What’s Next in the Evolution of Managed Services Pricing
MSP pricing models have continued to evolve since the early days of managed services, but the quest for the perfect model continues. Currently, the most common approach is to charge a per-user fee, which is easy to explain to customers, but comes with its own set of challenges. Ideally, MSPs would always charge for services based on value, but many are still trying to figure out how to make that work.
When managed services emerged as a viable service model, providers typically charged a fixed fee for services on a monthly basis. This lent predictability to customers’ costs but often didn’t reflect all the work that went into keeping each customer’s environment running trouble-free.
Promising to charge the customer a predictable fixed amount made it prohibitive to increase the fees when more work was needed. In many cases, MSPs underestimated their service-delivery costs when calculating fees, and by the time they realized the problem, they were stuck in year-long contracts with customers.
As the fixed-fee model revealed its shortcomings, MSPs experimented with other models, including per-device and per-user approaches. Per-device models require detailed accounting of costs and tend to overemphasize price over value; they also allow non-technical buyers to make decisions on what devices to manage that will potentially save costs. Per-user models have similar pros and cons, but have become the most commonly used approach. Whenever a customer adds or subtracts a user, it’s easy to make the adjustment on the monthly bill. The challenge, of course, is for providers to ensure they aren’t overlooking any service-delivery costs when calculating price.
With per-user pricing, you have to take into account the whole cost structure, divide it by the number of users, and build in a profit margin. The model requires foresight—you need to envision scenarios in which devices and components are added to the environment and forecast how that will change your costs. To avoid problems, customer contracts should include contingencies for raising per-user fees based on such changes.
The per-user model has some built-in complexity that providers ignore at their own peril. But even more complex are value-based approaches. Though harder to calculate, value-based models provide the truest reflection of the value MSPs deliver to their customers. These models recognize that service is more about supporting the business and their revenue streams than simply running a technology environment.
Pricing services on value revolves around asking the customer: How much is avoiding downtime worth to you? What level of risk are you willing to tolerate? These questions help customers make decisions to prioritize data. They can then decide the level of protection they need for different kinds of data. Providers take those priorities into account to set pricing; the more risk a business is willing to accept, the less they pay and vice versa
There are some variations of the value-based model. While some providers focus on risk-based pricing, others are starting to use a core application approach, wherein for a premium, they support the business application that generates the most revenue for the customer. Presuming all goes well, the application becomes the beachhead for other services as providers gain customer trust.
Pricing models will continue to evolve. Over the next two years, we’re going to see a hyper-focus on the user experience. Rather than emphasize downtime, SLAs will be about productivity and profit per user. Penalties will be quantitative, based on a calculation of how much downtime costs the customer per user.
This is an approach we are starting to see with the largest MSPs, who standardize customers on a set of tools and services and hold themselves accountable for the performance of that standardized infrastructure. Think, Everything as a Service, also known as XaaS.
Risk and liability, therefore, will figure a lot more prominently into the pricing equation. The model will become more complex, but if handled correctly, it will be more gratifying for customers and help to build trust in the provider. And trust, of course, is foundational to longevity in MSP/customer relationships.
David Weeks is director of sales for SolarWinds MSP. Read more SolarWinds MSP blogs here.