By: GreatAmerica on March 13th, 2018
MSPs: Stop Making This Common Pricing Mistake
Jim Hocking sat down with MSPinsights to talk about MSP pricing and the most common mistake he sees MSPs make when it comes to pricing their services.
MSPinsights: What's the most common mistake you see new managed service providers making as it relates to developing an appropriate pricing model?
Hocking: The most common mistake we see new managed service providers make as it relates to developing an appropriate pricing model is not charging enough for their services. We find that many partners who come to us for help have a good solution in place, but are simply not charging a high enough price per user, and therefore are struggling to become profitable and achieve aggressive goals. Collabrance recommends our partners charge a minimum of $125/user for an all-in managed services solution.
MSPinsights: What are the pros, cons, and key price point determination factors managed service providers should consider related to each of the following:
• Pros: Monitoring only is fairly easy to manage as the MSP typically only monitors and alerts the customer of issues, versus remediating them. Monitoring only can be a great option for companies who have internal IT departments that can fix issues, but do not have the tools in place to identify/generate the alerts. Monitoring only may provide opportunity for project work.
• Cons: With monitoring only it is much more difficult to provide differentiation. It can be more difficult to profit from this offering, and many monitoring only options are more competitive and commoditized. With many monitoring only contracts, remote and onsite support are charged at an additional hourly rate, which is harder for a customer to budget, and can also leave them with the feeling that they are being nickeled and dimed. It is much harder to win against competitors who can provide much more value and differentiation from offering an all inclusive solution.
• Key price point determination factors: This is typically the lowest cost offering an MSP provides. Make sure you understand how your RMM tool is priced, and how adding additional licenses impact that pricing. Also, companies who sell RMM tools typically require the MSP to invest in a large quantity of licenses up front as part of the agreement, so MSPs need to keep that in mind. With the monitoring, are there other items, like AV, DNS filtering, etc. that should be offered with those tools.
• Pros: Since there is usually a flat fee per device with this model, it is typically the easiest model for a salesperson to price quickly to a customer. Easy to adjust for adds/changes of devices during an agreement due to the flat fee per device charge. If a device is added or removed the pricing adjusts accordingly.
• Cons: It can be easier for the customer to focus on the price vs the value with this model. While easier for a sales rep to price to a customer, it can be more difficult for the MSP to get the pricing right. For example, servers and workstations are configured differently, and if some require more support than others it is more difficult to adjust for this. It does not address multiple users on the same device, so the user support costs could be much higher.
• Key price point determination factors: The more you standardize your offering and understand your costs, the easier this model will be to price. Whether you are pricing per user or per device, we recommend not presenting the cost in this way to the customer, as it can be easier for them to shop you. We recommend presenting one monthly option to the customer that covers everything. Many MSPs break pricing down by user or device which is completely fine, but do not break it down that way when presenting to the customer. Ensure differentiation from competitors by delineating the services and value you offer.
• Pros: The per user model is becoming more popular since most users in today's environments use several devices (smart phone, pc, laptop, etc). It can be easier to have an all-inclusive per user price in these environments. Easy to adjust for adds/changes during an agreement due to the flat fee charged per user. If a user is added or removed the pricing adjusts accordingly. Users are typically easier than devices to identify through active directory.
• Cons: In environments where there may be several users per device, this model can be more challenging to set up. For example, a computer lab in a school could be difficult to price per user as several students could be using the same device periodically. Devices per user continue to grow, and as it does MSPs need to make sure their price per user adjusts accordingly.
• Key price point determination factors: When pricing using this model, be aware of the amount of devices each user will need support on. If there are environments where every user is using multiple devices you may need to adjust your pricing up to cover the additional costs to support.
Whether you are pricing per user or per device, we recommend not presenting the cost in this way to the customer, as it can be easier for them to shop you. We recommend presenting one monthly option to the customer that covers everything. Many MSP's break pricing down by user or device which is completely fine, but do not break it down that way to the customer.
• Pros: MSPs with tiered models can change their support offering based on customer need. It gives more options for a customer to select. With a tiered approach more customers will be a fit for your solutions.
• Cons: Tiered support levels are much more difficult for an MSP to manage internally. Any time there are multiple levels of support for multiple customers it is harder for a service desk to efficiently manage compared to just one level of support. This model can be more confusing to customers, as it is harder for them to understand what is and is not included in some of the offers.
While a tiered approach may get you more customers, they may not always be the right customers. For example, if a customer truly needs your highest tiered option, but only cares about price and they choose your lowest tiered option with less service "included" and more incremental bills to the customer, the experience will likely not be a good one for either of you.
• Key price point determination factors: If your business takes a tiered approach, make sure each tier is profitable for your business. In other words, do not offer up a lower priced, lower margin option to get in the door hoping the customer will add more services later. To successfully sell a tiered option your MSP needs to have a solid documentation process. If not, some of the different types of support can end up costing you if services are being performed that are not included in the agreement.
All you can eat
• Pros: This model is the most profitable of the other models when priced right. This is the easiest type of model for a customer to budget. An MSP can provide the most competitive differentiation with this model. When this offer is standardized, the MSP can support it best, as the same type of solution is offered to all customers, leading to the best customer experience.
• Cons: This model can be more difficult to price up front. The MSP needs to be mindful of all of the potential costs that can be incurred from the contract since this is positioned to the customer as a flat fee to cover everything. The provider must understand their target customer profile that values the offer and sell with in it. For this model there will be fewer customers to market in your target customer profile, but those customers will typically be more profitable.
• Key price point determination factors: As you price out your all you can eat offer, think about all of the services you can provide the end user outside of the typical monitoring and help desk support. Of these services, what could you put a price on? Many all-in offers include audits, technology planning and road mapping, user education, etc. If there is additional value and differentiation your company can provide, build it into your all-in pricing.
Make sure your customer understands what is included in the "all-in" offer. Most competitors will not include the same elements or levels of support as you do, especially if they come in with a tiered approach, so make sure your customer understands the value they are receiving for the price.
MSPinsights: What, if any, geographic or customer demographic nuances should MSPs factor in (i.e. rate adjustments in cities where service costs are higher, nonprofit discounts, etc.)?
Hocking: Collabrance works with partners located across the country. One thing we hear a lot from prospects is when it comes to pricing, their area is "different." We hear things like, "we could never sell that price in our local geography." However, according to Service Leadership, Inc., a consultant we partner with to obtain a variety of financial data, "all-in seat pricing" varies by about 400% within each geography, no matter where you live.
The most successful, highest maturity MSP's are selling "all-in" seat prices at $200/user/month, while others may be selling for as low as $50/user/month.
That said, there are several factors that should be considered when pricing managed services for your customers. For example, MSP's need to be aware of different costs within different areas and make sure those are built into their all-in seat price. For example, it may cost $50 just to park in a downtown area, whereas in a rural area it may cost nothing. Also, there may be additional taxes assessed based on geography. We coach our partners to study their local areas and educate themselves on these things.
When it comes to discounts, some manufactures do offer discounts to non-profits, industry organizations, or buying groups that MSP partners can take advantage of. As MSP's vet different technology providers these are good questions to ask up front.
MSPinsights: Are there anecdotes you can share about how your channel partners' pricing models have been successful (or not)?
Hocking: Our best partners typically only have one main offering they sell, and they are selling at a per user cost of $125 or higher per month. They have standardized their offering and know their ideal customer. Also, they are not afraid to say no to opportunities that are not a good fit. They are disciplined not only on their offering, but also to their sales process. An all-in managed services sale is a value-based sale, and they know that they have to follow a sales process and build an ROI to justify their solution.
From a pricing perspective, their pricing is consistent across their customer base, since their customers all have a similar solution using the same technologies. They are more efficient, provide better service, and in the end are more profitable.
On the flip side, our partners who have struggled consistently have "one-off" opportunities that are not in their standardized technology stack or ideal customer profile. They also have a hard time saying no to opportunities, and they consistently lower their price to win deals. Many new MSPs will make these one-off exceptions to build their customer base thinking it is the right thing to do, however often times we see those same customers being offboarded in the future because they either are not profitable accounts, or the customer is not happy with the support they are receiving.
MSPinsights: What's your singular best piece of advice for service providers as they make managed services pricing decisions?
Hocking: Take the time to get your offering and pricing right, and be disciplined. The biggest mistakes we see from our new partners when we first engage with them are that they were not charging enough to begin with, they did not have a standardized offer, or they were not disciplined enough to stick with their pricing and offer. The more exceptions you make, and the more you go outside of the offer and pricing you created, the harder it will be to scale your business as you grow, and the harder it will be to provide your customers with a positive experience.
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About the Author: Jim Hocking, Director of Sales at Collabrance, is responsible for building the strategic vision for sales and marketing while providing business planning, education, training, and sales assistance to partners. He is also responsible for originating new partnerships. Prior to joining Collabrance in 2016, Jim started at GreatAmerica in 2011. While at GreatAmerica, Jim held multiple sales positions in the Office Equipment Group, and the Communications and Data Group. He also served as a Sales Mentor. Jim began his professional career with Pitney Bowes in 2004 spending seven years in sales and sales management positions before joining GreatAmerica. Jim received his Bachelor's Degree in Business Administration from the University of Northern Iowa.
About Collabrance: Collabrance LLC, a U.S. based Master Managed Service Provider, offers an outsourced technology suite for MSPs. We offer partners a low risk way to quickly and profitably scale their managed services business with less risk. Our portfolio of standardized technology services, proven processes, and sales coaching results in exceptional customer satisfaction and remote resolution rates.
Founded by CEO Tony Golobic in Cedar Rapids, Iowa in 1992, GreatAmerica is a $2 billion national commercial equipment finance company. GreatAmerica is dedicated to helping manufacturers, vendors, and dealers be more successful and keep their customers for a lifetime. GreatAmerica is family-owned and provides financing, third party portfolio servicing, and niche market-focused services in all fifty states and several U.S. Territories and has a staff of over 500+ employees with offices in Iowa, Minnesota, Missouri and Georgia.