Many MSPs struggle with profitability. The culprit is often the failure to price and package services properly. But why is it so difficult to get MSP pricing right? Is it really a “black art” or a straightforward formula that some fail to employ?
“If you asked me this question two years ago, I would have said it’s more of a black art,” says Chris Gotstein, president and founder of GoTech IT Solutions, an MSP in Brookfield, Wisconsin. He says he used to price based on a “feeling” of what he thought a client could afford. “That really came back to bite me hard two years ago, because when we started looking at the numbers, our profit margins were way low.” Today, Gotstein’s pricing is at best-in-class margins.
For David Stinner, president and founder of USitek, an MSP in Tonawanda, New York, packaging and pricing his services to achieve net profit of 20% “was aspirational for a very long time. But just like when you set goals and you think things through, you eventually achieve those things.”
Are Stinner and Gotstein outliers, or is the MSP industry gaining maturity? The results from our latest MSP Success Reader survey on pricing and packaging provide an inside look at what your peers are doing to boost profits, from contracts to tiered pricing to plain old math.
Want access to all the data from our pricing survey and see how you stack up against other MSPs? Download the infographic here.
MSP Pricing: It’s a Math Problem
Industry experts from organizations like TMT and Service Leadership to vendors like Kaseya agree that many MSPs just aren’t charging enough for their services.
Paul Stoessel, CEO of CyberSecureTX, an MSP in Sugar Land, Texas, went to a TMT training session at the start of 2024. “That’s when I learned that my pricing was all messed up.”
We asked readers if they use a formula or strategy to price managed services offerings. Just over half, 54%, say they use a combination of value-based pricing (the perceived value to the client) and cost-plus (covering direct/indirect costs and a profit margin). Their pricing models include per device (32%), per user (20%,) per seat (5%) and flat rate (3.5%). But the largest percentage (40%) use a combination of those models.
In addition, 71% of respondents offer two or three tiers of pricing; a quarter do not offer tiers.
How many MSPs are achieving the “holy grail” of 60%-plus gross service margin (GSM)? Just over a third of survey respondents say their GSM is 60% or greater, while 35% are in the 50-60% range, and 27% are getting 30-50%. Just 5% of readers say their GSM is less than 30%.
Stinner says he uses a “simple method” to determine his managed services pricing and consistently achieve 20% net profit. “I take my cost, which is primarily my cost of goods sold, labor for managed services, plus tools cost divided by the number of users I support, and price it up for a 70% gross margin.”
Stoessel, now armed with what he learned at the TMT workshop, bases his managed services pricing on how things are licensed to determine a per-seat price of between $150-$200. “It’s just a matter of math. So some things are licensed by the user, some are licensed by device, and then there are some site-specific things like managed routers. That all gives me my bottom-line price and I calculate my cost of goods off that. That’s how I know my GSM is where it needs to be.” For Stoessel, that’s 60-65%. He says he won’t go lower than 55%, though he does make an exception at 50% for one nonprofit client.
Gotstein’s formula is a combination of cost-plus and value-based. His goal is 65% GSM and he is currently averaging from 55-65%. He also wants to roll out tiered pricing. “Selling against yourself and being able to position where these packages are does seem to be helpful in the sales process. I want to try getting some people some options to see if that helps with our closing rate.”
Mike Farlow, CEO of ComTech, an MSP in Graham, North Carolina, uses a combination of pricing as well. “We do evaluate the cost of all the tools and we do know our exact hourly cost to deliver each service. We boil down the salaries of all our technicians and factor in admin salaries, so that way we have a true cost of doing business per endpoint. And then we mark that up to a competitive price point.” ComTech has been able to maintain 20% net profit based on those calculations, he says.
ComTech currently offers two tiers of pricing and they charge per seat. “If we can’t load our agent on it, then we don’t charge for it,” he says.
It’s All in the Contract
The vast majority of MSPs surveyed (95%) have client contracts. The most popular (60%) is one-year, followed by three-year (54%), and monthly (38%). Asked if they offer discounts for long-term contracts or prepayment, 45% do not, 31% do, and 24% do so sometimes, depending on the customer.
For their current clients, 42% of MPS survey respondents review and adjust pricing annually, while 20% adjust on a rolling basis as contracts come up for renewal, and 9% have automatic price increases built into the contract.
Stoessel’s contracts are primarily annual, with automatic renewals and built-in price increases, typically a minimum of 3-5%. If a vendor increases prices significantly, though, he does pass that on. And while he doesn’t offer discounts, he will reduce scope while maintaining his desired margins.
USitek offers one- and two-year contracts with autorenewals and annual price increases of around 2.5%.
ComTech, in contrast, has month-to-month agreements, Farlow says. “That’s actually one of our selling advantages is that we are totally flexible. We do earn their business every month. We maintain a 99% client retention rate without contracts. So we’re pretty proud of that.”
ComTech does not offer discounts, but he tries to keep annual adjustments to just a few percentage points as long as a customer’s usage parameters or ComTech’s costs haven’t increased significantly. “I know that’s not best practice. I should be increasing significantly across the board for everyone, but we’re still making money, and I think that boosts the client retention rate as well. They know they’re not facing a cost increase every single year.”
What’s in a Package?
We asked survey respondents about what they include in their standard managed services packages. The top offerings are proactive monitoring and maintenance (95%), endpoint management (91%), security essentials such as anti-virus/updates/patches/firewall (88%), and help desk support (83%). Add-on services include compliance, VoIP/telephony support, advanced cybersecurity such as EDR/XDR/MDR/CDR and SOC/SIEM, and cloud services such as Microsoft 365 management and cloud storage.
MSP Pricing Is Never One and Done
Gotstein’s new MSP pricing is achieving his desired margins, but says, “I’m never happy with it. It’s constantly evolving as we bring on new products into our stack, as our vendors increase prices from year to year, and as I have to adjust for salary increases and staffing. It’s a very fluid scheme. So I’m very persistent about continuing to look at the pricing and tweaking it where we need to.” He says he does not want to repeat his earlier mistake of not charging enough.
Stoessel, too, says review is continual. “Every time I get a bill from a vendor I’m thinking, ‘OK, am I maximizing this with the client?’ But realistically, I have to look at it a couple of times a year.”
Stinner and Farlow say they review annually, which is what 76% of survey respondents do. Only 1% say they’ve never adjusted pricing and packaging.
New Strategies to Increase Profitability
Our reader survey also asked MSPS what new strategies they’ve implemented to boost profitability. Some are working with their vendors to obtain better pricing or share support costs. Others are replacing tools in their stack with lower-priced options or streamlining to remove redundancies.
MSPs are also adding services like co-managed IT, fully managed private cloud desktops, advanced security services, compliance, and disaster recovery. One respondent added a per company/tenant fee to manage the Microsoft tenant for each client, separately from the per user/seat fees, while another is splitting out per-email licenses from per-seat licenses “because most client have more emails than seats.”
Stinner has implemented two new strategies. One is hiring offshore staff. “So we pay well in their local economies,” he says, “and it’s allowed us to pay better in Buffalo—and well-paid staff are happy people.”
Another MSP pricing strategy is boosting profits for project work. “Professional services has been the most difficult area of the business to maintain profitability,” he notes. Stinner’s simple solution? Double the time an engineer scopes for a project and quote for those hours.
Farlow has had success with dropping his 10-user minimum on their remote-support only package to five users. “We’ve already added thousands of dollars in additional MRR because of it,” says Farlow. “We’ve also found that once we got them on board, adding things like additional backup managed firewall, phones, all becomes a natural upgrade … so it was a good strategy move for us. I hate we didn’t do it a little sooner.”
If Your MSP Pricing Scares Away Customers – Let Them Go
If you know you need to raise your MSP pricing to achieve best-in-class margins, what’s stopping you?
“I think the biggest factor is fear,” says Stoessel. “We don’t want to lose a client. And there’s a little bit of ego invested in that too.”
Some MSPs also fear they’ll be underbid by competitors. But Stinner notes, “If [MSPs] think that they need a price where everybody’s going to say yes, that’s the wrong price.”
Gotstein admits he was worried when he first raised prices, but “it all went really well.” He adds, “Taking the emotional side of pricing out and just looking hard at the numbers has definitely helped our bottom line.”
Numbers Don’t Lie
How you package and price your managed services offerings, along with the right contracts and a keen eye on ongoing variables that can impact your margins, are all critical to growing an MSP business. Stinner notes that when gross service margins are small or break-even, “that horrible place of struggling, and I was there 10 years ago,” becomes a downward spiral. You can’t invest in sales and marketing. You can’t find people because you can’t afford to pay them enough.
But based on our survey results, which shows that 68% of MSPs are achieving 50%-plus gross service margins, it’s clear the industry is maturing and focused on growth.
Want access to all the data from our pricing survey and see how you stack up against other MSPs? Download the infographic here.
And if you missed the report from our last survey on the 2025 economic outlook for MSPs, check it out here.
