Why IT Services Pricing Can Make or Break Your Business
I am just back from a few weeks on the road presenting at several partner events. I was energized not only from meeting lots of our customers in person, but seeing the energy in the community. Everyone in attendance had one thing in mind, and that is: “How do I improve my business?” Whether it was by getting into the latest technology to support their client’s business needs, understanding what the cloud is all about, or finding the right solution to help their own IT business run better, the search was on. I led one session on pricing your hybrid product and service catalog. Based on the attendance, and the discussions that followed, pricing managed services and other IT services delivered by the channel is still a major interest point.
We know billable staff generate revenue by delivering a mix of services to end clients to facilitate outcomes clients want to achieve without ownership of costs & risks. Services could include consulting, project work and any variation of support including managed services, break/fix type services and outsourced staffing. Regardless of what products and services you are selling or supporting, you need a solid methodology to price your services right. If you price your services right, your business will benefit in several ways.
Do You Know Your Costs?
The first benefit of pricing services right is that you will understand your costs. Before you set any pricing you should know the details of any costs associated directly with your billable and non-billable resources. Beyond base compensation costs, the details include, but are not limited to, burden rates, overhead and forecasted utilization rates. On top of these costs, understanding how long it takes specific resources to complete certain services or deliverables is key. Measuring resource usage for a service may be the most important pricing factor once you get beyond the cost details. If you understand what goes into your labor costs, you will ensure you cover those costs in the pricing published in your product and service catalog.
Another way your business benefits, is that once you understand the costs of your labor beyond base compensation costs, you can now plan the profit you want to generate. Do you want to make 30% and set a fixed markup, or do you price based on value and look to generate 100% or more margin dollars? No more throwing darts on the wall to come up with a price for a service. No more pricing just based on the competition or the market, then waiting for your business operation to move through a few months of time to see if you are still in business or making enough money to live another day. If you understand your costs, there is no delay in understanding if you are profitable or not, because you will set pricing to include the profits you want to achieve. Plan your profit, so you have profit.
Understanding your costs and knowing you have planned your profits leads to the next benefit, confidence. If you have priced your catalog of services to include planned profits, you will ensure your competitiveness by being confident your services can be delivered on time and on budget, to meet the needs of your client’s business. You will make your planned profit, yet be fair to clients and prospects. As a result, you can sell profitable one time services confidently while you build and manage a profitable recurring revenue stream.
Without a sound pricing methodology, you will put yourself behind the eight ball with your clients, with no moves but bad moves if you need to re-establish pricing in the middle of a relationship. With a poor pricing strategy you may realize you are not making money with the prices you are charging. Let’s say the managed service plans you devised not too long ago are proving to be money losers. You will have to consider adjusting your current pricing.
Even if changing your price is possible based on your established client agreement or SLA, it will leave a bad taste in your client’s mouth going forward. We know where that could lead. Worse yet, if you are not making money with your prices, and you can’t change the price or better control your costs, your service levels could slip, endangering the client relationship. Another benefit then, is that by starting out with the right pricing you will go a long way to ensuring a steady client relationship.
Just as you maintain your client base and recurring revenue and profit stream by confidently selling fairly priced and value based solutions and managed services, another benefit is that you will be able to add new clients the same way. Prospects will scrutinize your pricing, product and service deliverables, and compare them to your competitors before picking a winner. So you need to be able to articulate why your solution and services will work and facilitate the outcomes they seek. And confidently explain why your pricing is what it is.
You don’t have to be the cheapest solution or lowest cost managed services to win more than your fair share of new business. Be confident your recommendations meet the needs of the business, and they are priced right, and your business will reap the benefits. The benefits that lead to profitable one time revenue engagements, and that all important recurring revenue stream.
Len DiCostanzo is Dean of Autotask Academy and Senior VP of Autotask Corp., developers of Autotask hosted professional services automation software, the VARStreet family of advanced quoting and e-commerce tools and Taskfire a hosted service desk and ticket management system sold by IT solution providers for businesses of all sizes with internal IT resources. Monthly guest blogs such as this one are part of The VAR Guy’s annual sponsorship.