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November 29, 2017
By Frank Colletti, GVP, Worldwide Sales, SolarWinds MSP
Many MSPs look forward to the six-month mark of a new managed services contract. At this point, much of the upfront work of learning the customer’s business and IT challenges – and setting up and optimizing their network and equipment – is done. After that, the customer is typically easier to manage. This is where the wisdom of managed services and the recurring revenue business model starts paying off.
Fast forward a few more months or a year. Everything’s running smoothly, and the customer is paying a flat fee every month for your company’s expertise and proven ability. The challenge for many MSPs then becomes, How do you go about increasing your price when in the customer’s eyes you’re not necessarily doing anything new and different — and in some cases, it may appear you’re doing less now that everything is “being managed”?
First things first. Inflation is a reality, and any good business leader knows that charging the same price each year really means accepting a smaller profit margin. To avoid a prolonged price freeze and customers questioning your value, keep the following three best practices in mind.
1. Take a Price Increase Tip from Apple’s Latest Flagship Phone
Earlier this year, Apple unveiled the iPhone X, a smartphone that starts at $1,000 for the 64 GB model and goes up to $1,150 for the 256 GB model — that’s several hundred dollars more than previous iPhones, including the newly released iPhone 8. While Android fans may scoff at some of the “new” features, like longer battery life, an end-to-end display screen, and wireless charging, the point is these features are new to Apple’s ecosystem, and Apple is not adding them for free.
As an MSP, not every price increase has to correspond with a game-changing new service or technology offering, but you should tie the increase to some kind of additional value-add, so it’s not just about funding your growing operating costs. Perhaps you’re extending your help-desk hours, providing an additional layer of security, and/or guaranteeing faster recovery times or quicker service response times.
2. Ditch Per-Device Pricing for a Per-User Model Whenever Possible
In the past, one of the most popular pricing models used by MSPs was the “per-device” model. Oftentimes, assets were assigned different values. For example, the monthly cost for managing a server was higher than managing a computer or mobile device. When the majority of IT infrastructure was on-premises and employees were starting to bring their own devices to work, this was an easy way to increase managed services pricing. The problem with this model nowadays, however, is that many IT assets are moving to the cloud. So, MSPs that stick with the per-device model have to continuously reduce their prices.
To avoid the per-device pricing pitfall, many MSPs are using a …
… per-user model whenever possible (Note: There will be a few exceptions to this rule, such as health care, where you have multiple shifts of workers sharing the same devices). This removes the burden of the MSP needing to keep accurate device counts, which can fluctuate significantly from week to week; plus, it makes billing easier for the customer, and it avoids price shrinkage as more things move to the cloud.
3. Time Your Pricing Increase Wisely
The consensus among MSPs that have successfully navigated a few rounds of price increases is that it should happen on a schedule. Some MSPs build price increases into their contracts on a yearly basis, while others may wait up to three years. The problem with waiting longer than a year is twofold: First, the price increase is going to be greater, so there’s a higher chance of receiving an objection, and second, by locking yourself into a three-year pricing commitment, you could face unexpected cost increases that you won’t be able to protect yourself from. One MSP who had favored the three-year price lock received notice from her RMM vendor, stating it was making an immediate 10 percent increase on nodes under management. Without the flexibility to pass along some of that cost to its customers, the MSP had to eat the increase until each contract came up for renewal.
Even if you have longer-term contracts, make sure to allow yourself the flexibility to raise prices annually.
When you think about all the expenses in your business – from employee salaries and building rent to utility costs and insurance – everything is going up. It’s only natural that you should be raising your prices too. Also keep in mind that while an across-the-board price increase is a big deal for your company, the incremental increase experienced by each customer will likely feel insignificant to them, especially if they believe they’re getting more value. To borrow from Tiffani Bova of Salesforce, the customer will remember the service long after they forget the price.
Frank Colletti serves as group vice president, worldwide sales, for SolarWinds MSP, bringing over 16 years of experience in sales leadership to his current role. Since joining the company in 2003, he has made significant contributions to the success and year-over-year growth of both the MSP N-central product and the company’s MSP partner community.
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