4 Tips to Boost IT Services Profitability
By Len DiCostanzo, senior VP of community and business development, Autotask
Pricing IT services can be tricky. Price yourself too high, and your prospects and customers may balk (or walk). Price too low, and you'll leave money on the table — or worse, lose money. This is a challenge that IT Service Providers (ITSPs) — and managed service providers (MSPs) in particular — face on a daily basis.
For those who want to price right and increase profits on the IT solutions and services they deliver, here are four tips to help improve pricing strategies:
Understand your costs. Before a company can price services for profit, it must first understand its costs to keep the business running. If you understand your costs, you can plan your profits for all services in your catalog. Costs include all the business expenses on your financial statements, with a particular focus on overhead expenses. Knowing how much money is going out versus coming in is a critical component to pricing services and solutions. It impacts how you calculate hourly rates for billable staff. Five key variables go into calculating hourly rates, including:
- Number of working hours in a year. Typically, an employee works 40 hours per week for 52 weeks per year, for a total of 2,080 hours. But, in reality, the math isn’t that straightforward. Your accountant or financial adviser can decide on a different weekly and yearly number for working hours based on local laws (e.g. overtime allowances). Once you determine this number, use it as a starting point to calculate your hourly rates for individual resources.
- Burden. ITSPs typically don’t look at burden because it is rolled into an overhead number. But, looking at it separately provides insight into the true cost of an employee. Burden can be a specific number but usually is expressed as a percentage. Burden is the total amount of fringe benefits and taxes you pay your employees above base compensation. You need to account for payroll taxes, healthcare coverage, social security costs, 401k contributions, and other costs that ultimately factor into an employee’s total compensation. The burden rate varies by company simply because some components of burden are discretionary and others are based on variable tax rates. In working with service providers over the last couple of decades, I have seen burden range from in the teens to 30 percent or more.
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