How much are the software license fees

Pricing strategies for managed services that will increase your profitability in 2019

Note: The following is an excerpt from the guide: From Break / Fix Model to Managed Service Provider, which includes a 4-step action plan for transitioning to Managed Services, as well as free templates and tools that you can use to get started right away.

 

The pricing strategy for managed services is a complex topic. There is no one right way to go, but rather it depends on factors that vary between each provider and their customers. A single blog post can therefore only scratch the surface of the topic. So let's keep things simple by going into some basics first. I would also like to point out a few other points that are already a little more in-depth and that you can keep in mind when you turn the screws on your pricing.

MSP price metrics 101 (and the risk of relying too much on benchmarks)

The stakes for the right pricing are obviously very high. Just a few mistakes can mean that all the hard work you have put into creating your offer is in vain if your business is not profitable. In order to find out what you should be charging for your services, here are a few basic terms and concepts to understand at the beginning:

  • Cost of Goods Sold (COGS): Also known as service costs. This number reflects all direct costs associated with providing your service, including software license fees, labor, and other expenses.
  • Monthly Recurring Income (MRR): As the name suggests, this is the revenue generated monthly through your fixed price service.
  • All-in price per seat (AISP): Is the MRR divided by the number of customers served. Example: If a customer with 20 endpoints generates € 3,000 in MRR, the AISP is € 150.
  • Gross Profit Margin: The percentage of every euro in MRR that you can actually receive or use to cover your fixed costs (operating costs). This is crucial for determining your breakeven point.

At the risk of obviously oversimplifying effective pricing, it essentially boils down to knowing your COGS and demanding enough that the resulting MRR be at least 2x the direct cost. The order of magnitude of the desired margin is 50% and more, with some MSPs reaching up to 70% plus.

While benchmarking is tempting, the only helpful thing to know is that MSPs charge, on average, between € 125 and € 200 per user per month. Rather, your pricing should focus on it Their Orientate on costs and the margin that you need to achieve in order to generate a profit. And not what other people ask for their performance.

Do you need help breaking down your actual COGS? MSPexchange offers a fantastic MSP margin calculator that will guide you through calculating your costs, margins and prices based on a flat rate per end-user model.

 

The MSP margin calculator | Source: MSPexchange

Should you focus purely on all-you-can-eat support?

While many MSPs, as we have reported, focus on tiered or à la carte pricing structures in order to provide their customers with a range of packages to choose from, there are some clear advantages to opting for a single standardized offering instead specialize. Not only does it make things easier, it also allows you to fully focus on your positioning.

As with any pricing model, the all-you-can-eat (AYCE) support model certainly brings with it some potential stumbling blocks. A common mistake is not to be clear about what to do with the exception of the Not are covered by the flat rate offer. Nevertheless, there is a reason why flat pricing models are becoming more and more important. If you have the right tools and structures to provide AYCE support, this model can be very profitable.

However, if you are looking to learn more about tiered, or à la carte, approaches, here is some great advice on these models.

Price per user or per device - what should you use?

If you opt for a flat rate, you also have to consider whether you want to set your price per end user or per device. You don't have to commit yourself here and you can simply give your customers a fixed monthly price. There can be advantages and disadvantages in letting customers know that the price depends on the number of users or the number of devices. On the one hand, it makes your pricing easy to understand and understand for the customer. On the other hand, however, it makes them very susceptible to downsizing and other organizational changes.

While the price per device prevailed in the early stages of the introduction of managed services, the price per user has since grown in popularity. On the one hand, it is less complicated (no setting different prices for different device types and no discussion with customers why VMs also count), and on the other hand, there is something nice and advantageous about positioning not devices but people .

However, not every user is the same and some experts believe that prices should only be set after you have obtained an accurate overview of the actual costs.

The developers of the MSP margin calculator (see above) recommend dividing the users into different cohorts according to their needs and the effort required to provide them with the desired service.
E.g .: While one customer only has full-time users who use your standard package, another part-time has users who need e-mails or executives who require special services, etc. The cost of the services that you provide to each of these groups of customers will be very different and therefore each will have a different impact on your margins. The margin calculator helps you to cover these costs so that you can calculate the price for your flat rate more effectively.

Of course, there are also the intangible factors, such as the emotional burden of working with certain customers. In order to incorporate this into the pricing, MSP consultant Nigel Moore recommends weighting these factors using a model that he calls "Per user 2.0" (the MSP margin calculator can also guide you through the process here).

The model pictured above is from Moors manual,A (Stupidly) Simple Method to Pricing MSP Agreements Easily and Profitably- an absolute must for all MSPs. Learn more from Moore on his website, The Tech Tribe.

Important dos and don'ts in pricing

In conclusion:

  • DO request prepayment. Otherwise, you will find yourself chasing payments and missing out on the positive impact of predictable MRR on cash flow, which was originally one of the reasons you moved to managed services.
  • DON'T feel obliged to offer the same price to everyone. A flat fee does not mean the same price for everyone at the same time. Your rate should be based on your cost of providing the service, which should also mean more to customers in need.
  • DO give yourself a buffer by aiming for larger profit margins. Unexpected costs almost always occur. So protect yourself by aiming for 60% or 70% and remembering that it is easier to get there from the start rather than backtracking and raising prices later. This means…
  • DON'T be afraid to raise prices. According to experts, one of the most common mistakes MSPs make is not charging enough for their services. When MSPs talk about raising their prices, they almost always say that they have lost almost no customer and that they would have wished they had taken that step sooner.
  • DO set a minimum fee. Otherwise, in most cases, they will simply not be able to operate profitably with small customers.
  • DON'T get too preoccupied with what others are doing. Sell ​​customers the total value you have to offer.

New to managed services or looking for more efficiency and profitability?

For more practical advice, check out our free guide to transitioning from Break / Fix to Managed Services. It provides a 4-step action plan that you can use to get your business up and running PLUS a range of free templates and tools that you can use out of the box.