Pricing should be based on the value of the services you offer, and the risk you incur.
If value is what you deliver as an MSP, why are you still charging your customers a flat fee based on number of devices or users? Wouldn’t it be better to make calculations based on value, and price your services accordingly?
Of course it would, but value-based pricing isn’t easy. It requires a formula that accounts for risk levels, support commitments, and all the costs associated with delivering a service reliably and effectively.
Such formulas can get fairly complicated, which largely explains why MSPs for the most part have relied on a per-device, per-user pricing model. The model has worked well enough but is far from perfect.
Let’s say you charge $59 a month per desktop, $299 per server and $39 per printer. The customer can easily take those prices, walk over to a competitor and ask them for a better deal. Or the customer may be pressuring you with a competitor’s prices.
Multiply this scenario by thousands of customer/provider relationships, and the result isn’t hard to guess—commoditization. And you know what happens when your services become a commodity. It won’t take long until you start struggling to pay the bills, and you’ll be looking for new ways to boost revenues.
Value-based pricing helps prevent that. But you need to come up with a workable formula to determine the correct pricing and place your business on a more solid footing.
Some of the most successful MSPs employ some type of value-based pricing formula, said Charles Weaver, CEO of the MSPAlliance. Also referred to as risk-based pricing, the model accounts for the level of risk you take on with each customer. It all starts by calculating the expenses associated with the delivery of the services.
That is the easy part, said Weaver. Or it should be, assuming you have a good handle on your operating costs.
On top of your costs, Weaver suggests adding 30 percent. “If you don’t make 30 percent gross margin on managed services, you’re probably doing something wrong. You’re either underpriced or you have a leaky hole somewhere,” he said.
Then you start getting into the risk-management part of it. If the customer hires you to run a server and says, “I just need it for some data, but the data isn’t critical and I’m not that worried about it,” your base price will cover the service. But say the customer has highly sensitive data such as medical records or intellectual property—and requires that the server be up and running and accessible at all times—the value of the service just went up.
At that point, you explain that $299 covers basic maintenance, backup, regular patching and support from 8 a.m. to 5 p.m. If the customer needs added redundancy, hourly backups and 24/7 support, the cost of delivering the service climbs. So instead of $299 per month, you have to charge the customer much more.
And that new number should be commensurate with the added risk you are taking, which is based on the value the customer places on the data it's asking you to manage and protect. The service commitments in your SLA with the customer are an acknowledgement that you understand the importance of this data and you agree to take on the associated risk and responsibility.
Weaver encourages all MSPs to adopt risk-based pricing. Flat-fee pricing based on users and devices, he said, is inflexible and potentially problematic. If costs rise, or you miscalculate costs upfront, you’re stuck.
With risk-based pricing, you can avoid such outcomes. You’ll make more money, and your prices will offer a truer reflection of your value as an MSP.
Pedro Pereira is Massachusetts-based freelance writer with two decades of experience covering and analyzing the IT channel and technology. He can be reached at firstname.lastname@example.org.