Article | August 26, 2013

Priced To Sell: 5 Insights To Finding The Right Price Strategy For Your Managed Services Business

Rob Merklinger, VP of Sales, Intronis

By Rob Merklinger, VP of Sales, Intronis

There are two primary reasons VARs make the difficult transition to sell subscription-based IT services. The first reason is the hope of earning steady, predictable income, which will allow them to be more strategic in their business decision-making, as opposed to focusing only on the latest IT emergencies. The second reason is the desire for higher profit margins. One of the biggest obstacles standing in the way of achieving those goals is figuring out the right pricing model. Working with hundreds of MSPs over the years, I’ve noted a few winning strategies shared by successful partners. Even though the exact pricing will vary based on the location of your target audience (e.g. rural, suburban, major metropolitan), the following principles can help you make sure you’re setting your managed services pricing appropriately.

  1. Don’t Just Look at Hard Costs. One of the biggest mistakes new service providers make when trying to set their service pricing is looking at only their hard costs and marking up their services based on that information alone. If you’re looking at selling cloud backup as a service, for example, don’t base your pricing on only what it costs you for online backup.  If you’re charging for just raw storage, you’re cheating yourself and risking turning your service business into a commodity. Instead, look at the big picture and consider other factors that go into selling cloud backup services — including the initial installation, upgrades/software support, monitoring, data maintenance, periodic business continuity testing, and helping your customer develop a disaster recovery plan.
  2. Determine Your Incremental Charges. From the beginning, you’ll want to plan for how you’ll handle your customers’ services expansion. If there’s one thing that’s for certain — especially in the world of data storage — it’s the fact that it always grows. Using the cloud backup example, determine your price per GB (for remote monitoring, it may be a price per seat or price per user, depending on your service model). You may want to consider using a tiered pricing structure to incentivize more usage. For example, maybe you’ll charge customers $4 per GB for up to 9 GB and then $3 per GB for 10-19 GB, and so on. This step also requires knowing the customer base you serve and understanding that the cost for data storage in a rural area may be $2 per GB (with up to $5 per GB for managed services) compared with $5 per GB in a major metropolitan area (with $10-$15 per GB for managed services).
  3. Don’t Forget about “Additional Service Fees.” In addition to coming up with a baseline price for your services, think about all that’s included and other services that should constitute a higher price. For example, computer and server monitoring may constitute one price, but what about installing licenses on each machine? This is going to take a certain number of labor hours and needs to be accounted for. Perhaps the customer needs your help migrating its legacy backup, antivirus, or security solution to your offering — be sure to build that labor into your pricing as well. Other additional paid services may include: local vault backup services, plugins, SQL backups and Exchange backups.
  4. Monthly Billing Ensures Accuracy. Your customers’ data is always growing. If you bill annually or quarterly as a retainer sum, you will lose money as your customers reach higher tiers of data storage and/or as new computers and servers are added to your management program. Keep your billing cycle short (i.e. monthly) so you can charge the actual cost, not a cost based on outdated information. Most cloud providers charge monthly, so you should easily be able to look at your costs and determine your monthly profit margins.
  5. Show Your Value Regularly. A good MSP is able to troubleshoot the vast majority of its customers’ IT issues without the customer even knowing about it. But, don’t assume that your customer lives by the old adage that “No news is good news.” You’ll be much further ahead to assume the opposite, which is if your customer goes too long without hearing from you or understanding the value you’re providing, they may want to cancel their service contract altogether or at least negotiate a lower rate. After all, if things are running so smoothly all the time, why should they be paying you to watch over their bullet proof IT infrastructure?

Once you sign a managed services contract with a customer, there’s a simple step you can take to reduce the chances of having them revert back to break-fix. You can provide customers with a report (with their monthly bill) that gives a snapshot of all the services you performed for them over the previous month. Did you troubleshoot a server on a weekend and resolve the problem before they opened for business on Monday? Make sure it’s in the report. Did you detect after work hours that the customer’s network was under attack, and you took extra measures to thwart the attack? Make sure it’s in the report. It’s a good idea to use graphs in the report, too, because sometimes a picture can show things more succinctly. Your goal is not to bury them with details; it’s to highlight your value so that they always feel like the price they’re paying you each month is well worth the value they receive.

If you’re interested in more information about selling cloud backup as part of your disaster recovery solution, take a look at the new Intronis e-book, “The Ultimate Guide to Selling Cloud Backup,” designed to help VARs and MSPs sell cloud backup more effectively.

Rob Merklinger is VP of Sales at Intronis, a cloud-based backup and disaster recovery provider that works closely with VARs and MSPs.