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How To Price Managed Services: MSP Pricing Models

Aug 26, 2021

No one wants to give away revenue. However, when MSPs prices are high, landing new clients is significantly harder. Setting prices too low hurts profitability, hurts cash flow potential, and increases the risk of business failure. Finding a happy medium, or at least hitting the higher range of the acceptable expense range, should be the end goal of every managed services provider. The proverbial “win-win” is the key to building long-term client relationships and a sustainable MSP business with high-quality service levels.

That explains why pricing is an important topic for the IT services community and the people who rely on their support. What’s the best model for your business? There is no simple answer to that question, as each MSP must consider a number of factors before building a line card with prices on every deliverable.

A little due diligence can ensure your firm is maximizing profit while providing cost-effective services to your clients and potential customers. While the complexity and number of solution options can complicate the process, MSPs can effectively price their managed services to scale up revenue and margins with the right mindset and strategy.     

Set Realistic Objectives

Discount rates and concessions should never be part of the strategy. Aiming for the lowest price with prospective clients is a sure way to put yourself out of business. The value organizations receive when MSPs provide critical advice and tailored solutions is why they deserve proper compensation, so lowering prices to land new accounts must be avoided at all costs. The best way service providers can prevent rate erosion is by building high-demand offerings.

Before constructing a managed services pricing model, MSPs need to develop portfolios of technologies, support programs, and ancillary services businesses need. From proactive IT monitoring and management and backup and disaster recovery options to ensure business continuity to cybersecurity and compliance applications, clients are typically willing to pay more for the most critical services.          

The hard part of pricing managed services is determining the amounts those businesses can afford to spend each year. Can you develop a cost-effective suite that addresses their needs and affords your MSP the profit it deserves? That is the root of the problem (and the opportunity).   

Calculating the Expense Side of the Equation

The costs associated with running an MSP practice must be a primary consideration when determining your managed services pricing model. Your expenses may not differ significantly from the competition unless your collective tools, deliverables, and employee skill sets are substantially more valuable to the target audience.

Do you know what technologies and process improvements your clients truly need to run their businesses effectively and securely in 2021? The response to that question should help determine the objectives for building a valued portfolio and a successful managed services pricing model.  

That procedure should include a complete evaluation of the target market and a careful review of the competitive environment. What are other MSPs offering, and what things are mission? How are the biggest competitors pricing their managed services, and, possibly, how much are they marking up those services? A quick survey of the tools they employ to support their clients can determine that final point, though some guesstimates and extrapolation may be required to fill in the gaps.    

Now is the Perfect Time to Adjust Your Managed Services Pricing Model

If anything good comes from the pandemic, it’s knowing how much businesses need the IT services community. From helping companies adapt quickly to remote and hybrid work environments to upgrading employees’ collaboration capabilities, MSPs proved their value when clients needed it most.

Now is the perfect time to revisit your managed services pricing model. That is not an endorsement for raising rates while the business community is still struggling with the ongoing economic challenges of the pandemic. However, MSPs should be looking ahead with contract renewals and targeting 2022 budgets for existing and new clients.     

This is an opportunity for increasing wallet-share by adding valuable services to your proposals. Pitching new offerings and discussing pricing adjustments right now can be tricky if the customer is struggling to stay in business. However, MSPs are often the efficiency experts that companies look to for answers. With the right tools and support programs, paying a little more to their trusted IT partners might improve their bottom line.

For example, implementing automations and integrations that trim manual labor requirements can significantly improve payroll expenses. Those savings can be routed into other money-generating solutions that boost your clients’ bottom lines.  

Setting the Proper Prices for Your Managed Services Customers

No MSP operates in a vacuum. Your managed services pricing model has to align with your clients’ budgets and be fairly competitive to keep everyone happy. The goal is to satisfy prospects and existing customers as well as the accounting and sales teams that rely on strong revenue and steading cash flow.

The array of pricing models for managed services may be long, but they give MSPs a number of options for meeting the specific needs of clients and their own businesses. Those choices include:

The Basic Plan − Some MSPs may not be comfortable offering a bare-minimum option. This package typically includes IT infrastructure monitoring with alerts, with additional costs for addressing problems when they occur, unless the company has an onsite IT staff. With the rise of co-managed IT, this model is regaining traction with larger organizations that may not feel they need a full-time MSP. Enterprise clients value remote monitoring and the managed service provider environment, but may not need the full array of services you have to offer. 

The Tiered Model — People like options. Current and prospective customers may prefer a variety of packages that align with their budget and resource requirements, and the price tiers allow MSPs to set prices according to the cost of delivering those specific services. This model allows providers to attain respectable margins while giving the decision-makers more power in the procurement process. The biggest challenge is ensuring that the sales team focuses on the appropriate plan rather than default to the lowest-priced option to improve the chances of securing the deal. Proper incentive plans (larger commissions or bonuses for higher tiers) can help minimize those concerns.   

Menu or Ala Carte Pricing — Giving clients more flexibility and allowing them to pick from an array of additional services can drive new revenue, but it typically adds to an MSP’s cost of doing business. Allowing decision-makers to pick from a variety of managed services offerings provides them with more control and can lessen negotiation time. However, customization and one-off deals typically complicate the relationship and the account management process. In this model, the price of each specific managed service must cover the cost of service delivery plus enough margin for negotiation since it is easier to compare and pick apart rates on individual solutions than packages. Ala carte takes away some of the mystery and makes it harder for MSPs to shift costs between different solutions. In some cases, this model can lengthen the sales process as discussions focus on individual pieces of technology instead of addressing a prospect’s business goals and problems.

Set Fee Pricing Model —The opposite of menu or ala carte, this is where clients get everything the MSP offers for one flat fee. Consider this the all or nothing approach,  or a bundled package where the entry price for managed services covers is easy to understand, though providers usually leave some room for negotiation. This has increasingly become the go-to option for providers as it simplifies the sales process and the management and delivery of their portfolios. Costs are easier to calculate, and MSPs often get volume discounts from their preferred vendors.  This managed services pricing model is often the most profitable while providing clients with a highly comprehensive support package. While the cost and complexity may extend the sales process, the high reward and ease of managing this model make it attractive for MSPs.

Per-Device — This model is easy for clients to understand and simple for MSPs to implement and manage, from sales and account managers to the accounting teams. The formula is just as straightforward: the client is billed a flat fee for each device every billing cycle (typically by month). Pricing for those managed services may vary by the type of device and specific package of solutions assigned to that particular user. Still, this model provides more clarity to each client and makes it easier to project IT costs when shifting work environments (adding laptops and mobile devices). The per-device model with one set monthly price is among the range of options available to the vast majority of MSPs.    

Per-User — Similar to the per-device model, this option bills by the person, not by the number of machines in the organization. This is a clear and cost-effective option for clients with flexible workplaces or more advanced IT environments.  For MSPs, this model requires a bit of homework, from calculating a fair price that captures all costs for delivering their portfolios to assessing the number of potential devices for each prospective client and then layering in a reasonable profit margin. A per-user pricing model is a viable option for your service offering.

Which Option Should You Choose?

Selecting a pricing model for managed services should never be considered a one-and-done activity. Some MSPs regularly adjust their rates and how they bill or offer more than one option to their clients depending on different business, market, or other key factors.     

There is no absolute right or wrong way to price managed services to your target client base. One may work perfectly for your peer MSPs but not be the best fit for your firm or the businesses your team supports. A good practice is to assess how competitors price their individual services and then determine which model might offer you and your clients the best advantage.

Copying what other local MSP do is not the best solution. That approach can lead to pricing battles and a race to the bottom as customers gain the upper hand by playing one side versus the other. Find a pricing model that leaves some mystery in the equation.    

Monthly costs are always a key factor. The best way to keep clients happy while remaining highly profitable is by keeping ahead of the expense curve and finding a service offering and pricing model that aligns best with the needs of each prospective audience. Whether offering a per device model or delivering more flexible bundles of services, there are a variety of options for keeping everyone profitable and satisfied.

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