Two Trends In Managed Services Prices
First, the key goal: Your customers want simplicity and predictability. Godgart recommends two simple steps to achieve those goals.
Are you charging “by device” for your managed services? Perhaps it’s time to move to a “per user” model that also includes quarterly — instead of monthly — fee adjustments. The approach, which Autotask CEO Bob Godgart described to me earlier today, caught my attention. Here’s why.
First, the key goal: Your customers want simplicity and predictability. Godgart recommends two simple steps to achieve those goals.
- User-based pricing: Instead of charging per device (desktop, laptop, firewall, server, etc.) move to user-based pricing model. Give customers a simple monthly fee that allows them to understand how much they’re paying per employee.
- Offer a quarterly price protection: Imagine if a small business has 30 employees in January, 32 in February and 37 in March. Yes, try to get the small business to bring their new employees under the managed services contract each month. But don’t charge your customers for those new employees until the beginning of the next quarter.
Item 2 above is counter-intuitive. However, it might impress your customers, enhance loyalty and deliver more recurring revenue over the long haul. Using the example, you’d charge the customer for 30 employees in January, 30 in February and 30 in March — even though they’ve grown to 37 supported employees. And then in April, you’d start charging them for the 37 supported employees.
In that scenario, the customer maintains a predictable quarterly cost, and realizes they’re getting extra value from you. In return, you will likely have an easier time up-selling your customers in a more predictable fashion. You’ll lose a few dollars over the short-term, but gain recurring revenue over the long haul.
Sound logical? Or does that approach introduce new challenges? I’m all ears.
I think someone has a new idea on how MS should be handled every week. Sometimes twice. Per device contracts are sure to change with far less frequently than per user.
I once walked into a company with 15 servers and 25 people. Per user contract pricing is a sure way to lose money.
James: You raise some interesting cons about potential per-user pricing. As we prepare our next MSPmentor 100 survey, we’ll be sure to explore the per-user vs. per-device pricing debate. In the meantime, I welcome more comments and perspectives and will potentially use them for a future post.
-jp
a lot of managed service software providers charge their licence-fees per monitored device.
I think that it is impossible to charge either per user or per device, rather you need to charge both ways. The service offering that you provide a user (Help Desk) is most definately different then the service offering you provide for a device (NOC, alert management, etc.). Also the price point at which you can sell each service varies differently, you can sell a Help Desk solution for say $50/month and a NOC solution for $150/month.
In the example that James mentions above this model would result in a $3500/month fee. If that were priced per user the cost would be $140/user. In my expererience the only way that you can get a price like that is to include a lot of onsite support as well, this of course is not very scalable.
It really comes down to how you position the plan when you are talking with the customer. This customer as an example, with 25 employees and 15 servers, would most definately need to hire an internal IT person to support this environment. Best case they are going to find someone that is going to cost them $6000/month. So this is the number you want to come in at, not a per device or a per user cost but a total solution that will include these items but they will not be the discussion point.
On the topic of changing your bill quarterly or monthly. Aside from having a totally automated process to handle it, there is no way that you can scale your MSP practice if you are having to change your monthly invoicing every single month. So I would recommend quarterly. And on the per user pricing, round up those numbers. If you support their 30 users for 6 weeks without pay, why then change it to 37 users, change it to 40 users, the customer will be fine with this.
Lane: Thanks for helping our readers get a feel for more pricing approaches. I suspect a lot of readers out there are taking notes.
-jp
Love this discussion! Being new to the MSP industry but not new to IT in any way….I just have one question: Why should this be any different than having an internal staff member? How is the salary of an IT staff member determined? How are the collective salaries of an IT department determined? I have been a member of corporate IT for many years and never have I heard “well, our salaries this year are based on per user or per desktop” what I’m saying is that clients are probably more likely to respond to what they know and what the norm is…which is to pay based on what they are getting, i.e., the value of the service.
Maybe this per user/per desktop is working but at some point we align better with the fact that if they were to hire an IT staff member (which is entirely possible) or already have one, then we work out a pricing model as simple as if we also were an IT staff member.
It’s tricky but if a client has to choose between a flat-rate salary of an IT member or an MSP that is charging for a device or user, would they just go the path of least resistance and choose a salary???
I realize an MSP offers “an entire IT department” but in the mind of a client, it’s still spending money and they will spend that money much more easily if it’s easy for them to understand and easy for them to do!!!
Is is possible then for MSP’s to not use that model at all and come up with pricing that is more in alignment with what clients might typically see if they hire someone?
I have a different opinion on this matter. Basing your pricing on the cost of an internal IT department is one strategy, and is commonly used for the mid market where cost comparisons are typically calculated based on outsourcing vs. internal resources.
However for the Small Business market (sub 100 seats), pricing your services based on the cost of hiring someone is not always advisable.
Small Businesses are likely to outsource their IT BECAUSE they dont see the need or the justification to hire an internal staff person. So the idea that your should price your services based on internal IT departments is a little far fetched to me.
If this were true then lets examine other mature service industries, accounting and legal. Most small businesses outsource all or some of these business functions. Do accounting or law firms price themselves based on what an internal resource would cost?
Why would a 50 person IT firm have in house counsel? (I’m sure there are reasons why this could exist, however you have to admit its not the norm) So if our law firm said to us, we are going to charge you $15K/month because if you hired an attorney that’s what you would pay, I’d politely show them to the door and call the nearest mental hospital.
Im not advocating that any pricing model is better than the other, simply that pricing based on internal IT costs is not the sole solution.
My thoughts are:
1) Charge as much as you can but not more (always have profitable contracts)
2) Be flexible with how you determine your price, each business is unique and there are hundreds of variables that can be used to determine price (the important task is to get the client!)
3) Remember we are a service business first and a technology company second (so what justifies law firm A vs law firm B?)
4) Dont try to use magic to determine price, most customers want to understand why they are being charged $5K per month vs. $3K per month.
5) It IS a good idea to compare your costs to an internal IT model as a proof of ROI! This is not the same as basing your pricing on an internal IT model! See Everon’s great calculator as an example of this (http://www.everonit.com/hidden_cost_calculator.html)
To comment on Shane’s comment, I think most customers choose what they understand and when they see value = price, not what is the path of least resistance. (Most companies aren’t lazy with money)
I think pricing models have very little to do with the success of your sales team or your business. Successful MSPs use each of the models out there and they all work and have their own strengths. Its more important to focus on Value is = or gt; Price. Value can come from many things…sometime its how pretty the proposal looks.
Joe, thanks so much for this great blog. I really learn so much from this blog about what my MSP vendors are seeing in the marketplace to help me create financial solutions for their clients that solve everyone’s problems.
It’s already helped me in my business in tangible and intangible ways. Thanks again.
Stu
Stu: Thanks for the note. Let us know how we can continue to bolster MSPmentor, and certainly let us know when we miss the mark.
OK- I am on vacation but I have to chime in. I have always priced the MSP/HaaS solutions on a per user price model. I like to make things easy for clients to understand. When selling anything to a potential client, the more simple it is for them to understand the better chance you have of getting a decision. Making it simple does not always me a YES. It just means you can move more quickly through the sales cycle or forecast.
The main reason I like per user is because most business decision makers generally know the 3 major components of their business. Gross Revenue, Pretax profits and employee count.
By pricing your service against one of these major areas you become easier to digest and remember later on. It was amazing how many clients remembered our pricing better than I did sometimes.
We did a lot of HaaS and always priced out a per user price.
Now that I have said all that, the type of relationship you have with the client will always win out how you price.
My 2 cents worth……
Ramsey: Glad to hear you’re having a profitable vacation 😉
I have to agree with James (first commentator) on the development of “new” pricing techniques coming out every week.
In my experience, moving to a per-user pricing model just didn’t work. We’re seeing lots of environments out there with varying technology that sometimes (more often than not) are causing us to charge for a premium technology to support. Case in point? The difference in support cost of a Cisco ASA Firewall/Gateway vs. Linksys WRT-54G gateway. Think about your burden cost of getting a CCNA involved in a problem as opposed to your helpdesk staff.
When it comes to measuring profitability against a contract I’ve always found that the MSP loses when pricing per-user. I track metrics very carefully and couldn’t imagine charging the same for the two aformentioned devices. Sure, per-user might make sense (and be easier to price) in the small 5-10 user space, but it doesn’t scale well in my opinion beyond that unless you are outsourcing almost everything you’re providing as an MSP.
John, Great info. Would you ever consider a hybrid model, where certain IT assets (Cisco firewalls) were priced per device, and then also offer a per-user model to cover the basics (laptop and PC support, etc.). Anyone pursuing that type of hybrid approach or does that complicate matters?
Good discussion all,
One thinking point for the group, in the per user pricing model, there seems to be an assumption that you’d have the same price for all customers. Instead, each customer would have a unique price based upon what they need managed, plus add in an automatic contract review upon major projects, or 10% change in managed devices.
Joe, That hybrid aproach is exactly what I was talking about in my comments above.
John K has a good point and it is exactly what has driven us to use this type of aproach. It really comes down to knowing your costs and what type of profit margins you want to see. It is easier to figure these out if you take the hybrid aproach as you as per user costs are usually associated with Level I or II technicians and the per device costs are associated with Level III technicians.
Once you know what your costs are and you have reviewed the prospects environment (i.e. they have 25 users and 10 devices) then put together a proposal based on whatever pricing concept you think the customer wants to see.
Once way to do it might be to come in with a fixed fee for their existing environment. Once you have a signed proposal and your are on to the contract side of the sale, then introduce ad per user / per device costs for any additons to the contract. You have already closed the deal, you are now in the mode of making sure that you are not going to regret it 3 years out when the company has tripled in size.
I agree Lane – We always formulated our cost Level 1,2,or 3 but then we adjusted to sell at a Per User price. Example: Server + desktops + routers / # of users = Selling price.
Something to think about.
When cell companies charged for roaming,network and monthly access. Did it not aggrevate you when you got your bill because you could not figure out why or How they charged you. Eventually they (cell carriers)came up with a way to keep things simple. Welcome to the Flat Fee per month all you can eat package.
These guys found that more than 50% of their customers moved to a higher billing (Falt Fee) per month that included everything, mainly because the customer did not have to worry about the bill or extra charges they did not understand.
Your pricing needs to be easy and something they don’t have to spend hours trying to figure out what they are being billed for. Even though I like per user, my main point is really – “Simplified Selling” or KISS method. (Keep It Simmple Stupid)
Ramsey
Great discussion. We’ve been fighting with this at our office for months now. In the end, we realized that we’ve been “hybrid” pricing since we started selling AYCE contracts 18 months ago. We typically start with a per device price and then add a per user price. We then adjust up ro down based on the complexity of the environment, # of 3rd party apps, pain in the a__ factor of the end users, etc. Almost all of our current customers have stable user bases, so we only review contracts for price adjustments on a bi-annual basis. We also a-la-cart some components of our contract, including anti-spam, offsite backup, etc.
I don’t think its advisable to publish per user or per device pricing. Each agreement should be reasonably custom.
-Brian
Brian: I agree that MSPs should NEVER publish their per user or per device pricing. I am starting to receive direct mail pieces that specifically mention pricing. They are low-ball offers filled with confusing text and qualifiers/exceptions. This is a disservice to customers and the MSP community.
I’m somewhat amused by the perceived difficulty of counting managed devices and adjusting billing accordingly every month. If you’re really managing the clients network, you better darn well know how many units are there, whether new devices have been added to the network, whether any have “disappeared,” etc. If you don’t, how can you say you’re really managing the network? Our customers are paying us to know what’s going on and we do. We monitor, count, manage, alert and adjust billing monthly.
Great article. Making money on your vacation is a beautiful thing…