Ask a Mentor: How to Set Managed Services Prices?
Each Tuesday, MSPmentor’s Ask a Mentor service publishes a reader question and invites you to weigh in with recommendations. This week’s question comes from an MSP based in Florida. Here’s the question and our reply…
Question: The reader states: “I am currently working on establishing a small VAR/MSP shop catering to the S in SMB down in south Florida. One of the things on which I keep second guessing myself is on rates, mostly because I’m afraid of going too low on rates in an effort to appear attractive. I am an avid reader of your blog (and the VAR Guy) and wanted to know if there is any material out there you would be able and willing to recommend for me to look into as far as an acceptable practice for rates go. Any advice or feedback would be greatly appreciated.”
Answer: Ah, the old pricing question. I’ll direct you to the following MSPmentor blog entry from January 2010. In it I make the following recommendations:
- Check out the local competition’s prices
- Join local associations to keep your finger on the pulse of pricing and local economic issues
- Survey your customers to learn how they feel about the value of your products and services
- Pay attention to local supply and demand (are rival MSPs moving in or are they imploding)? For those MSPs that are imploding, what were their prices
- Consider new market segments that will help you boost prices
- Calculate your costs.
Fast forward to the present and I’d like to make three adjustments to the list.
- I’d move Number 6 (“Calculate your costs”) into the top priority.
- Then, I’d ask you what type of profit margin do you want to make.
- Avoid the temptation to use blanket profit models and industry averages published by research firms. The reason: Much like the real estate market, the price of your services will certainly vary by region and by vertical market. So certainly: Read research and gather industry data points. But set the price based on the value you deliver — not the value an MSP across the country can deliver.
Also, re-read that original blog post: There are more than a dozen reader comments with additional tips.
Readers: Admittedly, I’m just a blogger. You’re the experts since you set your prices every day. Feel free to weigh in with comments or suggestions. Or, to submit your own question, simply visit our Ask a Mentor page. We’ll post a new reader inquiry each Tuesday. And we’ll reply privately to you as well.
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Joe, most times we tend to focus our pricing around what the competition is doing or our costs. There is a good book that business owners should read: The Art of Pricing by Rafi Mohammed. One of the key takeaways from this book for me, which you mention in point 3 of your list, is the idea of value. An MSP needs to understand the value they offer to their customers. I recommend those involved in setting pricing read this book.
Ryck: Thank you for sharing the book recommendation with MSPmentor’s readers. I will check it out. And thanks for reading MSPmentor.
-jp
Joe,
I think that you are spot on with your additional recommendations. Your profit margin needs to be the 1st place you look when setting pricing. Make sure you identify all of your costs, licensing, infrastructure, hosting fees, employee costs, rent, etc….. Once you have your costs identified you can then determine you minimum sell price based on your profitability goals. At that point you are ready to look at all of the other factors and set a standard price.
Lane Smith
Do IT Smarter
So true Lane. W/out a fair profit, we wouldn’t be around to provide quality services to our customers, regardless of price. Too often providers worry about the competition’s prices w/out really knowing what the competition is selling.
I know you’ve heard this because you have a quality operation: “You guys are twice as expensive as the other quotes I have.” When I’ve dug into the differences in the sales process, it is NEVER a equal comparison. I could sell our services for half the price we charge, but only if I can do half the things necessary for well run IT. You get what you pay for.
[email protected]: Thanks for identifying some of the line-item costs. I concede: I think I’d be stumped if I tried to calculate an MSP’s ongoing monthly costs.
[email protected]: Often you really do get what you pay for. Unless you buy something that’s truly disruptive… But those options don’t come along too often.