How can managed services providers (MSPs) navigate pricing models? Is per user, per device or some other approach best? Continuum offers these five MSP pricing tips.
What's the secret to successful MSP pricing models? That's the most frequent question we hear from our managed services providers (MSPs), especially as they begin to budget and plan new services for 2014. While MSP pricing models vary from one provider to the next, here are five potential paths you can take.
1. Per Device vs. Per User: We're seeing an overall shift in the market. Early in the MSP market, most companies focused on per-device pricing across servers and desktops. But individual users increasingly have multiple devices (desktops, notebooks, tablets and smartphones). Amid that shift, a growing number of MSPs are embracing per-user pricing -- which can simplify SLAs (service level agreements).
Through our relationship with MSPmentor, we got a sneak peek at some of the latest market data:
- 42 percent of MSPs focus purely on per-device pricing
- 22 percent of MSPs focus purely on per-user pricing
- 44 percent of MSPs promote blended per-device and per-user pricing
(Note: Finalized data will surface in the seventh-annual MSPmentor 501 report in early 2014.)
While the per-user pricing model gains momentum, per-device won't go away -- especially since many MSPs need to manage data center devices either on-premises or in the cloud.
2. Flat Fee Pricing (a.k.a. value or "cake" pricing): A growing number of MSPs focus on flat-fee pricing for all included services -- help desk, NOC, patch management, anti-virus, cloud storage and so on.
TruMethods CEO Gary Pica, an MSP veteran who now coaches many service providers, refers to this model as the Chocolate Cake approach. Instead of selling customers on individual ingredients (flour, eggs, butter, etc.), focus on selling the total experience in one cost.
The Flat Fee or cake pricing typically involves a per-user monthly cost (anywhere from $25 to $200 per user, depending on the number of services you're rolling in). The key requirement: Never disclose costs for each individual service.
3. Tiered Pricing (i.e., Gold, Silver, Bronze): This was a hot approach a decade ago and many MSPs still promote it. Just be careful with your approach here:
- Too many choices can slow or stall a customer decision.
- Many customers will automatically run to the lowest-cost option.
4. A la carte with hourly blocks: Here, MSPs mark up their offerings to capture target margin -- plus the hourly blocks allow the MSP to maintain face time with high-maintenance customers.
5. Maximized fixed price: Here, you raise your fee to the max -- perhaps as high as $600 per server. But you show extra value by including some items such as planned projects and onsite work. Just be careful to avoid runaway costs and make sure your contracts clearly articulate what's covered in this fixed-price approach.
How Much Should MSPs Charge?
As you evaluate various pricing models you'll be tempted to ask the following question: "How much should I charge for my managed services?"
Indeed, many MSPs reach out to peers asking about their monthly per-device or per-user rates. But too often, MSPs don't do their deeper homework. Even if you know how much a peer or a rival charges, have you determined the:
- exact services delivered?
- cost of delivering each service?
Think of it this way:
- Auto dealer one charges $500 per month for a car lease.
- Auto dealer two charges $150 per month for a car lease.
Who is making more profit -- dealer one or dealer two? Until you have the deeper details (make and model of car, dealer costs, bundled services, etc.) you can't reach an informed answer.
The bottom line for MSPs: Profits await you. But so do net losses if you haven't really done your homework on pricing models, your actual costs to deliver the service, and more. It’s also important to take a fresh look at your service delivery costs and weigh the pros and cons of outsourcing backend support from a Service Desk and/or Network Operations Center vs. hiring additional salaried technicians. You may find that it can be more cost-efficient to scale your business through outsourcing, which will affect your pricing decisions.
Ray Vrabel is Director of Technical Account Management at Continuum, a leading provider managed services solutions that power MSP growth.