Q: There seems to be a lot of different opinions on how we should price our offering. How can we determine what the right pricing strategy is for our MSP business?
Setting a pricing strategy is a critical process for any business, especially in the IT services industry. The wrong pricing strategy can not only scare away prospective clients, but it can also hurt the business from within. On the other hand, the right pricing strategy can set the business off on the right foot with each new client, at a pace that allows them to move far past the competition.
To get a better understanding of the importance of pricing strategies and implementing them for MSP businesses, we reached out to Gary Pica, founder and president of TruMethods. Gary shared his observations on common MSP mishaps, as well as his best practices for MSPs who are looking to adopt a new strategy.
The importance of setting the right pricing strategy
A pricing strategy is important because it helps set the tone for your success. If an MSP does not understand how price relates to the services they deliver, they will suffer with lower product margins. This will lower the quality of the MSP’s service and its business overall — and they might not even know why.
The MSPs with the most effective pricing strategies look at their service delivery areas, which includes their labor and tools, and convert them into an average cost per seat. If they know what their average cost per seat is, then they can set a target margin.
Another aspect of setting a pricing strategy is accounting for each cost associated with the account. Support people, VCIOs, and account managers are all examples of people that push tools and services that can increase the cost of managing their infrastructure. Unless you have the framework to understand what your average cost per seat is, it’s almost impossible to determine if your price is right. In that case, you’re basically guessing.
Setting the wrong pricing strategy can incur many risks for an MSP business. The main area that suffers for MSPs is their margins, which then leads to stagnation for the MSP business overall. As you continue to add customers, you eventually hit a ceiling on your recurring revenue level that you can’t push past because of their poor margins and pricing strategy.
When you are creating your pricing strategy, keep in mind which industries you sell to. Industries with higher security requirements should have higher price per seat, because of their specific needs and the level of support required. Therefore, MSPs must adjust their pricing strategy for these industries to protect their margins.
How to determine the right pricing strategy
First, be sure to know what your options are. Some of the popular strategies that I see MSPs use include per user pricing, per device pricing, market-based pricing (following the lead of other MSPs to set their price). I recommend a cost-based pricing strategy when creating their “pricing calculator” to set their margins.
MSPs should keep their calculator as simple as possible, to provide a simple framework to pack value into their pricing strategy. Divide your monthly fee by the number of seats and see where that number is in relation to your target. If you don’t hit that target, it lowers your margins.
As your “first step” look at your MSP’s functions, which includes the people in each role (support, centralized services like backup and RMM tools, technology alignment, and vCIO. Calculate how many seats each person in these roles can manage and use that to find your average cost per seat per labor, then do the same thing for tools.
I call this “micro-Pica-nomics,” while “macro-Pica-nomics” does the same, but also considers how much revenue your functions can touch. Once you accomplish you set up with this framework, the rest is just math that can be completed with a calculator. Eliminate any inefficiencies in your MSP, to make sure that your price matches up with the value that your MSP provides in the marketplace.
Use internal evaluations
There are several areas within your own MSP that you should evaluate to help determine the correct pricing strategy. Most MSPs have too many tickets based on their number of users, which can really hamper the quality of work your support team is able to offer. Examine the ratio of support resources available to the number of seats a person can manage. You can calculate the ratio by dividing the number of seats the MSP has by the number of tickets and alerts.
MSPs should aim to have a cost per support seat of $10 or less for their support function, which means that one support resource needs to manage about 500 seats. If that cost is higher, it leads to value and cost problems that will prevent you from adding the other valuable resources that allow you to charge more.
Use price per seat and average cost per seat as metrics to help in setting a pricing strategy. Be careful about what you include and exclude from your pricing strategy. For example, I often warn MSPs about bundling Office 365 into the core offering because it does not offer enough value for the way it inflates the cost per seat.
Most MSPs that I have spoken to don’t know their average cost per seat or even how to calculate it. Nearly the entire industry does not have a unit of measure, so they are relying on other data that could be misleading. When they run their gross margins at the end of the month and realize they are not where they need to be, it showcases this “data gap” that exists because they don’t have a framework in place to set their prices.
Using these steps, you can construct the pricing strategy that best fits your MSP business. The right pricing strategy will give you a major competitive advantage over other MSPs that use less precise methods to set their pricing strategy.
Photo: Austin Distel / Unsplash
