MSPmentor Blog

MSP Pricing: How to Build an Effective Long-Term Strategy

Establishing a pricing approach can be one of the most daunting decisions MSP executives have to make. Price too high and get laughed out of the customer’s office. Price too low and you can leave money on the table, compromise margins and jeopardize long-term viability. Exacerbating matters is the fact that today’s pricing decisions have long-term ramifications. Bad pricing decisions have a way of sticking with you, since you’ll need to honor them over the lifetime of the customer contract.

Consequently, it’s important to put some serious consideration into how to price services, particularly if you’re in an early stage MSP. Following are a few important pricing rules to consider:

Aim high

While it may be obvious, it bears repeating: the goal is to maximize the profitability of each and every service offered. Do not be afraid to set the price high.  Discounts can always be given if and when needed, but you can never go back and ask for more money after you propose a service at a lower price.

Devise a clear, standardized discounting strategy

It is critical for leadership to establish a clear discounting strategy so sales and finance understand what discounts can be offered, and when. If not, you’re liable to get dragged down by a series of deals priced in a one-off fashion, which breeds confusion and inefficiency while closing business. By taking a more standardized approach, a sales representative can submit quotes for internal review, with reference to the discount policy and an explanation of why the customer is being offered a discount. Management will be able to easily verify the rationale, and approve as appropriate.  If the proposal is accepted, finance will also be privy the discount strategy, so they won’t be taken by surprise when processing the order. This simplified process sharply contrasts situations where sales representatives are left to make up their own discounting strategy.  Without a clear discounting strategy, representatives must develop individual pricing, leading to inconsistency and additional cycles for those who have to approve proposals, process orders and book revenues.

Understand your cost of doing business—and never sell below cost

Establishing a complete, accurate understanding of your costs is a critical first step to ensuring pricing sets the stage for profitability. This includes operating expenses, human capital costs, capital expenses and issue resolution times. Once the cost is established, the price needs to reflect an achievable profit point—never sell a service below cost.

Tailor pricing to your offering type

It is important to start with an understanding of the offerings being brought to market, and whether they fit the description of a commodity or a value-based offering. The pricing model will vary substantially depending on the answer.

Leverage tiers for operational scalability

Establishing a tiered pricing model is often a highly effective way to make pricing attractive and fit the budgets of a range of prospects. Further, this tiered model gives MSPs an opportunity to establish pricing for a range of customers, while at the same time standardizing pricing internally to streamline sales, management and finance efforts.

Present single price proposals to customers

The best MSP sales representatives are those that take a consultative, value-based approach, even if you are delivering commodity type services. When going into an account, it is vital that your sales team understand the prospect’s business and the value the offerings provide within that context. When this consultative approach is employed, the sales representative should consult the tiered pricing model, but present a single price proposal to the prospective customer.  The sales representative should consider the prospect’s challenges, objectives and budgets and build a proposal based on those requirements. This approach demonstrates that your company is looking to truly partner with the prospect and deliver long-term value.

Keep analyzing

Given the vital nature of pricing, this isn’t a once-and-done deal. It’s important to assess the profitability of customers and specific services and track them over time to ensure the pricing continues to make sense.

If a particular service takes too long to deliver, has a high failure rate or has been the source of refunds due to service level agreement (SLA) breaches, you may want to avoid offering as a recurring service. Instead, it could make more sense to provide these services within a billable scope of work.

Conclusion

Establishing pricing is a daunting effort because so much is riding on it—and there aren’t simple formulas or answers. The reality is that there is no one-size-fits-all approach to pricing MSP services—to the contrary, having a cookie-cutter pricing strategy can be a huge disadvantage. The trick is establishing a pricing model that is optimal for your customers and your business.

Now there’s a new white paper that takes some of the guesswork out of developing effective pricing strategies. “Pricing Your MSP Offerings: Key Strategies for Building a Winning Pricing Model” provides the high-level strategies you need to formulate a pricing model that works best for your business. If you’re tasked with managing pricing strategies for your MSP business, this paper is a must read.

Greg Donovan is vice president of service providers at CA Nimsoft. Monthly guest blogs such as this one are part of MSPmentor’s annual platinum sponsorship. Read all of Nimsoft’s guest blogs here.

Discuss this Blog Entry 1

Mitchell Cipriano (not verified)
on Dec 13, 2012
Greg: I like your suggestions. One thing I would add is that when pricing managed services, I always recommend pricing based on the value being delivered to the customer and not a one size price across the board with discount based on volume. This approach serves a a few goals. First, if you clearly understand the value your customer is receiving, then it is easier to explain it to to your customer and justify your price. Secondly, customers that are getting more value from your service often require the most effort. Lastly, these customers will have a far greater appreciation of what your service means to their business and will be glad to pay for it. At first, this method may seem counter intuitive, because you may be charging different prices for the same service to different customers, but you will be compensated more in line with the effort you are making and the value you are delivering. Mitchell Cipriano www.demandbydesign.com
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