MSP Pricing and Profitability: Killer Mistakes to Avoid
MSP pricing is a topic we frequently get questions about. What pricing models should be considered? How much should MSPs be charging per user? In this post, we’ll answer those questions by digging into how MSPs can make their own calculations and ensure their managed services agreements stay profitable over time.
There are few aspects of running a managed services business that have more direct bearing on your profitability and success than your pricing and your managed services agreement (MSA).
That’s why, when we set out this year to develop more tools our MSP partners’ could use to fuel their growth, the first two on our list were:
We introduced the calculator during a recent MSP Live Chat session where I explained it is based on the calculator I used to successfully manage, grow and eventually sell my MSP. I was joined in that session by bvoip CEO and active MSP owner George Bardissi. George and I go way back, and our discussion with audience members covered a wide variety of pricing and packaging challenges, with insights from our own experiences.
It was such a popular session and there were so many questions to cover we ended up doing a Part 2 follow up session the following week. You can watch the full recordings of each session here:
As that suggests, pricing is obviously a complex topic. There are many ways to do it right as an MSP, and even more ways to do it wrong. There are plenty of mistakes that George and I have seen (and made) firsthand, and many things I would do differently if I were starting from scratch now.
Let’s take a deeper look at a few of the major talking points from these two sessions, and explore each in more detail.
How do you set your pricing for long-term success? What pricing model should an MSP use? Per user or per device? What are the best ways to protect your bottom-line?
Mistake #1: Offering client-facing tiered pricing
For quite a while, it was common for MSPs to provide clients with different tiers of service offerings. Usually, it was presented as a “bronze, silver, gold” type of choice. The logic was every buyer appreciates having a choice, but the problem with this approach was many clients would simply choose the cheapest option and forego options or services that they actually needed.
In my MSP, I had tiers of service packages I would apply to different types of clients. I would refer to them internally, but I never presented them as options that my clients, themselves, could choose. The way I thought about it was my clients were bringing me in to be the expert — I shouldn’t be letting them decide what they need.
Offering prospect clients tiered options can seem like a positive, but ultimately providing them with one clear option can be a lot easier and simplify things for both parties. Prospects will appreciate that there’s one less decision they have to make, and your technicians will appreciate not having to keep up with which client is on which tier.
Bonus: Getting rid of a lower tier can also help you avoid taking on “problem clients” who refuse to pay for what they legitimately need.
All that said, can there sometimes be benefits to offering tiered services? Certainly, but if you’re not realizing those benefits by closing more deals or upselling more clients, then there may be no point clinging to the method.
Mistake #2: Not identifying your minimum profitable contract
Every MSP has a responsibility to themselves: Make sure each client is profitable.
In many cases, however, getting to that point is a prolonged learning experience with a lot of curveballs.
My recommendation: Use our MSP Pricing Calculator to track and plan expenses — especially labor costs — so that your contracts don’t come back to bite you. For many of today’s MSPs, a deal south of $2,000 – $2,500 MRR isn’t going to be worth it. If the MRR on a deal looks questionable, consider selling block time as an alternative to all-you-can-eat service.
Remember that with the cost calculator, you can use your existing clients as a template. If you have a profitable client who is similar to a prospect, your existing cost calculations can help you plan your agreement and exceed that minimum profitability threshold.
Per-user vs. per-device pricing models
In locking in profitability, many successful MSPs seem to go in the direction of per-user pricing as opposed to per-device pricing. Gone are the days of one device per user. With users having multiple computers, phones, and tablets trying to keep track of devices can be cumbersome. By having a flat rate per user per month it aids in having a mutual understanding with clients of how the contract will increase in price and gives your business the ability to easily track and make billing adjustments.
Does that mean that per-device can’t work for you? Of course not. As long as you’re ensuring you have a healthy gross profit margin (goal: 70%), you should stick with whatever works for you.
Whichever pricing model you choose, just keep in mind you don’t have to specify to your clients that’s what you’re basing your pricing on. On one hand, it can help make your pricing easier for them to understand, but on the other hand, it opens you up to more potential negotiation and nitpicking. Instead, you can always just provide your flat rate number and have one less thing to pick at.
Mistake #4: Not including an escalation clause in your MSA
Your managed services agreement should include an Escalation Clause that protects you from inflation. This helps keep your MSP profitable year after year and saves you from uncomfortable renegotiations when vendor prices increase.
If you’re interested in reading more advice on crafting a profitable MSA see my recent 2020 Guide to Managed Services Agreements.
Mistake #5: Not ensuring profitability over time
Sometimes a new contract won’t be profitable for several months, because you may need to be very proactive at the beginning to get the network running smoothly. In many cases, that can be acceptable knowing that, in later months, there will be very little maintenance to be done. Using the MSP Pricing Calculator can also help you strategize this type of agreement in such a way that you can be sure it’s worth your time investment.
By regularly going to the 2nd tab of the calculator, you can compare your profit margins and determine if your labor costs are indeed decreasing over time. If not, or if they’re actually increasing, you can troubleshoot and try to find a solution to course correct.
Mistake #6: Not protecting yourself from cyber liability
These days, it’s certainly wise to consider cyber liability every time you bring on a new client. Increasing cyberattacks against MSPs have only increased the risk that a single vulnerability or mistake can cost you your business.
There are two great ways to protect yourself from this sort of danger. First, ensure that your company and each of your clients has cyber insurance — in fact, it’s a good idea to include a requirement with specific coverage needs in the contract (for more on cyber insurance, see our MSP Live Chat with techrug founder Justin Reinmuth).
Additionally, you want to make sure you’re providing the level of security the client actually needs, not just what they’re willing to pay for. The dangers of doing this are quickly beginning to outweigh the reward of haggling your way into a new client.
Mistake #7: Not handling “unlimited” support effectively
Offering unlimited service or troubleshooting is a great way to earn business. In fact, it can be hard to stay competitive in some markets if you don’t offer this.
The trick to making these kinds of deals without losing your shirt on labor costs is to clearly define the boundaries of your offer in each contract.
Yes, that essentially means putting limits on your “unlimited” service, but you’ll find yourself regretting it if you don’t.
In closing: Keep laser-focused on profitability
Profitability is not so much a destination as it’s a moving target. Overhead changes, market demands change, and customers change. While there’s no single methodology for pricing that’s guaranteed to work for every MSP, there’s one truth that applies to everyone: you have to continuously optimize your pricing model and your agreements if you want to stay competitive.
Our pricing calculator can help you do that by taking much of the guesswork out of the process. Just like how NinjaRMM can help your business thrive by taking the guesswork out of client management, time tracking, and support ticketing. Learn more and start a free trial today.