service them. These aren’t price increases just to make more money; it is 100 percent needed to keep the ship afloat. Better to lose an unprofitable customer than it is to keep them and lose money.

Louissaint: By the time they are customers they have already agreed to price increases as it is in our agreements. There is nothing to convey; we let them know right from the start.

Rumpf: Always be nice, and always give them time to adjust to rate increases if you’re making an across-the-board (non- MSP-style) increase for labor, etc. With MSP pricing, make sure you’re meeting with the individual customers to explain the new pricing rather than just firing off a renewal quote.

Wilkeson: If you do it yearly, the increases should be in line with inflation, so that’s the message to convey. Most business owners can relate to that.

6 — A La Carte Pricing

Sobel: Avoid as much as possible as a solutions provider! A la carte pricing invites the customer to start focusing on line items rather than the total package and value.

Clancy: The only a la carte stuff is the add-ons beyond the base product. You can add VDI (virtual desktop infrastructure), mail, cloud server, backup, and all that on a per-item basis. But the core MSP package is all in or not in.

Rumpf: Some products we do, and others we don’t. That decision usually comes down to whether it’s in our best interest to segment products. For instance, public Wi-Fi is an easy one to sell solo compared with tablet solutions, which are always bundled with wireless service, support, printers, and scanners.

Walls: It’s best to offer your solution as a package. Offering a la carte is difficult to scale as your customer base grows. It becomes a challenge for the operations team to keep track of what customers get what services and ultimately hurts their efficiency.

Wilkeson: I recommend bundling as much as possible. This keeps your offering simple for service delivery, billing, and marketing. While there’s always a need to offer some a la carte options, I recommend keeping them to a minimum.

7 — Overcoming Customer Pricing Objections

Nelson: We go back to question number one. Are we solving a real problem for you? Is there value in that, and does our size, experience, and industry knowledge matter? If a client/prospect is simply looking for the lowest cost, we’re not the group. If they are looking for the best value, we are typically the group for them.

Clancy: Your old IT guy stinks; that’s why I’m here. He stinks because he’s inexpensive, and that means he can’t afford great people. If you want a 1975 Fiat, get one. If you want a 2016 Toyota, you’ll pay more. Yes, both are 4-wheeled conveyances. One will spend a lot of time making you mad. The other has power windows and heated seats.

Louissaint: This is your livelihood, not mine. If you don’t think that keeping your business up, running, and producing income for you is important, then that’s fine with me. Either that, or “That’s ok, I can respect that, we are not the company for you.”

Rumpf: We start that pitch from the opening conversation, and it’s always based on value. We’re in business because we keep restaurants and retail locations up and running, period. If our customers are online and working properly, then we’re doing our jobs. It’s not about what something costs to fix, or where a service provider is located — the solution we sell is valuing the uptime and simplicity of the system against the cost of failure and the time and expense of complexity. It’s a complete opposite approach to most sales styles.

Wilkeson: I am a fan of selling to a customer’s pain. Generally, if you are pitching your offerings based on price, you are going to lose if your offerings are priced profitably. When selling to pain, the focus is on alleviating that pain, which tends to become a bigger focus than the price.

8 — Pricing Mistakes To Avoid

Nelson: Careful with the all-you-can-eat model. It is successful with certain offerings but needs to be very well-defined and controlled.

Sobel: Not understanding my total cost of service delivery was a huge mistake in my early MSP days, and later being willing to drop prices too aggressively in hopes of “getting more work later” was a serious mistake. Any time I dropped my price it never went well.

Clancy: Not minding the increases in headcount with our customers “truing up.” We lost tons of cash not catching the new user and increasing the rate. We also have allowed customers to drive our prices down via negotiation without getting anything back. Terrible move. Also, not having sharp edges on what is, and what is NOT, included. The grey area is a deadly place to lose all your profit. Also, many firms don’t mind their profitability per-account. We need to know who our noisy/unprofitable accounts are and ditch them or raise their prices.

Louissaint: We all have to sustain our businesses to be able to provide our clients with the proper resources that they need. If you price too low, you cannot deliver your service properly. If you cannot deliver your service, customers will be unhappy and will leave. Bottom line: Do not cheat your customers by not charging enough.

Rumpf: Making pricing too complex. We used to have crazy formulas for pricing. Now, it’s simple. Every single item/bundle/etc. has a unique product code with a fixed price. Also, pricing too low.

Walls: Years ago we played with different hours-based plans that don’t fit in the MSP model. Save hours for non-recurring service revenue such as projects. Also, pricing too low.

Wilkeson: Offering “freemium” services. Offering basic inexpensive services with the idea that you will be able to upsell the customer to something profitable down the road. Also, pricing inexpensively because “the competition is so fierce” and thinking you can sell enough volume to make up for low margins. While volume does tend to drive efficiency, the decrease in costs typically doesn’t make up for how low the offerings have been priced.

9 — Miscellaneous Pricing Advice

Clancy: Stand firm. You’re awesome. Start acting like it. If you can’t improve your batting average and you need more hits, then you need more at-bats. Just do the math. If your goal is to increase monthly recurring revenue by a fixed amount every month, then you can quickly extend the number of appointments, meetings, touches, conversations, cold calls, etc. that are required to achieve the goal. Get ready to work harder.

Louissaint: Whatever you want to charge, double it.