MSP Pricing

There are more than one pricing models in the MSP industry. This definitive guide will help you explore the pricing models that are based on multiple factors, in-depth.

What are Managed Services?

Managed services are the outsourcing of the obligation for maintaining and providing for the need of a wide range of processes and functions that help improve business operations and reduce expenses. It is an alternative to the break/fix or on-demand outsourcing model in which a service provider accomplishes on-demand services and bills the customer for the work done alone.
Under this subscription model, the customer or client owns the organization or system being managed while the Managed Services Provider (MSP) is the service provider who delivers the managed services. The client and the MSP are bound by a prescribed, service-level agreement that details the performance and quality metrics of the business relationship.

What are Managed IT Services?

Managed IT services is the solution delivered by the IT service provider who combines flat-rate, unrestricted IT support for a once-a-month fixed fee with the hands-on monitoring of IT workspaces and infrastructure.
Simply put, managed services put the focus back on the IT organization. The more complications that an organization has, the more time and resources it needs to designate. This results in lesser profit for the IT organization and pushes it to take more practical measures to reduce the amount of problems the organization faces. This inevitably aligns both organizations’ outcomes.

What is MSP pricing?

At a higher level, MSP pricing is based on three factors: cost of service, the anticipated profit margin, and the existing market influence. The cost of services of the MSP is determined by the technology and people needed to deliver the services.

Choosing the Right Pricing Model

There are more than a few different pricing models for the MSP industry. One of the most crucial considerations is to ensure that an MSP is charging enough for the services delivered.
Whether an organization is just starting as an MSP, moving away from a break-fix model, or merely re-examining the business model and pricing approach, here are a few things to consider when determining the charges for the services provided:

Increased Services

A managed service provider may have started out by offering basic IT management services, but now the MSP offers an expanded array of services that include strategic planning, network security and Disaster Recovery Planning.

Cost Increase

If the MSP business is growing, it’s likely that the expenses in doing business grow too. MSPs should constantly strive to understand the expenses of doing business and delivering services to clients.

Target Clients

For instance, MSP services for a HIPAA-compliant health care organization will call for more specialized knowledge and care, snowballing expenses. A client’s industry will help understand the scope and depth of the services to be delivered.

Competition

Keeping a watch on competition ensures that a managed service provider remains competitive in the services offered and pricing. It helps to add services that can outperform the closest competition.

What are the different MSP pricing models?

Here are the different pricing models for managed IT services, and each depends on the services that the MSP offers to clients:

Value-based pricing

This model is for MSPs who provide IT services for all components of a business. It is the most inclusive model that establishes an MSP as an outsourced IT department. It is characteristically a flat-fee model.

Per-device pricing

This model suits providers who offer monitoring services for definite devices, including desktops and mobile devices. Customers are charged a flat fee for each device that is added to the plan. Although the model offers predictability and flexibility, it does not help customers get the complete picture of network health.

Tiered pricing

Frequently, the most popular among MSPs, tiered pricing presents different bundles of services with cumulative prices, as and when more services are added to the package. This places the responsibility on MSPs to pre-determine the tier structure.

Per-user pricing

Comparable to the per-device pricing model, charging customers based on this model covers individuals rather than devices. This model covers all the IT needs of an individual employee and the devices they use. This model works well for businesses that function with employees who use multiple devices.

Monitoring-only pricing

This model suits MSPs who provide network monitoring and alerting services; the services usually only involve alerting customers of issues, but not the mitigation of issues that arise. This model works for MSPs who work with companies having in-house IT departments that don’t have the required tools for network monitoring.

All-you-can-eat pricing

This comprehensive service model includes remote support, on-site support, and bench time–all for a flat cost charged every month. This model is the most profitable for MSPs and also supports a business in accounting annual IT services.

Tiered pricing

Frequently, the most popular among MSPs, tiered pricing presents different bundles of services with cumulative prices, as and when more services are added to the package. This places the responsibility on MSPs to pre-determine the tier structure.

A la carte pricing

Often considered unpopular mostly because of the low ROI, this model allows clients to pick IT services–for instance, clients can request for the MSP to offer Disaster Recovery Planning, patch management or managed backup services.

Factors affecting MSP pricing

Cost of technology or tools that support services

A popular study says that close to 42% of MSPs feel that the cost of technology tools reflects in the price that their customers pay them. Nevertheless, what are the margins that the MSPs are setting for themselves in setting that price? Does the technology used create a situation where a business owner and their techs are hindered by day-to-day intricacies, closing tickets connected to wrong passwords? Or, have they invested in a platform that securely integrates a network operations center (NOC) and a help desk for a completely managed solution, empowering the business to close more deals and their techs to focus on revenue generating and strategic client projects?

Cost of staff to support services

Hiring can be a costly investment, when it is not done right. The average salary of an MSP specialist in the USA is approximately 49,000 per year. This does not include the cost of training, benefits, or specialized experiences. Depending on several variables, this salary could be suggestively higher, which is why many MSPs feel that this factor affects the price of their services.

MSPs need to be more evidently strategic when forming a team of technicians, and must use their time as resourcefully as possible to ensure their investment in human resources is creating revenue. They have to make choices, and these choices can lead to profit, or and paths to new revenue. Should the expensive investment in skilled technicians be left to responsibilities that a fully managed solution could handle, or is their time more lucrative doing something more impactful to the bottom line?

Cost of selling the services

This includes a long list - marketing or advertising costs, travel costs, business lunches and dinners, and more. Several MSPs feel that this cost factor affects their pricing and the way they package their service offering. Sales can be a two-faced aspect of running a managed IT services practice: many business owners are naturally good salespersons and know how to market their services easily and focus on closing deals. However, other MSPs aren’t as content, or may not have the time to go out and attract new business. Sales and marketing are important, and it is important to tactically align with the right partners who can help with sales education and enablement, business growth and development.

Other common factors that affecting pricing:
Customer relationship/Nature of Engagement
Ease of customer payment
Ease of billing
Partnerships required to support services
Length of sales cycles

MSP pricing strategy

MSPs face several aspects that can impact their bottom line, but what sets apart the average profit from a huge profit margin are the premeditated investments that they make when picking the infrastructure they build their business upon.
Managed services pricing strategy is a compound theme. There’s no solitary right way of doing things. It categorically all depends on aspects that are exclusive to each provider and their business.

MSP pricing metrics

The risk factors for getting the pricing right are obviously high. Missing the mark can bring to naught, all the hard work that an MSP put in launching an offering. Here are a few basic terms and concepts to know, to understand what and how a managed service provider should be charging:

Cost of Goods Sold (COGS)

Also known as Cost of Services, this number reflects all the direct costs associated with the MSP providing services, including software licensing fees, human resources and other expenses.

Monthly recurring revenue (MRR)

As the name suggests, this is the revenue that the MSP’s fixed-fee services generate on a monthly basis.

All-in seat price (AISP)

This price amounts to the MRR divided by the number of users supported. For instance, if a 20-seat client generates $3,000 in MRR, the AISP is $150.

Gross margin

Gross margin denotes the percentage of every dollar of MRR that the MSP gets to keep/apply to their fixed overhead (operating expenses). This is a critical factor used to determine the MSP’s breakeven point.

At the risk of generalizing, operative pricing boils down to knowing the MSP’s COGS and charging enough to guarantee that the resulting MRR is at least twice that of direct costs. The ballpark figure for desired margin is 50% or greater, with some MSPs aiming for as high as 70%.

While it’s alluring to look to yardsticks for guidance, it’s only so helpful to know that on an average, MSPs charge $125–$200 per user per month. MSPs need to ascertain their pricing based on their costs and the margins they need to hit to be profitable and not based on what competition is doing.

Should you go all-in on AYCE?

While many MSPs apply tiered or a la carte pricing structures to offer their customers several packages to choose from, there are obvious benefits in developing a flat, standardized offering. This approach not only helps keep things simple, but also allows MSPs to fully commit and focus on their positioning.

As with any pricing model, there are undoubtedly challenges and pitfalls with AYCE pricing. One common mistake that most MSPs make is not getting crystal clear up front about exceptions, leaving out the things that aren’t covered in the pricing. That said, flat pricing models continue to gain acceptance, and for good reason. AYCE can be very profitable when implemented with the right tools and structure.

Per user or per device pricing — which should you use?

Assuming that an MSP is going with flat-rate pricing, another decision that the MSP has to make is whether they wish to specify their rates as per user or per device. MSPs can also stick to quoting customers a fixed monthly fee. Keeping clients informed about whether their pricing is based on users or devices can have upsides and downsides. On one hand, it can anchor the MSP’s pricing in clear terms that clients easily understand. On the other hand, it can make the MSP very sensitive to organizational changes or downsizing.

While per-device pricing gained popularity in the early days of managed services adoption, per user pricing has lately gained ground in popularity. Per user pricing is less complicated, because there are no different prices for different types of devices, and it is also about focusing the offering on supporting people, not devices.

That said, no single user is alike; it is important to establish the pricing early on to get a more granular sense of their actual costs first.

MSP pricing calculators recommend dividing users into allies based on their needs and how much effort that is needed to service them. For instance, a client may have full-time users that need the MSP’s standard package, part-time users who require only email; executives with exclusive needs, etc. The cost of the services that the MSP provides to each of them will be different, and hence will have a different impact on the MSP’s profit margins. Margin calculators help surface those costs, so that MSPs can price their rates more effectively.

There are other more intangible factors, like the complexity of the issues faced by a particular user. To include these in pricing considerations, MSP needs to weigh these factors with a model on a case-to-case basis.

Key pricing do’s and don’ts

Opt for pre-paid billing. Otherwise MSPs can waste a lot of time chasing payments and missing out on the value of predictable MRR on cash flow.

DON’T feel obligated to offer different categories of clients the same price. One flat fee does not mean one price for all. MSP rates should be based on the cost of providing services.

Aim for higher margins. Unforeseen expenses are almost always a given. Aiming for higher margins helps MSPs protect themselves and achieve up front, rather than trying to go back and alter prices.

DON’T be afraid to increase prices. One of the most common mistakes that experts see MSPs committing is not charging enough for the services they offer. MSPs need to be more confident while increasing prices.

Have a minimum fee. This helps MSPs remain profitable with smaller clients.
DON’T fret too much over competition. It is important to sell customers the overall value you provide.

FAQs

What is managed service?

Managed services are the outsourcing of the obligation for maintaining and providing for the need of a wide range of processes and functions that help improve business operations and reduce expenses. It is an alternative to the break/fix or on-demand outsourcing model in which a service provider accomplishes on-demand services and bills the customer for the work done alone.

Under this subscription model, the customer or client owns the organization or system being managed while the Managed Services Provider (MSP) is the service provider who delivers the managed services. The client and the MSP are bound by a prescribed, service-level agreement that details the performance and quality metrics of the business relationship.

What is MSP pricing?

At a higher level, MSP pricing is based on three factors: cost of service, the expected profit margin, and the existing market influence. The cost of services of the MSP is determined by the technology and people needed to deliver the services.

There are more than a few different pricing models in the MSP industry. One of the most crucial considerations is to ensure that an MSP is charging enough for the services delivered.

What is the average cost for IT support?

Typically, IT support such as server maintenance can cost anywhere between $100 to $395 per server per month. The more features that clients want to be handled remotely, the more they need to invest. For helpdesks, packages range between $60 to $85 per workstation per month, with higher-cost options for 24/7 user support.

What are the key MSP pricing metrics?

MSP pricing metrics The risk factors for getting the pricing right are high. Missing the mark can bring to naught all the hard work that an MSP put in launching an offering. Here are a few basic terms and concepts to know, to understand what and how a managed service provider should be charging: 

Cost of Goods Sold (COGS)
Monthly recurring revenue (MRR)
All-in seat price (AISP)
Gross margin