Magazine Article | September 17, 2012

Advice On Pricing Your Managed Services

By Jay McCall, Business Solutions Magazine

Choosing the right model and appropriate monthly price can be two of the most daunting tasks you’ll ever face as an MSP (managed services provider).

When you get right down to it, the pricing models and monthly costs per service can differ radically from MSP to MSP. We’ve addressed this topic in recent issues of our magazine (see “Stop Underselling Your Managed Services,” September issue) as well as our blog posts (see “Do You Make This Common MSP Sales Mistake?”) insofar as we’ve warned of the dangers of underselling your managed services. But I think you’ll agree that the time is overdue to provide you with some practical advice on how you can actually do this. I found three industry experts who offered helpful advice on this topic.

What’s the most effective model for selling managed services — per person, per device, or some other model?
Frank Gurnee, VP of channel services, ExhangeDefender: It was once common for MSPs to set their monthly pricing based purely on the overall value of their offering as opposed to using a per-user or per-device model. This is no longer the case. MSPs are now finding that customers require greater transparency, which is causing MSPs to move to more upfront pricing models. Many have argued that per-person pricing is a good way to show value to a potential partner; however, with the myriad of devices customers are using these days (e.g. smartphones, tablets, notebooks, and desktops), the cost to support an individual becomes higher. It may be a better strategy to price based on the type of device. For instance, mobile and tablet devices have one price and desktops/notebooks have another. This will assure the maximum efficiency and profitability for an MSP.

Bob Lawson, product marketing director at GFI MAX: We typically see pricing per device with different costs, depending on the type of device (e.g. servers, workstations, BYO [bring your own] devices, tablets, and smartphones). This creates a blended rate for delivering the IT service depending on the mix of devices and complexity of what is delivered within the boundary of the managed contract. For example, some contracts include a clause that permits certain IT problems to be solved “on the clock” break-fix style. There are huge advantages in this approach, but it can be tricky defining what’s in the contract and what’s not, if you try to get too clever.

We are also seeing service-centric models appearing, sometimes called utility computing services. The idea is customers only pay for the IT services they consume, as they do with their gas or electric companies. Managed Print is an obvious choice for this service model. But we’re also seeing managed security, mail archiving, and online backup services sold this way. This pricing model can be a huge differentiator for MSPs, but they need to ensure they have the right software in place that will allow them to “set it and forget it.”

Dina Moskowitz, CEO, SaaSMAX: The best method is selling managed services as a business solution and not necessarily per-device or per-person. A managed services sale is typically a sale to a business owner in order to help them manage risk, reduce overall costs, and increase both productivity and employee efficiency. For this reason, the sales model must be directed at the business owner or C-level executive, preferably the CEO or CFO. If selling a full IT-outsourced managed service, then a per-person, per-environment, or per-employee model can be used. If selling a device-managed service such as a managed firewall, on the other hand, then the pricing model can be per-device. What MSPs must not confuse is the sales model and the pricing model — there is a distinct difference between the two.

What additional information does an MSP need to know before determining the correct price?
Gurnee: MSPs must define their offering clearly before setting a price. It is important that the offering is scalable, as standardization is the key to any pricing model. This doesn’t mean there can’t be additions, but the core offering must be definitive. MSPs must know what their vendors are providing, what potential additional costs may arise, and they must know all of their associated costs before determining a final price.

Lawson: Understand your costs fully, but don’t make the mistake of going down the cost plus price model. The best route is to focus on market rates. Do this by working out the cost difference between your service and what the customer would pay using its in-house staff. Building your pricing model this way accomplishes two things:

  • It explains your costs in terms your customers understand.
  • It keeps you from leaving money on the table. Sure, you have to check that this rate covers your internal costs, so you don’t lose your shirt on the deal, but you are pricing based on your customer’s ability/willingness to pay, not 10% thrown on top of your cost base. This is how many of the big MSPs do it.

Moskowitz: A successful MSP business model entails making money based on your efficiency, not your billed hours per technical resources. Therefore, you need to first understand what the cost of delivering a proposed service is. Second, the MSP business model is not a model of markup from cost but a value-added sale and a risk mitigation sale — similar to insurance. Once the cost to deliver the service is understood, and this was a big problem early on in the adoption of managed services, then you must understand the value to the client, and then you can price accordingly. In the past, this always included a lot of experimentation. I believe today the model is much more mature and an MSP can learn more about how to price the managed service through peer groups like HTG (Heartland Technology Groups).

What are the biggest mistakes MSPs make with regard to pricing their managed services?
Gurnee: Charging too much. Knowing how competitors in your area are pricing their services is an important part of differentiating yourself. The pricing must be in line with local competition, but that doesn’t mean you have to be the cheapest deal. It just means you must be able to show the most value for your customer’s dollar.

Lawson: Being too greedy and shooting for a complete managed service offering right away. Instead, start with an offer that’s easy for your customers to buy and to give them a chance to see the value of what you’re offering. For example, you might start out by simply watching some of their systems and flagging any problems early. Then, you can move them to a “fix it” contract when they see the value and are ready.

What additional advice can you offer to help MSPs choose the right price for their managed services offerings?
Gurnee: Don’t be afraid to experiment with pricing. See what works, and if something is clearly not working, reevaluate and start over. There is no defined science, and no matter what anyone tells you, there is not a magical formula that works everywhere in the country. What works in a large city most likely will not work in a rural setting, and what is popular on one coast may not be on another. You must constantly be reevaluating your pricing, vendors, and solution stack as well as talking to your customers on a regular basis. If you know how your clients’ needs change over time, you will be better prepared to provide them the right solution and keep them as customers.

Moskowitz: The price the client is willing to pay depends on many factors, including location, size of company, and vertical market. All these factors play some part in determining how much they value IT. The more important IT is — whether it’s driven by industry regulations or a company’s need to gain a competitive advantage — the more they will be willing to pay for your managed services.