How Do I Price Managed Services?
“Do you have any managed services pricing strategies or tips?” That’s the single most common question I get asked by business owners trying to evolve from a break/fix model to a managed IT services model. Ultimately, you understand the need to evolve your product portfolio and expand into offering more proactive IT support. As a business model, managed IT services provides monthly reoccurring revenue and aligns your interests with those of your clients, thereby making those clients stickier. But still, MSPs with varying levels of maturity often lack confidence in your current pricing strategy. So what is there to consider when pricing managed services, and what are some of the most popular pricing approaches today?
No One Right Pricing Answer
Let me start by saying that there’s no one right answer to pricing managed IT services. The vast differences in local economies and the overhead the business owners currently have are just two factors that affect what an MSP can charge. When it comes to pricing, the key to success lies in being knowledgeable of these factors, understanding what your margins must be for maximum profitability and knowing which model is the best fit for your business.
When building an IT services portfolio, there’s no one-size-fits-all formula that can guarantee success. Instead, you must understand the various pricing options available to you. Examine the solutions in your technology stack, calculating the cost of delivering goods and services to clients, and evaluating your target margin and revenue goals. Only after completing this analysis can you identify which of the following models is the right fit for your business:
MSP Pricing Models
Although many different models exist for pricing your managed services, the five most common approaches we see today are tiered, a la carte, all-inclusive, per device and per user. According to a recent survey we conducted with Spiceworks, here’s a breakdown of each model’s adoption rate among MSPs:
- Tiered: 51 percent
- A la carte: 59 percent
- All-inclusive: 61 percent
- Per device: 49 percent
- Per user: 43 percent
Note: Study findings indicated a significant amount of overlap between each.
So what do these pricing models look like?
In a tiered pricing model, providers present a series of packages or service levels to potential customers—bronze, silver and platinum, for instance—each of which comes with its own solutions, services and support. This model helps make profit predictable, as MSPs can effectively calculate the cost of solutions, labor and service delivery at each tier before setting prices. Depending on your client base, however, SMBs may only be interested in one or two components of your offering. With this pricing approach, you run the risk of losing the sale should clients feel they’d have to pay for things they don’t want or need.
A La Carte
A la carte pricing allows customers to piece together a service agreement based on only those products and offerings they’re interested in. This model allows for the greatest level of flexibility and client customization, but can also be one of the most difficult to manage when it comes to ensuring margins are healthy and costs are accurately calculated.
This pricing model offers a flat fee for all services that are included, and focuses on selling the total experience in one cost. Rather than offering multiple purchase tiers or a la carte options, the offering or package is often one-size-fits-all and is completely standardized. While this is not always the surest approach, “all or nothing” can be appealing as it often warrants a premium price tag.
This is a simple pricing model that requires users to pay a flat rate for each device (desktop, server, smartphone or tablet, etc.) being supported by the MSP. Per device pricing can be attractive for MSPs who can bill for every supported device (regardless of the number of employees or users) and easily add or remove devices from your plan. Still, be careful and ensure pricing is set appropriately for each device type.
With this pricing model, clients are offered a flat rate for each user or employee at an organization, regardless of the number of devices each person uses. Per user pricing can simplify the billing process and is appealing to clients, but as the average number of devices per user continues to grow, MSPs must be mindful that margins don’t suffer over time.
How to Have the Pricing Conversation with Former Break/Fix Clients
You may be new to the MSP game. If you’re transitioning from a break/fix model, converting your old clients can often be challenging, but worth it in the end. Save all your invoices for those tough-to-convert existing clients. Add up all the capital expenses that were paid over the course of one, two or three years. Then, propose your managed services contract, expressing that with it, clients’ capital expenditure can be a more budget-friendly operating expense. And to nurture existing relationships, consider offering a price-break as well. Keeping a record of past invoices and taking these steps will go a long way towards securing a winning bid or switching existing clients over.
There’s no denying that as today’s technology and managed services landscape continue to evolve, so do best practices surrounding how to effectively price managed IT services. This may only be the beginning for many of you, but understanding pricing is an essential step in maximizing your margins and promoting future growth as an MSP.