I’ll start with a bold statement: being an MSP salesperson is like being a real estate agent.

Hold on – don’t stop reading: there is a reason for such a statement.

Any real estate agent will tell you what a person ends up buying is rarely what they said they wanted to buy in the first place. A three-bedroom, two-car garage house becomes a four-bedroom, three-car garage one; a swimming pool becomes a large yard; and so on.

When a possible customer approaches an MSP, it can be the same. I have often heard customers say that they want variable, usage-based pricing, as they believe that this will give them the best possible overall cost. After the first couple of bills, they are screaming for a more predictable system, as the accountants start to realise that putting money aside for such variable items is not easy. The users also find that the same accountants start to apply pressure on them – don’t use the provided services and the organisation spends less. The idea that usage of the services may make more money for the organisation seems to escape many of these bean counters. 

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Full usage-based pricing is also not good for the MSP, as there is little to no predictability in revenue or profit streams: this becomes more important the closer an MSP is to going for an IPO or for expansion. The markets want something that they can use that is predictable.

Is there a way around this? There is, and it is shouldn’t be too difficult to put in place.

Whether the prospect wants variable or predictable pricing is actually secondary; what they actually want is a service at an attractive price. Variable usage-based pricing makes this difficult to present to them – instead, usage tiering gives the best of all worlds.

Usage-based pricing

Here, a prospect can be presented with different levels of usage-based pricing. Tier One is a fixed, predictable price. The customer pays this amount – whether they use all the agreed services in that period or not. The tiers above that are then based on ‘overage’ – usage of services over and beyond those agreed within the basic Tier One.

“But that isn’t optimised for my variable usage!” the prospect cries.

The trick is to make that basic fixed price Tier One a usage level that the customer will hit more often than not. This provides a base level of predictability to both the customer and the MSP alike: then, both can plan accordingly. 

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The tiers above Tier One then need to be carefully planned. Make the tiers too broad and there is little in the way of dynamics to drive the user to expand its use of the system. Too many tiers, and it gets too confusing and the variability of costs rears its ugly head again.

As an example, let’s take a system where the base Tier One is for 100 items of service. The customer will generally use between 90 and 110 units — on average, it is around the level agreed. On the periods where it uses less than the 100 units, it pays a bit more. In the periods where it uses more than the 100 units, it moves into Tier Two charging – which should be less per unit than charged under Tier One.

Now, if that Tier Two covers a further 100 units, it is very unlikely that the customer will ever use enough to get beyond that tier. Make it only for an extra 10 units and make a Tier Three beyond that where the price per unit used drops even further, and you may find it easier to up-sell to that customer. It’s a bit of a tightrope, coming up with the correct tiers that work for all parties — but it is better than either fully variable or fully fixed pricing.

Make it easier for your customer

The key is to provide something that is initially attractive to the prospect but which also covers the costs and sufficient margin to make it worthwhile for the MSP. The trick to ongoing sales success is to make it easier for the customer to then use more of the services provided without its finance department getting upset.

Multi-tier models allows for this to be done.

Photo:  Andy Dean Photography / Shutterstock.

Clive Longbottom

Posted by Clive Longbottom

Clive Longbottom is a UK-based independent commentator on the impact of technology on organizations and was a co-founder and service director at Quocirca. He has also been an ITC industry analyst for more than 20 years.

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