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Managed Services Pricing: Explore the 20 Percent Rule

You’ve heard the rally cry: MSPs need to abandon platinum, gold and silver pricing. Instead, it’s wise to promote a single high-end price for all-in services — delivering a world-class experience to your end customers, while generating high-margin revenues for your business.

It makes a lot of sense. But there’s some interesting financial math making the rounds in the small business market. And it suggests some — though not all– of your customers are willing to pay even more for your services. As Inc. Magazine puts it:

“One-fifth the people will spend four times the money. This keeps going until you literally run out of people.”

The math goes something like this…

Stage 1: Let’s say you start your business with an all-in MSP pricing model that costs $150 per user per month. And let’s say you attract 1,000 seats to that model. The quick math:

  • MRR: 1,000 seats X $150 per user per month = $150,000 per month in recurring revenues
  • ARR: $150,000 per month X 12 months = $1.8 million per year.

Stage 2: Inc. suggests about 20 percent of those customers (about 200 of the seats in your 1,000-seat business) are willing to pay four times more for a next-generation set of services. It’s sort of like shifting 20 percent of your base from a Honda Accord to a high-end Tesla. But let’s be conservative and assume the multiple is closer to 3X (rather than 4X). Suddenly, your 1,000 seat business looks like this:

  • MRR Group A: 800 seats X $150 per user per month = $120,000
  • MRR Group B: 200 seats X $450 per user per month = $90,000
  • Total MRR for combined 1,000 seats: $210,000
  • ARR: $210,000 X 12 months =$2.52 million per year.
  • Net annual gain: About $700,000 with no added seats.

Stage 3: The business research goes on to suggest that 20 percent of MRR Group B is willing to pay 3X and move up to an even more incredible service — from your Tesla to a Lamborghini. Now, your model looks like this:

  • MRR Group A: 800 seats X $150 per user per month = $120,000
  • MRR Group B: 160 seats X $450 per user per month = $72,000
  • MRR Group C: 40 seats X $1350 per user per month = $54,000
  • Total MRR for combined 1,000 seats: $$246,000
  • ARR: $246,000 X 12 months = $3 million (approximately)
  • Net annual gain: $1.2 million from your Stage 1 model with no added seats.

To reiterate… As Inc. Magazine puts it:

“In total, you are probably leaving as more than half your money on the table if you are not obeying the 80/20 product pricing rule. The rule is simple: One-fifth the people will spend four times the money. This keeps going until you literally run out of people.”

Will MSP Customers Pay Up?

Admittedly, I don’t think Inc’s pricing assertions hold up for traditional managed and cloud services. After all, it’s difficult enough to sell managed services at $150 per user per month. How is an MSP possibly going to sell a new set of services at $450 per user per month… and yet another set at an insanely lofty $1,350 per month per user?

Clearly, you’d need to break out of the classic MSP service offerings. And some of the services would need to be aspirational. Perhaps the Stage 2 Pricing includes a new Mac, new iPhone and new Apple Watch every year for the 20 percent of users who seek true IT luxury. At $450 per user per month, that’s $5,400 per user per year in revenue — plenty of revenue to keep those Stage 2 users drenched in the latest technology.

And what about Stage 3 Pricing for the four percent of users are — in theory — willing to pay $1,350 per month? Frankly, I’m not sure that tier exists anywhere on the planet for MSPs, especially in the SMB sector.

Absolutely Impossible Math?

At first glance, it’s certainly easy to dismiss the 20 percent rule — there’s simply no way 20 percent of your customers are willing to pay 3X more for a Stage 2 Service. And there’s no way 20 percent of those Stage 2 customers (or 4 percent of your existing base) are willing to jump up and pay 3X more (yet again) for a Stage 3 Service.

But at least pursue the exercise above. Stop charging “slightly more” as customers step up from Silver packages to Gold and Platinum. Instead, just offer the Platinum, as many pundits say.

Then think really big. Insanely big. If you were going to introduce a super-premium service that costs 3X more than Platinum… what would it possibly include? And could you convince 20 percent of your existing seats to consume it?

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