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Addressing the Pricing Conundrum

Addressing the Pricing Conundrum

pricing_condorum

A la carte versus flat fee? To bundle or not to bundle? Per user or per device? Cost-based or value-based?

One thing is sure – in the MSP guidebook there is no golden rule for pricing your services and nor should there be as the price you charge will depend very much on the type of services you offer, your target market – and above all, your service delivery costs.

Part 2 of this three-article series MSP metrics for profitable pricing puts forward a simple methodology for calculating service delivery costs: after all, if you don’t know what it’s costing you now to deliver your current services – how can you set prices and allocate resources for anything new?

Armed with this information, it then is a question of finding the pricing model that is right for you and your customers. That is sometimes easier said than done however and based on the conversations I have had with MSPs recently, a good number are dissatisfied with their current pricing strategies.

Indeed, there is quite a variation in the basis for pricing strategies across MSPs, as respondents to Kaseya’s 2016 MSP Global Pricing Survey highlighted:

Survey Results for: Cost Based Value Based Price Match

 

2014 25% 59% 16%
2015 28% 51% 21%

The table shows that while value-based pricing remains dominant, there is a definite increase in price-matching – possibly as a result of today’s highly competitive markets. Price matching may seem like a necessary evil to win a contract, but its ongoing use as a pricing model just fuels the commoditisation of IT services and inevitably results in a race to the bottom. Wise MSPs focus on delivering value to retain higher margin engagements, shifting from pure device management to delivering a great end-user experience or developing a specialist practice.

When did pricing become so difficult?

The growth of SaaS and cloud combined with new technologies that enable remote monitoring and support have totally changed the way IT services are delivered – and the costs associated with that delivery.

Add to this the impact of mobile technologies on the way that consumers expect their services to be delivered – anytime, anywhere, in-hours, out-of-hours, 24/7/365 and from multiple devices – and costing/pricing has gained a whole new layer of complexity.

Then factor in the cost of acquiring and retaining specialist resources (people costs are likely to be the bulk of your service delivery costs) or the need to consider offshoring or outsourcing to a partner to reduce operational costs.

And the fact that managed services is recognised as a growth area does not help: recent industry reports expect the annual growth of the SMB managed services market to continue through 2016 and to exceed 20% over the next five years. This means more suppliers are piling into the market – with an inevitable impact on prices.

Why is it so important to get it right?

If you are not using the right pricing model for your business, you risk:

  • Not being as profitable as you could be.
  • Actually losing money because you are not charging enough to cover your full burden rates.
  • Losing out to other MSPs who are positioning themselves competitively – and still making a healthy profit.
  • Not winning new business because of an inflexible/inappropriate approach to pricing.
  • Losing money on some client contracts by applying the same pricing approach and margin across the board. These may be new clients who are an unknown quantity initially – or clients with more complex needs or using older technology.


What are your options?

A number of pricing models are being used by MSPs. All have their pros and cons. Some benefit the MSP more and some the customer. Plus, the pricing model that works best when you begin your engagement with a customer may not be the most appropriate further down the line when you are managing more services on their behalf. Equally, you may need to vary your pricing model across your different service areas.

When reviewing your current pricing strategy – or considering a pricing model for a new service area, bear in mind the following:

  • A thorough understanding of your service delivery costs is essential, whichever pricing model you choose.
  • The model should still be relevant as you grow: even though you will inevitably need to make adjustments along the way, you don’t want to have to totally change your core pricing structure as you take on more customers, with more complex needs.
  • Keep pricing as simple as you can: transparency in pricing can eliminate confusion and reduce the need for extended negotiation in the sales process.
  • Build in the value of any specialist industry sector or vertical market expertise. If your target market is financial services, then you will add value if you have invested in that knowledge base and experience.
  • Don’t slavishly follow competitors’ pricing but do be aware of what they are charging for comparable services: no-one operates in a vacuum.

The table below provides a summary of the main pricing models in use by MSPs today.

Pricing model What is it? Impact on MSP Benefits to customer
A la carte pricing Customers select and pay for the specific service elements they need. Allows a ‘foot in the door’ when building recurring revenue from ‘reactive’ customers. BUT it can extend the sales cycle as the customer has to select from many choices – and it doesn’t communicate value well. The most flexible option for customers as they can build their own service agreement, completely tailored to their requirements – assuming they fully understand what these are.

Customers can be reassured that they are paying only for what they need.

Bundled (aka SLA-based, tiered pricing)

 

Different levels of support packages are offered at different price points and the customer selects the package that most closely reflects their needs. For example, avoiding downtime may be critical to their business, so they would be prepared to pay a higher price for an advanced monitoring service that would avoid this. MSPs can offer different package tiers reflecting different service levels at a price point that includes a reasonable margin.

Bundling some services together can reduce the complexity of the overall offering.

BUT there is a risk that the customer may just choose the cheapest option – so more effort may be needed to sell the value of the more expensive packages.

Customers have the option to choose a ‘bundle’ that most closely reflects their service requirements and budget. This approach can simplify the sales process from the customer’s point of view.
Flat fee pricing for fully managed services Commonly known as ‘all you can eat’ pricing, this is a value-based, standardised model, whereby the customer pays for the total ‘meal deal’ as opposed to selecting individual items. More effort is required to sell as individual service items are not priced separately – but it can produce higher margins.

On the flip side, it can also eat into margins if you underestimate usage or the cost of delivery.

Customers benefit from an all-encompassing managed services solution with a single cost.

BUT it may be more difficult to justify internally, as opposed to the more transparent payment for individual service elements.

User-based pricing A flat fee is charged per user, irrespective of the number of devices or services they use. Services such as BDR and security can be included in the seat cost and the user’s multiple devices are all covered. This concept can be easier to sell and keeps things simple.

It is easier too for the MSP to ensure the consistent delivery of services and support across a business.

BUT it can be risky for MSPs as their margins can take a hit if the number of and support/delivery costs for each device and service are not factored in correctly.

Because everything is handled within the one ‘user seat’ charge, customers benefit from knowing that all aspects of their IT are accommodated within the cost.

It is easy to administer as the number of users grows.

Device and end-user-based pricing A flat fee is paid for every device and end-user supported, with prices varying depending on the type of device (e.g. server, mobile, desktop and so on). It is flexible and easy to administer and quote for services.

BUT it does not communicate value as pricing is solely based on the number of devices and end-users managed. It can also make it difficult for the MSP to upsell further services.

A flexible approach for customers as devices and end-users can be added as the business grows.

BUT it can be difficult for the customer to see the value in the support offered as they will tend to view the cost purely as a numbers-based calculation, rather than related to the total value of the services being offered.

Is there a ‘most popular’ pricing model?

The simple answer is ‘no’. In fact, not only is there no consistent single model across MSPs – each MSP may adopt differing models or hybrids to come up with the right price for different customers and services.

In terms of the way MSPs package services, a recent industry survey from Spiceworks quoted 75% MSPs bundling services – versus 59% offering à la carte (the two obviously not being mutually exclusive and presumably being used as appropriate in different sales situations).

Kaseya’s results [2] for ‘bundling services’ versus ‘à la carte’ muddy the waters further, showing an increase in à la carte for 2015 compared with 2014, from 19% to 31%. They also show a decrease in multiple bundles offered and an increase in MSPs with a sole bundled offering from 15% to 18%.

Survey Results for: A la Carte

per user / device

Three or More Two

 

One

 

2014 19% 32% 34% 15%
2015 31% 27% 24% 18%

In terms of pricing, the Spiceworks survey went on to report that 61% MSPs were offering flat-fee pricing and 51% taking a tiered approach.

It really does come down to what works best for your business.

Some pricing mistakes to avoid

When reviewing the pricing model(s) you are using – or setting prices for a new service area, try to avoid the following pricing mistakes:

  • Don’t follow an inflexible pricing strategy; this can turn potential customers away.
  • Don’t forget to factor in the value you offer when you are comparing the prices you charge with your competitors: avoid being perceived as a ‘me too’ solution, by differentiating your services and by delivering them as efficiently and cost-effectively as possible – through advanced automation, for example. This is a topic we will be looking at in the next article.
  • Don’t reject bundling as an option; it can help you to better align your service offering to customer needs.
  • Don’t be reluctant to increase prices for existing customers – provided you can justify these. Increasing levels of automation can help here too as you may be able to reduce your service delivery cost and so keep any price increases to a minimum – or avoid an increase altogether.


Conclusion

Price is not the only criterion on which you will be judged by prospective customers. Indeed, it is not ‘front-of-mind’ for many customers according to the findings of the 2015 CompTIA ‘Trends in Managed Services’ Report, which also found customers prepared to pay a premium for MSPs who align most closely to their business needs.

That said, selecting the pricing model that is right for your business can have a significant impact on your profitability – and your ability to grow. Pricing for value is a major factor here.

The Kaseya 2016 MSP Global Pricing Survey reports that “high-growth MSPs share a determined, continuous focus on finding areas of growth and competitive value, and clearly articulating this value to their clients.” According to the results, high-growth MSPs:

  • Charge more for their technicians
  • Have a higher variance between what they charge for Level 1, 2 and 3 technicians
  • Charge more on average for ongoing server support and maintenance per month
  • Have a higher average size monthly managed services contract


Partnering can help

Whichever route you go, the cost of your service delivery is likely to be a major determinant of your pricing. One way of controlling costs is by partnering for the delivery of services such as NOC and Service Desk: you will benefit from your partner’s existing infrastructure and economies of scale and will be able to scale for growth without capital investment.

A partner like Inbay can help you to save on the cost of NOC and Service Desk delivery – and allow you to redirect your own staff onto high value areas, thus increasing profitability and revenue.

At Inbay we understand that every MSP is different and we will take the time to understand the pricing models you use and map our charges to your pricing model, so that you can clearly understand your cost of delivery for any services you use. Your new expense will align with your new revenue so every new client you take on using Inbay’s services should be profitable – and you won’t have had to make a huge payroll investment to achieve this.




1Data Source: Continuum MSP Pricing Research, December 2015, Spiceworks Voice-Of-IT

2Kaseya 2016 MSP Global pricing Survey