Picking the Best Pricing Model for Your MSP

Of all the complexities involved in building and managing an IT services business, one of the most difficult decisions facing owners is how much to charge clients for their services. Of course, that process would be much easier if every potential customer had an unlimited budget to pay for technology and support.

Few MSPs will ever walk into that type of situation. In most cases, you will need to balance the cost of your products and services (as well as a fair profit margin for delivering those offerings) with the prospective clients’ budget limits. Long-running managed services contracts need to benefit all parties over the life of the agreement mutually.

Finding that right “mix” takes dedication and requires constant communication between sales and management teams. MSPs also need to elicit tangible information on current and future plans and budgets from decision-makers in the businesses they support – and the prospects they are targeting.

Set Realistic Goals for your Pricing Model

Equitable and profitable are two key considerations when picking a pricing model. MSPs must understand and factor in all the costs associated with doing business, including rent and mortgage payments, payroll, utilities, vehicle fees, and many other operational expenses.

Some of the more overlooked pieces of the equation are sales and marketing activities, and the tools providers use to support their clients and run back-office processes. Of course, many of those costs are not static, so MSPs need to extrapolate the numbers to ensure their budgets align with their income.

Failure in assessing expenses will significantly affect profitability, especially when the firm locks clients into long-term contracts with set pricing. Miscalculations can easily put an MSP out of business.

On the flip side, setting managed services pricing too high typically drives away clients and prospects. MSPs should always sell based on value, delivering in-demand services and solutions to their customers, but they must still take caution when setting rates in more competitive markets. Decision-makers may not understand the differences between a top-notch IT services provider and a less capable competitor.

Assessing the current market rate is an essential step. MSPs need to understand what competitors are charging different organizations for various services and what prospects are willing to pay to fulfill their business objectives. If other providers cannot address a company's true needs, what good is a discount price?

Managed services firms that can best match their offerings with clients’ needs can demand a premium for those services more often than not.             

Assess Various Price Options

Putting “pen to paper” on pricing can be a scary proposition for business owners. However, these commitments can be fluid, and MSPs may choose to use multiple models based on various factors. If you were to poll IT services providers who have been in business for five or more years on their pricing strategies, most, if not all, would say they have made changes in their tactics.

Knowing the options is critical. Here are the most frequent models MSPs choose for pricing their services:       

Tiered

Many IT services businesses prefer giving their clients one or more options. A tiered pricing model offers different levels or packages of services that decision-makers can choose based on business needs, compliance requirements, or other factors. Each tier should provide a solid profit margin for the MSP for the various product and services they deliver to their target audience. 

While many are moving away from the “Good, Better, and Best” model of the past, especially with their cybersecurity programs which can increase the risk profile for providers, others are setting levels based on compliance needs or workplace environment. With the shift to remote work, MSPs need to be mindful of the extra costs associated with supporting employees (and endpoints), especially those in more distant offsite locations.    

À la Carte or Cafeteria Style

The more MSPs allow clients to customize product and support packages, the more it typically costs providers to deliver those offerings. Flexibility can be a powerful tool in a sales team’s quiver. Still, the expense of building out and managing a highly diverse portfolio can be substantial, especially for a small IT services firm. Clients can also get confused with too many choices. Business owners may not understand all the complexities and features and choose options that may not meet their true needs. Offering an à la carte option can also slow the sales process and increase acquisition costs, negatively affecting its bottom line.   

MSPs can set higher prices using this model to maintain healthy profit margins. However, budget-conscious prospects typically have choices and can shop around for more cost-friendly alternatives. That situation can lead to a “race to the bottom” pricing model that benefits no one. Eventually, even the clients will lose out with either subpar support or loss of their trusted IT provider.

Per-Device

The first of the two “keep it simple” pricing models involves clients paying a set or flat fee for each computer, laptop, and other managed device. This typically involves businesses paying MSPs a monthly recurring charge. Rates may change based on the number of devices under management or the type of equipment they support. For example, the cost for managing servers may be significantly higher than for PCs, laptops, and mobile devices. This model provides greater flexibility for clients as their costs only increase as the business grows. MSPs benefit from that automatic incremental revenue and can more easily predict future profitability based on sales projections.   

Per-User

This model's calculation involves estimating the number of people who require IT services support in a specific business. As clients add employees, the monthly fees increase. The issue for MSPs is that many people are using multiple work devices, especially with the shift to remote and hybrid work environments. One of the big advantages of this model is that it is extremely flexible and easy for everyone to understand, including clients and providers’ accounting teams who create and manage billing and collections. Calculating per-user pricing can be tricky. MSPs must first assess their total cost of managing the IT services and support for each worker to determine their break-even point, and then factor in a healthy margin and any incidental charges that may come into play.

Co-Managed or Separate Services

This model covers MSPs that provide a single offering to clients. Similar to à la carte, this option is typically best for simple or clearly defined engagements. For example, if an MSP is remotely monitoring specific aspects of a business' IT infrastructure, they would normally charge a set fee each month for that support. Again, the move to remote work is creating new opportunities for providers, and this model makes it easy to sell and bill for a particular service.

There is No Simple “Recipe” for Pricing

MSPs must take a number of factors into account when evaluating pricing models. Those additional requirements will need to be reflected in their rates if their target clients typically have more technically complicated systems with greater service and support needs. MSPs should always have the means to overdeliver on their commitments without bankrupting the company.      

Clients themselves can also be a factor in pricing. If their management teams and employees are easy to work with and bring realistic expectations to the relationship, MSPs will typically be fairly willing to negotiate rates. Inversely, providers may demand a premium from prospects who communicate poorly or are difficult to please. Low-stress environments tend to increase the profitability of MSPs.      

Another big factor is the condition of the prospect or client’s environment. Suppose their technology is out of date, and they are reluctant to pay for upgrades. In that case, MSPs should always add a rate multiplier to compensate for support costs for the inevitable issues that are sure to appear at some point in the contract. Quoting higher prices to these prospects helps minimize the risk to the provider.    

Considering the multiple pricing models and other factors that can make pricing complicated, you might want to consider adding CPQ software to your arsenal for adding speed and clarity. A CPQ, Configure, price, quote adds advanced pricing control on individual and bundle products with customizable price and discount options. CPQ also allows you to set and lock down pricing rules and lockdown costs, preventing undue discounting.

There may not be a “right” or “wrong” choice for the MSP. In fact, some opt for the multiple option approach to pricing to meet the diverse needs of their specific clients. No matter what model an IT services company selects, the key is to focus on selling the full value of its portfolio.