It happens to every MSP sooner or later--that awkward moment when you need to confront your customers with an increase in the cost of their monthly services in order to stay profitable.
But does it really have to be awkward? Not if you plan ahead and communicate well.
There are plenty of reasons you may need to raise prices: vendor price hikes, inflation, increasing service demands, margin erosion, and other factors that require cost adjustments to maintain or improve service levels.
If you aren’t prepared, announcing those price increases to customers could be difficult or even cause some clients to call it quits. You can achieve a better outcome (that is, more revenue and happier customers) if you communicate regularly, prove your value and avoid surprising them with unexpected increases.
How you handle the price increase conversation will depend on why it’s happening in the first place. Here are seven steps you can take to make a price increase more palatable:
1. Communicate early. Hardware or software vendor partners may increase their prices, which will warrant an increase on the part of the MSP. Alert customers as soon you know that a product price increase is coming, and let them know you’ll have to pass that along in order to continue providing that product or service.
However, you can’t just raise prices every time your vendors do or you might price yourself right out of business. Customers aren’t going to put up with frequent increases. Evaluate potential vendor increases, and make sure you price for sustainable profits over several years.
2. Survey the competition. Check whether your rates are in line with comparable service providers. If they’re not, develop a plan to gradually bring your prices in line with the market.
3. Put it in writing. Include language about regular inflationary/cost-of-doing-business increases in your Managed Services Agreement (MSA). These increases should be a percentage of the existing price that can help adjust for the rate of normal inflation or other factors.
This is a simple way to introduce the cost increase conversation in the regular contracting process, so you don’t have to go back and revisit the issue later. It also gives your customers plenty of warning when an increase is coming and provides a timeline so they can adjust their budgets.
4. Tie cost increases to your value proposition. Odds are you will add new services and features over time, and that will require price increases to maintain your margins. Explain the new value you are providing and how the new features/functions will affect ROI or total cost of ownership. Customers will be more willing to accept these increases if they know they’re getting improved services or additional benefits.
5. Communicate your value regularly. Schedule a reasonable number of check-in calls per year, starting off with a QBR (Quarterly Business Review) with each customer to evaluate how things are going. Customers will remember that you reached out, and they will appreciate the gesture. This ongoing dialogue with customers about the services you are providing and changes in the marketplace helps to ensure they are aware of new products and features, new security threats you are monitoring, and other activities. Then, when it’s time to talk about a price increase, they will already know what you’ve been doing to help their business succeed.
6. Offer additional options. You can also introduce price increases by creating new service or product bundles. If necessary, make sure a lower-cost option is still available, but emphasize that they can obtain greater value with the more expensive package. Ultimately, you will find that most customers care more about the value of what they are receiving than the price.
7. Weed out the weak. Sometimes it is hard to recognize which customers are profitable and which ones are not. Oftentimes, though, it is those who focus on price versus the value of the services they are receiving that place the most strain on an MSP’s resources. Even though there’s still a risk you could lose some business, it’s possible to structure price increases to help weed out unprofitable customers (particularly if you may have been underpricing your services). For example, if you have clients that require higher degrees of service than normal but also clamor for constant discounts, a rate increase can send them searching for a lower-cost provider and free up your staff to bring in new business or concentrate on creating new revenue opportunities with less troublesome customers.
Remember, your customers are also business owners, and they have likely been in the same position as you when it comes to periodically raising prices. Think about why you are increasing prices, communicate those reasons clearly and confidently, and make sure you’ve laid the right foundation by regularly communicating with your clients about the value you provide.
If you’ve checked these boxes, periodic rate adjustments can be introduced with minimal drama and without alienating your clients.
Neal Bradbury is Senior Director of Business Development for Barracuda MSP, a provider of security and data protection solutions for managed services providers, where he is responsible for generating greater business value for the company’s MSP partner community and alliance partners.
This guest blog is part of a Channel Futures sponsorship.