One of the keys to success for any business is developing an effective and attractive pricing strategy. Many MSPs don't even realise that their current models are not maximising profits. Of course, before developing a proper managed services pricing strategy, it is important to take a closer look at all the costs and opportunities to increase margins on services offered. The final strategy will be based on the specific needs of the business. In this article, we will present the available and most popular strategies used on the market. Learn how to properly prepare an MSP pricing strategy and thus maximise your profits in the MSP game.
How to correctly design a managed services pricing strategy
One of the most important points when defining an MSP pricing strategy is to know and understand the options available (described in more detail below, in “The most popular pricing strategies among MSPs”). It is worth remembering that the managed services pricing strategy should be prepared in such a way that it is not only profitable but also as simple as possible. This will enable clients to better understand what they are paying for, and it will avoid costly misunderstandings.
When setting the prices for services, avoid the trap of trying to create the lowest possible prices in order to remain competitive in the market. In the long run, margins that are too low mean stifling business growth. Instead, MSPs need to focus on the value of their services. By doing so, not only will they earn more but they will attract clients who will value the quality of their services, enabling them to create more long-term and stronger relationships.
MSP pricing: Factors to consider
Currently, there is no single standard for service pricing or one miraculous, perfect solution in the MSP market. This is a great opportunity for any business. It provides a degree of flexibility that can, however, prove to be a trap if not handled properly. Determining the right pricing strategy requires deep market research and it should be designed in such a way that it can be changed and adjusted as needed.
The most important factors to consider when preparing an MSP pricing strategy are:
- Understand your costs – Yes, it sounds like a no-brainer, but many MSPs do not fully understand all the factors that influence their costs. Indirect costs (such as non-billable hours required to set up or deliver the service) are equally as important as direct costs.
- Watch for trends – The MSP business owner should watch the changes in the market and stay abreast of trends in order to seize new business opportunities as the arise. Just look at SaaS or PaaS services, which not so long ago were practically unheard of.
- Standardize your offering – One of the keys to success in the MSP business is standardization. Don’t try to provide a tailor-made solution for each customer; it’s much better to offer attractive service packages that include everything your customers need. This will enable you to optimize your resources and lower your costs, in pre-sales as well as in service delivery.
- Use a scalable and flexible pricing model – The pricing for your services must be flexible and scalable, capable of meeting your customers’ needs as their business grows. It must be attractive for the customers and remain profitable for you, in any pricing scenario.
- Compete in value, not price – Keeping an eye on the competition is one of the most important factors in determining a pricing strategy. However, remaining competitive in the market does not mean offering lower prices to customers. In fact, quite the opposite: it’s better to let the price-sensitive customers go to the competition, and focus your efforts on the customers who are willing to pay for value.
- Know your target customers – The vertical in which the MSP offers its services, and the size of the target customer, is extremely important. For example: the costs of delivering services for the healthcare vertical are different than in the case of the education vertical. Small customers need different services than customers who have an IT department. Your service offering should be designed for your target customers.
The most popular MSP pricing models
Per-device pricing model
In this pricing model, the customer pays a fixed monthly fee for each system or product delivered. This model is ideal for physical devices, such as firewalls, Wi-Fi access points, switches and other network-connected items which can be bundled with remote monitoring and remote management services.
The big advantage of the per-device model is that it is intuitive for the customer, and easy to implement. In addition, specific services or products can be easily added or removed, depending on the client’s changing needs.
In some types of devices (such as computers, mobile phones, etc.) you should consider providing volume-based discounts. The unit price should go down slightly as the total number of devices goes up, because the cost for the MSP may not be strictly proportional to the number of devices.
Tiered pricing model
This popular pricing model involves creating “bundles” or different packages of services. A common example is the “Silver, Gold, Platinum” levels of service.
When designing price ranges, it is important to keep in mind the “good, better, best” logic line rather than “cheap, normal and expensive”. Try to include as much value as possible in your “Silver” package and if possible, no more than 20% difference in price to upgrade to the “Gold” level. If you have a large gap between Silver and Gold, most customers will choose the cheapest option and it will be difficult to upgrade them in the future.
With this pricing model, it’s important to keep it simple. Don’t offer more than three levels of service, and try to avoid optional modules or additional pricing options. The simpler your pricing model is, the easier it will be to sell; and you will avoid misunderstandings with the customer about what is included in the service.
Per-user pricing model
Many services are dependent on the number of users rather than the number of devices or the specific features included in the service.
One example is the “Workplace as a Service” which would include the provision of a laptop computer, mobile telephone, and a standardized set of corporate applications. These devices are bundled together with the installation, configuration, support, and maintenance. The service can be offered for a flat monthly fee per employee, usually with a minimum number of months (for example: 36 months). After that period the hardware is replaced for the employee and a new 36-month period begins. The result is a flat fee per month per employee.
This model is very transparent and easy to understand for the customer, and for the MSP it ensures long-term retention of the customer and endless opportunities to sell additional services.
From the MSP perspective, it is important in this case to define what services are included when determining the price per user. For example: installation, standard configuration and patching of specific software applications may be included; but any services involving applications not mentioned in the list would be charged extra on a per-hour basis.
A la carte pricing model
The standardization of services is the key to optimizing resources and lowering the cost of service. However, many customers want “special treatment” and may request specific services outside your standard offering.
In the “a la carte” MSP pricing model, service packages are tailored and optimised to the needs of each specific customer. Products and services are combined, and the price is set individually. The greatest advantage is, of course, a high degree of flexibility. However, this model is associated with many challenges for MSPs. It is very difficult to scale this model, caused by time-consuming and often difficult negotiations. Furthermore, it’s a dangerous practice: one exception often leads to another and when the exception becomes the rule, the MSP business becomes very difficult to manage. Sometimes it’s better to lose the customer than to change your business model. If you decide that it's worth it to offer “a la carte” services, make sure that you price it accordingly.
