Managed Services Pricing Models: Am I Just Plain Wrong?
In recent months, MSPmentor has evangelized all-in, per-user managed services pricing. We’ve told readers to follow advice from TruMethods, an MSP coaching firm that promotes a “cake” pricing model, rather than an “ingredients” pricing model. Generally speaking, I think TruMethods’ advice is right on the mark. But some readers keep telling me per-device pricing for managed services is alive and well, particularly in the emerging mobile device management (MDM) market.
I first heard about the cake model during TruMethods’ Schnizzfest conference in mid-2011. TruMethods CEO Gary Pica and CTO Bob Penland told attendees they need an all-in price, roughly $100 to $150 per user per month, for every service they were selling. Wrap it all together, Pica and Penland told attendees, and stop talking about individual ingredients (patch management, remote monitoring, storage, etc.). It sounded like many of the best MSPs in the room had already adopted Pica’s advice.
So I assumed per-user or even per-location pricing would increasingly replace per-device pricing (server, desktop, laptop, etc.). Generally speaking, I still stand by that theory. As HTG Peer Groups President Alrin Sorensen told me at the IT Nation conference, the new IT services battleground is all about the end-user experience. Building on Sorensen’s statement, it therefore makes sense to me that MSPs will increasingly offer a per-user pricing model.
Mobile Device Management Considerations
But here’s my new inflection point: As the Mobile Device Management (MDM) trend accelerates, I assumed MSPs will simply build some sort of MDM fee into a per-user monthly model. My assumptions started to change, however, during a recent MSPmentor webcast, held Nov. 16 (and archived here).
Roughly 60 percent of MSPs on the webcast said they are using or exploring per-device pricing for MDM. And one of our guest speakers, Smart I.T. Services President Jerry Fetty, said he’s succeeding with a per-device pricing strategy for smartphone and tablet management while leveraging Kaseya’s emerging Mobile Device Management software. Generally speaking, Smart I.T. Services’ mobile device management fee is roughly 50 percent of the price for monthly desktop PC management.
Per User Still Wins?
As the webcast marched forward, the per-device pricing model generated more and more chatter. But overall, I still think the all-in per-user pricing model is cleaner and easier for MSPs to promote.
As CharTec President Alex Rogers has often stated, some customers may be willing to pay a big premium for managed storage, while other companies are willing to pay a big premium for managed security, and so on. The big challenge: MSPs don’t have enough time to discover the price premium each customer is willing to pay for each individual service. So generally speaking, it’s easier to calculate an all-in price for every service without offering line-item costs to customers.
Rogers’ theory: Let security-conscious customers assume the bulk of their monthly per-user fee goes to security, and let mobile-conscious customers assume the bulk of their monthly per-user fee goes to mobility, and so on. Don’t waste time selling the value of each ingredient when you can simply serve the entire cake, TruMethods would likely add.
I realize MSP pricing models will vary for years to come. So I can’t really claim that per-user pricing will ultimately beat per-device pricing, especially when it comes to large MSPs that manage thousands of corporate data center devices. But in the SMB space, I’m sticking with my gut and continue to think per-user pricing is the growing market trend.
Joe,
Great article. I have been talking about the “per user” price model for years. I used it when I was an MSP and it was very successful for me. Most recently, I was on site making sales calls with a coaching partner of mine. The client said to me, I don’t want to talk about any of this managed IT services stuff. I told him no problem. After about 15 minutes of just chatting, I asked my partner’s client, if XYZ Company could give you all of these services for one flat rate, say around $2000/mo, would you go for it? The client said heck yeah. It was based on a per user pricing model that encompassed all of the services that my partner offers.
I will continue to preach that per user pricing is the way to go if for only one reason…its simple for the client or prospect to do the math.
All the best,
Stu Selbst
http://www.stuartselbst.com
Stuart,
Building on this point just a little bit… Last night I finally finished reading the Steve Jobs bio. In one chapter, it explored how Jobs — upon his return to Apple — greatly simplified Apple’s Mac offerings. At the time, there apparently were a dozen or so Mac models. Jobs basically told the team there were four quadrants to cover… Two columns were labeled Pro and Consumer. Underneath came Desktop and Laptop.
By focusing on those four simplified quadrants, he helped Apple to focus its products/services. Moreover, he helped to speed customer buying decisions.
Not exactly the same as the per-user vs. per-device pricing debate. But closely related since the ultimate goal is simplified communications and positioning to speed sales cycles…
-jp
Joe,
Recently I’ve had the opportunity to build a few “per user” pricing models for MSP’s. It really helps to streamline the sales process from marketing through sign-up and even simplifies the support process. Clients really appreciate the simplicity of the model. Keep evangelizing, you’re spot on!
Thanks,
Rob Leon
Rob,
Thanks. Always good to hear from you. And of course I must concede: I merely repeat what I hear from readers… like you.
Best
-jp
There is no “one right” answer to packaging and pricing. The real answer is what offering you can sell the most of at the right price. My experience has been that you need a core set of services that deliver a predicable end result to every client. That core set of services should be your value proposition or the reason why clients do business with you over others. Then you may have additional services that fit a specific client’s needs or specific areas of expertise that you have. Security and disaster recovery are two good examples. Be careful, this can be a slippery slope. It is easy to lose sight of your core value proposition and focus on technology.
Gary: I wonder how many MSPs actually know their Core Value Proposition? Seems like so many MSPs are trying to “win” business, they forget to “build” their business with those core values…
Thanks for your time back at Schnizzfest. I learned a ton.
-jp
Joe,
Gary is spot on with his comments (disclaimer: I have been a TruMethods partner/believer since day 1). I think the Core Value Prop is lost on many MSP’s who try to be all things to all businesses and that strategy just won’t work in my opinion. At the end of the day we are all relationship builders and managers. The better you are at demonstrating how your company way is the best fit for their needs the more successful you will be.
As long as technology exists there will always be a need to support it. You want to make the packaging and pricing as simple to understand as possible while demonstrating your value prop. The more you make the experience like shopping for a car (extras, add-ons, extended warranties, etc.) the more likely you are to confuse and/or turn off a prospect.
Eric: I like the car industry comparison you mentioned. In our own experience launching web sites, our developer doesn’t tell us how much each component will cost. There are typically 40 components to the sites. Imagine itemizing all the options? We’d never make a purchase decision…
-jp
In my opinion what we are really talking about here is not so much pricing but how you present your solution to the prospect / customer. This is more of a sales process conversation than a pricing conversation.
Whether you are selling per user, per device or bundled you need to have a per item (device, user, etc.) cost structure in place for all the services that you sell. Without this you have no way of telling if you are making money on a particular service. Once you have this in place you can identify you minimum sell price for each service and then your sales team can price the solution as the customer demands.
The next step is how are you going to track the services being offered. If you are looking to offer per device pricing but you have no way of tracking all of your customer devices and assigning incidents to them then you can’t offer per device pricing. However if you are offering per user pricing it is pretty easy to track your cost per use as all PSA / ITSM suites track incidents on a per user basis.
I have found that per user pricing models allows you to focus the conversation more on value. When talking with a business owner they value their employees over the devices the employees use. If you are talking devices to them it is likely that you are having too technical of a conversation and will lose their interest. If you talk about their employees and the productivity gains their employees will see with your solutions then you are talking about something they care about.
That being said though, I have found that once you get up over 500 employees in a company and are talking with a Director of IT or higher level IT your conversation moves more to per device management. So by having your cost structure down on a per device / item basis but giving your sales team the flexibility to offer the pricing model that fits for the customer you give yourself the most options for success.
Lane Smith
MSP Pioneer
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Some MSPs argue we support users, others argue we support computers. We really support both, and all the devices that go with it, whether it be smartphones, tablets, scanners, etc,etc, etc. We quote one price as Stuart mentioned and calculate it based on a per user price on the backend. The per user backend price may vary based on how complicated their environment is, etc. but that’s about it. The nice thing is this pricing doesn’t depend on numbers of computers or servers. What happens when the server goes to the cloud? In a per user model, it costs $x to support you, regardless of if your server is on premise or in cloud, if you have a smartphone or a tablet, etc. It works well, but you must also be able to answer the client when they ask how much it costs if they add addtional staff so be prepared!
In the MB sector, our clients think of pricing in terms of a per-user model, so that’s what we give them. Our chief challenge remains establishing a trust relationship and educating them on the value of our managed services. And Joe, to your point, knowing one’s core value proposition is the only way to avoid the price wars that are far too common in our profession…
Jim Van
Logicomm
http://www.logicomm-inc.com
I’m not sure I really follow along with either methodology as right or wrong or that you could label either as better than the other.
I think Lane’s comment is spot on; we’re having a conversation about ‘pricing’ when really the only thing that matters is proposition. We price (by which, and Lane hints at this too, I really mean cost) on a per-device basis – we sell a ‘cake’ to use the previous analogy and haven’t uttered the words ‘patch management’ for example to prospect in as long as I can remember.
In my experience the only thing my prospect or client cares about or remembers is ‘how much’. Ask them after month 1 of a managed service deal what their ‘per desktop’ fee is, and they probably couldn’t tell you. They pay a monthly fee and they get an end-to-end IT service that that delivers in all of the service areas we use to differentiate ourselves – our core value proposition if you like. If they grow a bit, their fee goes up a bit. I presume the same is true for people who cost and track their agreements on a per-user basis, too?
If you’re selling per-user, do you increase everyone’s fee when for example you introduce an MDM offering, or do you suddenly split into a mobile and non-mobile user tarrif? In this example, per-device pricing seems easier to manage
I can see benefits for either and suspect both models will continue dependant on individual preferences and circumstances. I don’t think one is better than the other.
The real key to the thread I think is the ‘cake’ and not ‘ingredients’ analogy. I don’t think how you actually work out the monthly fee is really all that relevant at all. You could sell a cake in slices and I could sell it in portions. At the end of the day, a cake is a cake.
Lee
Hi Folks,
I’m reading and absorbing all the feedback. Thanks for furthering the conversation. I’ll see if there are some key takeaways for a follow-up blog.
-jp
Joe, I know I am late to this party, but the responses are compelling and I want to add our experience. Gary Pica’s observation (5.) is not only simple in value proposition and core focus, but also transformative – it is THE driving force behind our MSP’s 50%+ growth top line, triple growth bottom line, and most importantly, off-the-chart fun factor increase for our team and clients in the last year. My biggest mistakes in this business have been making our value too complicated. Packaging and Pricing are really only about outcomes. CEO’s understand outcomes; they are confused by technology.
Lee Evans’ comment (13.), particularly the last paragraph strikes me. BYOD MDM (how’s that for a new MSP an acronym?) is just an ingredient in the cake like cloud delivery. As an industry, our clients don’t care how IT works, they just want IT to work.
masterIT delivers the cake every day, not the ingredients – per engagement, not per user or device. Internally, we calculate margin by client and device, but why confuse our client with the math? It has simplified our, and most importantly, our clients world.
Michael,
We’ll always save you a seat at the table no matter when you arrive. I remember discussing the per engagement model with you at Schnizzfest. Glad to hear it continues to work so well for you.
-jp
Since our move to Managed Application Services over the last six months, the per user pricing has helped us to increase our margins. The hardest thing for us was to work with our existing clients to revamp their agreements so that they were user focused and not IT focused. We broke a few eggs in the process but we are doing much better financially because of the focus on user based pricing.
Jeff
Jeff,
Sounds like the SaaS market — per user with an app-centric mentality — influenced your pricing model. Please let me and the MSPmentor readership know if you adjust the pricing model again down the road. I realize this stuff isn’t sent in stone.
-jp
VERY late to this party, but a couple of thoughts:
1. Per user pricing always worked for us, but we also had a “network fee” as well that gave us a minimum price for small accounts.
2. Having multiple options of per user pricing is in my opinion the best way to go. Not everyone wants or need everything, so only having one option just limits options.
3. I think the most important part of all this – and most often left out of the thinking/conversation – is that everything should be made as SIMPLE as possible for your prospects to understand and buy, but also for the MSP to propose. Too many MSPs lose hours creating custom proposals when they could just crank them out fast with standardized packages.
Just one crusty old ex-MSP’s opinions!
Mike
So Mike,
Let’s assume I threw an MSP party and it kicked off around 8pm, hit a high point about 11pm, and then started to wind down around 1am. Then, you walked in the door around 1:30am. Somehow I suspect a group of folks would wind up locked in deep conversation with you till around 4am.
Thanks for those three tips above. You arrived late but caught my ear — which is hardly surprising.
-jp
I am late as well, sorry. Great discussion, and I believe that MSPs have gotten really good at selling a payment for their services. This could be per user or per device. What they are missing is wrapping an amount for the hardware into that payment. Rather than the $2,000/ month example given above it would be beneficial to both the MSP and the end user if the managed service included all new hardware and it was instead $2,800 per month. This increases recurring revenue and margins on equipment in addition to positioning a refresh of the hardware at a future point in time. An added bonus is it keeps your engineers happy. Thanks for the article Joe.
Hi Lori,
Thanks for reading and weighing in. Are you involved in the hardware as a service market?
-jp
Hi Joe, I worked for a Solution Provider/MSP for six years and then joined GreatAmerica Leasing in March, 2009. We like to call it Life-Cycle Financing, which is a little different than HaaS, but yes you could say that is where we fit in this world. Coming from the MSP world I have a lot of passion in trying to help make things a little more “simple” which seems to be the key word here.
Thanks! Lori
Lori, GreatAmerica Leasing = a friend to MSPs, from what I’ve heard. Please keep me posted. Thanks.
-jp
It would be interesting to hear example _prices_ MSPs are charging for their ‘cake’. Not all cakes are created equal so I wouldn’t expect to pay the same price for all types of cake. I’d be interested in hearing what ingredients/services MSPs are including in their cake, is there a ‘standard’ set? If so, what is that standard set? Is that standard set generally understood and accepted across the MSP community? The article example states a per-user cake that would include ‘patch management, remote monitoring, storage, etc.’, what additional services makes up the ‘etc.’? And what margin does the cake price command? Pica/Penland recommends a $100 – $150 per-user/mth price range. Why the range, what determines the high or low price? Why not go high, $150, all the time?
Ken Vanderweel
http://www.nimsoft.com/msp_playbook
Hey Key,
You’ve asked some timely questions. But I gotta concede… I’ve never been able to reverse engineer an MSPs price, margin and costs…
Any readers care to share that secret sauce?
-jp
When Gary and Bob rolled out the ‘cake’ analogy at Schnizzfest 2009, a parallel analogy emerged: If you are running a bakery baking cakes, are you TastyKake, Entenmann’s, or the boutique bakery on the corner selling specialty cakes?
TastyKake mass produces cheap little cakes that hit a price-conscious market segment. Entenmann’s makes reasonably priced baked goods that taste good, are affordable, yet still not a cheap product. Le Pain produces a very expensive, exclusive product that may not actually taste much better than Entenmann’s but it has a cachet and atmosphere that a small number of people are willing to pay much more money for.
Most decent sized towns have all three of these cakes available and they all co-exist. Obviously, TastyKake, Entenmann’s and Le Pain all make money and are happy in their market. We MSPs need to be comfortable in our selected market segment, make money at the price we are charging and do the best job we can within those constraints.
I must state the obvious, that the more you charge per seat, the easier it is to include MDM, VCIO, onsites, etc. without nickel and diming on your pricing model.
Randy
Oops, it was Schnizzfest 2010…
Randy,
I think you’re the first person to mention that dreaded nickel and dime syndrome that all customers dread. Great point. I’m not sure when Gary and Bob first mentioned the cake metaphor — could have been earlier years. But it definitely came up during Schnizzfest 2011. Thanks again.
-jp
To use a Gary-ism, per-user or per-device can all end up being ‘an edge’ during your sale and makes it that much harder for the client to understand your value.
If you go in on per user you could have them start to say – well this person is rarely in the office and that person all they do is send email. If you go in on per device then you may hear well that’s a new computer – it will not have problems or that pc is only used once a week.
We’ve switched over to per engagement pricing with the underatanding that we’ll review again every 90 days or so – and have started going back to former per user agreements and redoing them as well.
You have to price it right and have a very good understanding of your costs to price per engagement – I suspect that’s why more people don’t do it.
Disclaimer: I’m a TruMethods member and credit Gary and Bob for helping us get past what many others are still struggling with.