MSP Pricing Models: 5 Steps Toward Profit Margin Optimization
Whether you’re just getting started as a managed service provider (MSP), are adapting to new industry trends or are revamping your current business model, developing pricing that works best for you and your clients can be a challenge.
The good news is that developing a pricing model doesn’t have to be an exercise in trial and error. Below are some tips to help get you started:
1. Audit & Understand Your Expenses: It is essential to take a hard look at your costs when developing a pricing strategy. Once you understand your expenses, you can begin to think about what you will charge for services. For many MSPs this means analyzing recurring costs as well as any overhead, including but not limited to:
- Staffing and employee benefits
- Marketing and overhead
- Rent, utilities, taxes, office supplies, and more
Reviewing your expenses from the previous year is a great way to start this process.
2. Carefully Consider Client Needs: Next, you’ll want to review the costs associated with supporting your clients. These costs can differ widely depending on a variety of factors, including the number of users they have as well as the number of servers and data used. When presented with a new client, take the extra step to assess the cost of supporting them.
NOTE: While many businesses offer discounted prices to get new clients in the door, we caution against that tactic. Clients often expect discounted prices to last for the duration of their relationship with you, and it can set you up for failure in the future.
3. Understand SLA vs. Value-Based Selling: Pricing based on Service Level Agreements (SLAs) and values are emerging concepts in the MSP channel. The SLA-based model creates a tiered support system, allowing clients to pay higher prices for increased levels of support. For example, if Company A requires closer monitoring or more dedicated time than Company B, Company A might have to pay for a higher tier of support. This model is often based on support availability and regular hours. Anything beyond the 9-6 window could result in extra fees for your customers.
In a value-based pricing model, MSPs act as an outsourced IT department for their clients. Businesses using the value-based model determine how much an in-house IT function would cost the customer and then select the pricing accordingly.
4. Determine if Bundles are Best for Your Business: Bundled pricing models make it easy for a client to understand the value your business brings to the table. However, a la carte pricing provides flexibility for your clients, allowing them to purchase only what is necessary for their business. Some MSPs combine these two models, focusing on bundles and allowing customization in specific circumstances.
5. Deliver Services that Drive Profit: Ultimately, it all comes down to the quality of services you deliver and your ability to communicate their value to potential customers. You’ll want to partner with vendors that offer high-quality tech and customer service; develop a team that is knowledgeable about the technology and services you provide as well as committed to customer support, and you will want to choose services that provide a higher margin overall. For example, remote monitoring might prove more profitable than hardware sales. It is essential to consider which services will be beneficial to both your clients and your business as you build your pricing model and your company.
Pricing models should be straightforward and easy for customers to understand, but remember, they are not one size fit all. What works for one company may not be the best for another. The model you choose will ultimately depend on what you feel most comfortable with.
For more details on how to create the perfect pricing model for your business, download our Pricing Made MSPeasy eBook today!