The Science Of MSP Pricing

Few if any aspects of the managed services model make MSPs sweat more than how to price their offerings. Because managed services typically require some level of customization for each customer, it’s hard to settle on a standard price for services.

This is a blessing and a curse. On the positive side, theoretically you can charge as much you want because you needn’t conform to a standard. But charging too much – or too little – could lead to problems.

You can get away with charging high prices until your customer gets a better deal from a competitor, at which point you’ll have to fight to keep the customer. And if you charge too little, you might not be able to finance the business after a while. To avoid any such scenario, MSPs must strike a balance between affordability to keep customers happy and healthy margins to sustain the business.

Cost Projections

In theory, pricing shouldn’t be as hard as it looks. You pay a supplier for a product, and then add a percentage when you resell it to your customer, factoring in your own costs so you can make a profit.

But when the product is a service that requires you to project your costs one to three years out, it gets a little tougher. You’ll need to project costs such as utilities, rent, and salaries, all of which tend to gradually increase.

The best way to make a projection is to look back. Figure out the percentage increase in your expenses for the past three to five years and you’re bound to come up with a decent projection.

Calculating your expenses is an absolute must when coming up with a pricing strategy. Be mindful of hidden costs. Some business owners do a great job of figuring out their staff expenses and the cost of delivering services but then overlook – or underestimate – things like overhead, new customer acquisition, and travel time.

Pricing Formulas

Once you accurately calculate all your costs, add your margin. MSPAlliance President Charles Weaver argues that anything less than 30 percent is too little. “If you don’t make 30 percent gross margin on managed services, you’re probably doing something wrong. You’re either underpriced or you have a leaky hole somewhere.”

Weaver is a proponent of valued-based pricing, a formula that takes into account support commitments and risk levels in addition to regular costs. For instance, if you have customers in verticals that handle highly sensitive data, such as healthcare or finance, you may have to provide extra layers of security, data backup redundancy, and compliance services.

This puts you in a position to charge a value-based premium. But of course you have to clearly explain to customers what the premium covers and why it’s in their interest to protect data from any potential breaches, and to ensure they comply with relevant data-privacy laws.

Value-based pricing can get fairly complex but, so long as you have a good handle on your expenses, you should be able to build the right formula. Many MSPs still use flat-fee pricing because it’s the easiest approach. The model works well enough if you don’t underestimate your costs, but you could be giving up some margin if you’re delivering extra value.

Managed services pricing will always be challenging. But so long as you have a grip on company expenses and market demands, you should be able to strike the right balance.

Click here to learn more about APC by Schneider Electric’s MSP Program, and for more information on pricing strategies and other best practices for Managed Services, download our Reference Guide: Managed Services Matters.

Leave a Reply

Your email address will not be published. Required fields are marked *