Managed services Tag

Pricing Strategies for MSPs

Establishing a pricing approach can be one of the most daunting decisions MSP executives make. Price too high and you will lose business, but if your price is too low you will compromise margins and risk your profitability and survival. Exacerbating matters is the fact that today’s pricing decisions have long-term ramifications. Bad pricing decisions will impact your business for a long time to come. Not only will you need to honor them over the duration of the current contract, but they will set expectations for future renewals. It is also important to note these expectations can carry from customer to customer through reference checking as well as basic word of mouth.

Based on these issues, it is important to have a strategy to from the basis for how you set prices and with a plan to evolve over time to meet your business needs. Here are a few things think about as you formulate your strategy:

Calculate & know the cost of each service you offer & never sell at a loss

Understanding the costs of your services sounds basic, but it is often misunderstood. To ensure you know your limits for the pricing exercise, you need to understand the ENTIRE cost of each service. This includes payroll, tools, outsourced labor, facilities, insurance, amortization of capital expenses, promotional expenses,  etc. It should also include an allocation to account for mistakes. This calculation is easier for businesses with a long established service business, but it can be daunting for a business new to services. Once established, this cost model needs to be reviewed and updated on a regular basis to account for changes in your processes, personnel, scale, skill and customer base to maintain its accuracy. Finally, NEVER sell a service below your cost.

Do not under price your services

This one goes without saying, the goal is to maximize the profitability and ROI on everything you do. Set your prices high and use a discounting strategy to make adjustments when necessary to win business or increase your footprint within a customer. Customers love discounts and they don’t like price increases, so it is easy to give a discount, but increases can be very difficult.

Create a concise discount program & apply it to all your customers

A standard discount program will make it easier for sales to produce quotes and for you finance team to approve deals. It can also be used to upsell customers to enhanced or new services by offering discounts for those actions. When creating a discount incentive, be sure to set a time limit and communicate the expected price once the discount program is over. Finally and most importantly, a standard discount program will allow you know your profitability limits in advance, so it will be less tempting to, “do whatever it takes,” to get a deal that ends up a money loser forever. It is critical for leadership to establish a clear discounting strategy so sales and finance understand what discounts can be offered, and when.

Some services are commodity

Research and understand the various services available from your competitors and their pricing. From there separate your services into two groups; those which are unique and those which are commodity. While both category of service should be priced based on the value they deliver and not your cost, your unique services can typically be priced with a higher margin than your commodity services because they have no competition.

Create a tiered discount structure

Establishing a tiered pricing model is a great way to incent customers to buy more of a service and to buy more services from you. Offering limited time promotional prices for new services or enhanced services can also be used to drive adoption of additional services.

Deliver a proposal that emphasizes the value delivered, not too focused on SOW & price

Always approach a prospective customer as their virtual CIO, understand the prospect’s business, its challenges and the value your services provide to solve those challenges. Really understanding the business needs of the prospect dramatically increases the value of your team in the eyes of the prospect and allows a value based pricing approach, even for your commodity services. This deep understanding of your customers’ businesses will pay off in longer term relationships and the ability to sell additional services as the customer’s business needs change.

Stay on top of market changes

The MSP market is very dynamic. This means new providers are entering the market all the time. You need to be aware of how their services will impact your pricing strategy and your relationship with your customers. The time to know a competitor is before you are quoting against them not while you are quoting against them.

Summary

There is no simple answer or one size fits all solution when it comes to pricing, but I hope we offered you a few things to consider as you build your own models that best fit your business and the businesses of you customers and prospects.

 

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Should Big MSPs Continue to Partner?

In a previous post, I talk about how the added efficiency from the scale of a traditional NOC service, with its shared service model, decreases as an MSP grows, and in fact the lack of process and tool flexibility can actually impede a mature MSP’s growth. This naturally leads to the question, should a large mature MSP still partner and if so why? I believe the answer is absolutely yes, but the partner selection needs to focus on different criteria.

  • Dedicated Resources – Once an MSP has enough internal scale, the additional efficiency contributed from the scale of a shared NOC is very small. At this point, the MSP is better served by finding a partner that can offer a dedicated team that benefits from a shared facility, infrastructure and management and that is located in an economically advantaged geography. This arrangement provides the MSP with the consistency that comes from always working with the same individuals, but with little facility and HR overhead. Additionally, the members of the team assigned to a given MSP will become very familiar with that MSP’s customers and will deliver better service over time. Operating within a shared facility and infrastructure, the MSP will still benefit from shared cost on those items that will not effect day-to-day service. Finally, an economically advantaged geography provides highly trained resources at a fraction of the cost that is available locally.
  • Process & Tool Flexibility – When a VAR first embraces services and becomes an MSP, they will typically be weak on processes, but as they mature, they develop a deep understanding of what works for their customers and they may even acquire some large customers that have their own process requirements. At this point, the MSP needs a partner that allows the MSP to specify the process and tool selection and to perhaps set specific processes by customer.
  • Flexible Resource Pool – Having a dedicated team is great for consistency and building specific knowledge to support your practice areas. However, there are times when a skill set is required either on a one time case or a periodic frequency that does not justify a full time resource within you team. To meet these requirements, an MSP needs to identify a partner that has a pool of specialized talent that can be drawn upon to meet a specific need or simply augment the staff to meet a temporary workload increase.

By following these considerations, the large MSP will still benefit from improved service quality and reduced service delivery cost while still focusing their internal resources on high-value projects and closing new business.

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Scale and Shifting Efficiency

Shared Services NOC a Perfect Beginning

When a VAR first decides it is time to begin to shift their business to the MSP model, they start moving customer by customer away from break-fix and over to a managed service that fits their needs. This is often a process that takes months or years to get all the customers moved to the new model. In the beginning the scale of the managed services part of the business is very small and, because the VAR is new to managed services, they need help in getting their new business up and running. At this point the shared services NOC is a great solution because the shared services provider has scale to operate efficiently with a wide breadth of capabilities and to do so 24/7. In addition, the VAR benefits from the process definition and advice they get from the provider.

The Efficiency Seesaw

An interesting shift takes place as the VAR’s MSP business grows. First, efficiency shifts. As the MSP side of the business grows the VAR’s scale approaches a point that the additional efficiency of provided by the shared NOC is minimal and the remaining efficiency gets lost in communications overhead. Add to that the lack of consistent service from individual to individual NOC engineer and you are actually operating at less efficency than what you could with your own team. Secondly, as the VAR gains experience in the MSP business, they will want to be able to better define their services, procedures and workflow than is possible with a shared NOC provider. It is at this point that the value of a shared NOC becomes negative and it is time to seek a new type of services partner.

What’s Next?

At this point, the VAR needs to make a choice to either build their own NOC and deliver their services internally or to find a different type of service provider that can bring many of the benefits of the shared NOC, but without the difficulties. In my next post I will describe what is involved in doing it internally, what this different type of provider looks like and explain why it still makes more business sense to continue to partner.

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When Shared Services Break Down

Shared services offer a number of wonderful benefits for small VARs and MSPs including low-cost, efficiency, breadth of support and 24/7 operation to name a few. These are great features when your business is growing and you are new to offering services. However as you grow, your needs may shift some and the shared services model becomes less attractive.  In fact, some of the items that are most attractive about the model when you are new to selling services are the very things that make shared services so unattractive as your services business matures.  We will be discussing some of the drawbacks of shared services for mature MSPs and ultimately some solutions in upcoming posts.

Today’s topic is the fixed processes imposed by the shared services model NOC

To manage the environments for many end customers spread out across a hundreds or thousands MSPs, shared services providers must unify all their processes. This means they have one way of doing things and that way applies to all their MSPs.  This approach allows them to spread out the work across a large team; allowing any team member to do work for any MSP, since all the processes are consistent. This is fine or even preferable when you are starting your services business because you have not yet developed your own processes and your customers are likely smaller and willing to adapt or even unaware of the underlying processes. As you grow your team becomes more sophisticated and you begin to attract larger and more demanding customers. At this point you may want to specify things like what days to perform patching or how escalate alerts. In a shared services model, your provider is unable to give you his flexibility. Many will even try, but the end result will not be good, because every time they do a patch or alert escalation for one of your customers, it ill be an exception for their team and an opportunity for an error. This becomes even more problematic when you need different processes for a few big customers.

Our next post will talk about the efficiency sea-saw and delivery consistency.

 

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The Core Four

Back when we were launching services at NetEnrich, we often had conversations with VARs about how to get into selling managed services and what services to initially launch. The initial services in your practice are your core services. We actually have four services we recommend as a starting point. We call this group of services, The Core Four. They are easiest to sell because the ROI is clear and they have broad appeal because their value is universal all companies. Additionally, these services create a “foot in the door” that provides a foundation for you to sell additional specialized services down the road.

The Core Four

  • Backup & Disaster Recovery — Every business needs a viable way to recover its data in the event of a disaster. Traditional solutions are too costly and too complicated for typical SMB customers. Protection from data loss, local failover and complete disaster recovery are now available to your SMB customers in an easy to consume and affordable service.
  • Hosted Exchange — Email is the life blood of any business, but the cost of infrastructure, licensing and expertise to properly manage it is out of reach of most small companies. A hosted Exchange solution delivers an always working and fully updated Exchange with no expertise required from the customer, all at a lower cost than a local exchange server.
  • Desktop & Server Management — Most work stops when a company’s IT systems break. Typically your customers will have to wait for your technician to arrive, troubleshoot and then fix the problem. All this time is lost productivity for your customer. Desktop and server management services perform regular preventative maintenance to prevent most minor problems. These same services can monitor the systems to catch bigger issues and fix them remotely before they create downtime for the customer.
  • Helpdesk — The profit margin on SMB customers demands a low touch model, however we know many small customers can become needy. The helpdesk service allows you to monetize these high touch customers while you and your staff remain focused on higher margin projects. A helpdesk service provides an affordable and affective resource to keep the users productive.

Specialized Services

After you establish success with The Core Four, you will likely want to add a few specialized services. Examples of these services include: VoIP, hosted SharePoint, email archiving and many others. In future posts we will discuss how to best select your specialized services and pricing strategies for your services.

Be sure to let us know your thoughts or what you would like to see us discuss.

 

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