Q: We added managed services to our IT offerings within the past five years. While we have a lot of happy customers, it seems like our margins are getting lower and lower. To truly provide our customers with the level of service they’re used to, we need to raise our prices. What are some ways I can communicate this to our customers without losing their business?
Talking to your customers about price increases can be tricky; however, it’s vital if you want to run a profitable managed services business. Often, providers are hesitant to have these conversations because they’re afraid of losing customers. But, like it or not, increasing prices is inevitable in any industry, and your customers know it.
To give you advice on how to navigate these conversations, we consulted your MSP peers and Gary Pica, the president of TruMethods. TruMethods provides industry training to MSPs who are looking to increase their profitability and grow their businesses. Gary and your MSP peers shared their individual insights and three ways to approach your customers with price increases.
How to approach your customers about price increases
Not all price increases are the same. In fact, there are a few different scenarios when you may need to raise prices for your customers. For example, if one of your vendors increases their price significantly, you might have to do the same. Other reasons for price increases include accommodating the cost of living or perhaps introducing an old customer to a more modern package with new technology features. How you should approach your customers will depend on your situation. Here are some situations you might run into:
How to prepare for the inflation of goods and services. Building price increases into your yearly contracts is one way to prepare customers for the change. One way to introduce yearly price increases is to include language in your service level agreements that the cost of the services will increase by X percent annually to adjust for normal inflation. Gary Pica shares that this type of communication with customers should be simple because it is already outlined in their contracts. “For this type of increase, you should keep communication to a minimum,” he says. “Simply include a short letter or email with their invoice.”
This is a great way to get customers on board with regular price increases over time—and it helps keep your business profitable as services become more expensive to provide. If this type of increase isn’t built into your contracts, it can be difficult to get your customers to agree it.
A potential pitfall we see MSPs run into is SMBs who expect discounts. They think that the longer they’re customers with an MSP, the more discounts they should get. One way to overcome this challenge is to reiterate the quality of services you provide for them and any additional efficiencies and features that you’ve added.
How to communicate price increases from vendors. When your vendors increase their rates, you need to either eat the extra cost or pass this price increase onto your customers. Unfortunately, nothing stays the same price forever—if it did, we would still be paying $1.55 for a gallon of gas.
Try to be as honest with your customers as possible, and explain to them why the cost is increasing. Matthew Ritchie from Computer Network Services shares a word of caution about raising prices too often. “Be careful, or you will price yourself out of business,” he says. “Vendors seem to think that raising prices is a normal practice, but imagine if you went back to a restaurant you loved, and the price was hiked. You’re done with that place.”
James Bayliss from Thrive Networks agrees that companies should keep prices steady. He says: “Ensure the price change you implement can cover your costs for at least a few years. Raise costs too often, and [your] clients will look elsewhere.”
Brent Fairbanks from Electronic & Computer Specialties, Inc. has a different approach. He shares that good customers don’t care about price changes—but the ones who are on the fence might leave. He says the best way to deal with this is to “raise prices very little, but more often. This gets them used to this practice, and if the change is small, we get less push back.”
How to raise the value of your offering. When you add more robust solutions to your service offering, chances are the cost of your customers’ managed services packages will need to increase. But, it’s important to explain the benefits and the overall value of what they’ll be receiving. Gary Pica shares that in the case that your prices are wrong, or your clients aren’t on your most recent offering, explaining price increases needs more attention.
“Be sure that if you are raising the price that you are also raising the value for the customer.”
“Be sure that if you are raising the price that you are also raising the value for the customer. Be sure that new services, processes, and tools are included,” he says. Additionally, Gary explains that in your conversation you should tie these new services or tools to the results they’ll see in their business.
“Here is a recent example that a TruMethods member shared with me,” Gary says. “They added several new security features to their MSP offering that added $3/seat in cost. This means that they needed to raise their seat price by $10 to maintain 70 percent gross margins. They spoke to each customer telling them the new threats that they are dealing with and the solution they had put in place to protect them. They got very little push back and increased their MRR $15,000/month across the 1,500 seats they have under management.”
The key to changing your offering is to make sure your customers understand the value they’ll be getting from the new offering. Explain what the new benefits are and how this help will their business run seamlessly.
Introducing price increases to your customers can be challenging. But, by implementing price changes, you can continually provide the best service possible—without sacrificing your margins.