How I fell into Managed Services can be put down to one simple quote.
“Why don’t we charge a fixed fee for support and then the better we are, the more money we make?”.
This one breakthrough from my technical manager in 2005 was how R & G Technologies fell head first into managed services.
I would prefer to tell you the story of how it transformed my business and made us incredibly profitable but in fact the opposite was true (at least initially).
The sad truth of the matter was, for all the good intentions, my company delivered mediocre service, and didn’t deliver on the promises that were made to clients…. All because I was charging less than my competitors.
You are doing your clients an injustice by charging too little
Both my mother and father owned businesses. When I was growing up I was always taught if you delivered a higher level of service, you could charge a higher price. However, no-one had ever explained to me the counter-intuitive truth that in many instances you need to charge a higher price to actually deliver a better quality service. Often, you are doing yourself an injustice by charging your clients less!!!!
This is a diagram to explain what I mean:
In fixed fee support contracts, it’s super critical to charge adequately. If not, you will often suffer by not having the available resources to deliver on your promises (SLA, proactive maintenance and monitoring etc) which will in turn result in poorer service. In my MSP this was exactly what was happening. The company simply didn’t have the time or resources to service customers because prices had been set too low. That’s not to say increasing price is the only way to improve service but it’s certainly the pitfall of many smaller managed services and IT service companies.
Rune Tipsmark from successful Managed Service and Cloud Service Provider Stea IT talks about pricing:
“In our MSP we understand that pricing at the cost of some of our competitors is just bad business. We know, at that price we won’t be able to give the service to the customer that they want, and we wouldn’t make much money – so it ends up being lose-lose. This is why our team is comfortable to walk away from highly price driven deals”.
So how do you price managed services effectively?
There are a few schools of thought on this topic, here are three pricing options in order of my least to most favorite.
Pricing Option #1 – Charging per device
- Reasonably easy for Customer to understand
- Ensures charges rise as complexity rises
- Not easy to manage
- Need a granular understanding of your costs
Taken from the latest Kaseya’s MSP Global Pricing Survey, 30% of Managed Service Providers use this form of pricing model. Each device (workstation, router, applications, mobile phone) is charged for as a separate cost each month. Based off their analysis the average charge per server is $167/mth and the average desktop is $52/mth.
I have personally used this model, had a mediocre amount of success and it is my least favorite option for pricing a Managed Services Agreement. Retrospectively, this is probably because the company was not mature enough to understand the exact costs which underpinned its resourcing needs (eg. how much does a Modem or a custom application really impact on your resources?). I suspect many small MSP’s may be in this same situation.
Pricing Option #2 – Charging per User
- Easy for Customer to understand
- Easy to manage (administratively)
- Less ability to manage network complexity
Charging per user is a quick and easy way to charge for managed services. Each user is charged at a fixed fee each month. It’s simple, and easy to manage. I personally prefer this model to the per device model which was more prevalent during the heights of the Managed Services boom.
Here’s what Joe at MSP Mentor thinks about per user pricing:
“ MSPs should try to target 100-seat engagements within 100 miles and charge about US$100 per seat for a range of services.”
Brian O’Connell and Paul Dippell, the brilliant minds at Service Leadership told me that to make money you need to be charging a minimum of $100 per user per month. And that the best in class Managed Service Companies charge $150+ per user per month. These numbers have been echoed by others in the industry, including Erik Simpson from MSP University.
I transitioned my MSP to this model and can attribute a large part of the company’s success from improving its pricing model. Coupled with some other small changes, this transformed my MSP into a company that delivered high levels of service, had a high customer retention rate, and added six figures to the bottom line within 12 months.
Pricing Option #3 – Value Based
- Most profitable
- Requires a solution sell
- Requires confidence
By far, hands down the BEST option for your managed services business. The value sell is based not upon your cost, but directly on what the customer will pay.
Here’s the process of a simple value sell:
1. Build Rapport
A strange step I know but I feel it is justified. To sell on value you must first build a level of trust with the prospect. If they are going to let you “under the hood” of their business they need to believe your organisation is credible, and that you will act in their best interests
2. Quantify the true cost of IT
Have a meeting with the prospect to clearly outline the costs (direct and indirect) associated with their current situation.
The typical questions I would ask prospects are:
- What is the cost of downtime to the organisation?
- How much is this current costing the organisation each month
- How many hours are staff losing each month due to inefficienct IT systems
- What is your average per hour salary cost
Punch it into an excel sheet and come up with a total cost of IT which includes all their current support costs as well as the intangible costs – that is, the cost of lost productivity and lost revenue due to downtime or inefficient systems.
If you want a working copy of an example cost sheet, download it here.
3. Sell a ‘Cost Saving’
$7,000 per month only seems expensive if they see it as a cost to their business. If you’re solution will save them $200,000 per year (in productivity and quantified pain) it’s a bargain!
Selling on value is not only super profitable but will impress customers when done correctly. Not only that, but you will have the time in future to exceed their expectations! Only 15% of IT company’s world-wide sell on value – however I can guarantee that they are the most profitable, and Client Heartbeat has shown that they also regularly have the highest customer satisfaction scores. Knowing all this, why wouldn’t you sell on value?
Client Maturity Levels – Charging for the non-standard
So now you’ve chosen your predominant pricing model. In many cases, successful MSP’s will now either force their clients to purchase and work to a standard solution stack or charge an additional premium if taking on a customer with a “non-standard” environment.
This is a great option for two reasons:
1. Reduces your risk
By giving the customer at fixed fee each month for unlimited support you are taking on a certain level of risk. Often times, you will not have setup the solution in the first place and there may be deep seeded problems you are inheriting. If the customer is not willing or is not capable of moving to your standard solution stack then you must protect yourself from this risk accordingly. I can guarantee you most prospects will understand.
2. Incentivises the customer to upgrade
By encouraging a ‘discounted’ contract fee when the customer finally adheres to your standards they are incentivised to act on your recommendations and upgrade their systems. This is a win-win-win situation whereby an upgraded/refreshed environment will have less support requirements (you will make more money), they will have less problems, and you will get some project work!
Alternatively, many MSP’s have a policy that a customer must upgrade or make changes prior to being on boarded. I myself am not against this idea however in our MSP I implemented an uplifted support fee until they reached compliance.
What is a Client Maturity Level?
In my business, I created a “Client Maturity Matrix” which covered all the different components of a client’s environment (servers, workstations, anti-virus etc) and each component was graded 1-4. If the client had mostly 3’s, they would be classed as a CML3. My BDM’s would then highlight the client’s current maturity level and show them what this equated to in relation to their ongoing monthly costs. They also showed them the cost savings that could be had by moving to a higher maturity level.
An example of one particular component was “Switches”.
The Client Maturity Level for this component may have looked something like the below:
I’ve got a basic example of a Client Maturity Matrix which you can download and change as you see fit. You can download it here. Not only will you be justifying the higher costs you want to charge, but you will certainly impress your client with your professionalism. The Client Maturity Matrix became a core part of our quarterly IT strategy meetings which were used to drive project sales.
Final Advice – Don’t be afraid to charge more!
I met up for coffee with an ex-employee who has recently started an MSP and was asking for advice. After talking to him for half an hour, the first thing that popped into my head was pricing and I wonder how many other MSP’s make the same mistake. Strong, intelligent pricing creates a positive feedback loop which in turn allows you to deliver higher levels of customer service to your clients, and make more money doing less.
Don’t be like me and spend years running around like a headless chicken putting out fires and under delivering. Understand the power of effective pricing and transform your MSP.
Feel free to touch base with me using the comments below or catch me on Twitter. I’d love to hear some of your thoughts and offer some advice on your current situation.
Recommend MSP pricing resources:
- Managed Services Pricing: how does your compare – free webinar by Kaseya and Autotask
- MSP Pricing: How to Build an Effective Long-Term Strategy by MSPmentor
- Managed Services Pricing Models by MSP University
- MSP Pricing Tips – Determining Optimal Margins for IT Managed Services