Many MSPs struggle with pricing, caught between trying to maintain profitability and keeping prices low enough to dissuade customers from jumping ship. But the cold hard truth is most MSPs aren’t charging enough. “That’s why 50% of MSPs are at–or below–breakeven after a true owner salary,” says Gary Pica, founder of TruMethods, an MSP coaching and peer group business, now part of Kaseya. “And they do not make as much money [as they should] for the risk and the effort that they put in. Their customers might like them, but they don’t value them.”
And there’s the rub.
“Their prices are too low, but really, that’s a result,” says Pica. “Their value is too low. The way that they package and present their offering [doesn’t have enough value].”
Here are some MSP pricing strategies that cover how to package and price a value-based offering that will drive profits for your MSP and deliver desired business outcomes for your clients.
Why MSP Pricing Strategies Are a Struggle
One reason many MSPs have a hard time getting their pricing right is because they don’t fully understand their cost drivers, Pica explains. “They have so many tasks that they do–support desk, vCIO work, tool costs, proactive work, projects–even in a small MSP, and all of these things are done differently. Turning that into a unit of measure where they know their costs [is difficult].”
Determining the true cost of service delivery is challenging, agrees Erick Simpson, an MSP business and channel growth expert, and CEO and chief strategist of MSP Mastered. “I think what throws MSPs off is that they’re using the same resources to do lots of different things,” Simpson says. “You might have a technician that’s working tickets on the service desk, prepping for a project, and going on-site. How do you measure everything?”
Related: Cracking the Code: What Survey Results Reveal About MSP Pricing and Profitability
Creating A Pricing Model Based On Value
To properly set your prices, first determine your costs. Simpson tells MSPs to start by adding the cost of third-party services and solutions to the hourly cost of service delivery from your technicians–this is calculated using your technician’s salary and your overhead costs. From there, the key is having your technicians document every minute of their workday–from time spent closing tickets to on-site. Then, “you know what it’s costing you,” Simpson says. “From there, you can evaluate whether you’re maintaining your profit margin with the rate you quoted the client, or if you need to adjust it.”
Pica has devised an entire methodology on MSP pricing strategies, called Picanomics. The system hinges on all of an MSP’s employees working in a defined role or function, and then tying that function to a unit cost, such as a seat. (For small businesses whose employees work multiple functions, use time-tracking like Simpson recommends, then calculate how much time they’re spending in each role.) This way, MSPs can calculate what they should be charging based on seat cost, plus their target margin. This lens allows MSPs to quickly see if they’re pricing their services correctly, and where they can add value for their clients to justify charging 70% margins (which is what you should be charging, according to Pica!).
Why You Don’t Want To Compete On Price
Attempting to compete on price alone is one of the worst ways to differentiate yourself from competitors. Simpson says, “It’s a race to the bottom.” MSPs who compete on price alone are targeting the worst kind of customers–those that focus on cost alone–instead of growth-oriented, highly profitable clients.
Additionally, customers who aren’t highly knowledgeable about IT will always choose between providers based on price if that is all you give them. A prospect “can’t distinguish the value from a bunch of line items. The only way to do it is to paint in big, broad strokes about what your delivery areas are, and why they will address [the prospect’s] pain, issue, or security,” says Pica.
Charles Henson, owner of Nashville, Tennessee-based MSP Nashville Computer, advocates for MSPs to stop worrying so much about what their competition is doing. “Try not to focus on your competition and what they’re charging; focus on the value you bring to the table with your team and your security tool set,” he says. “Understand what your beliefs are when it comes to technology, and why you chose the tool sets you’ve chosen. It’s probably not just because it’s the cheapest. Make sure you understand the value that these tools bring to your clients’ networks from a protection standpoint.” That way, you can convey that value to them.
Raise Your Value, Raise Your Prices
Of Pica’s over 700 peer group members, almost all the MSPs charging the highest seat prices are the ones selling the most new recurring revenue. “They have the highest prices, and they sell the most,” Pica says. “That’s how you know it’s a value proposition that’s driving success.”
As far as how to do that in practical terms, Henson advises, “Instead of selling them on managed services, talk to them about efficiencies. Talk to them about their ROI. Talk to them about how you’re going to create uptime for their network.”
MSPs that establish a consultative relationship with prospective clients, rather than a transactional one, will win business, Simpson says. “When you sell consultatively, you’re delivering business outcomes, not technology outcomes. Then you can charge more because you’re more strategically valuable to that business owner. When you can map your services to be a profit center for the client, rather than a cost center, that is tremendously more valuable.”
Protect Your Clients And Weaponize Your Rates
If you need yet another reason to justify raising your prices, low rates mean leaving your customers open to risk. “If you’re not making enough profit margin, you can’t say you’re securing your customers,” Pica says. “It costs money to secure those customers.”
In fact, Pica argues that MSPs who focus on selling value can weaponize their competitors’ low prices. Higher rates mean a massive difference in an MSP’s ability to take care of their clients. Pointing this out to prospects can mean winning the sale.
Pica says, “I have a saying that I used to tell prospects who wanted a discount: ‘We care too much about our customers to charge them less.’”
