One of the biggest challenges for businesses generally involves pricing their products or services the right way, and MSPs are no exception. Building the right MSP offer often involves various considerations like demand, market competition, profit margins and more. Also, equally important is the strategy you incorporate when pricing your services.
Before we check out the significance of various methods of pricing, let’s take a quick look at how pricing affects your profitability.
Pricing and Profits
The way you price your services directly affects your profitability. While competitive pricing is essential to gain more customers, pricing your services too low will hinder your growth in the long term. Besides, this type of pricing will push you down the rabbit hole of low margins, low growth and low-value services.
What you need to focus on instead, is the value of your services. When you price your services based on the value you provide rather than the cost you incur or the comparative pricing of your competitors, you can attract quality customers who value your services.
Also, knowledge about price elasticity of demand (PED) can help you come up with a strong pricing strategy. Products or services that are highly sensitive to price fluctuations are considered elastic while those that remain stable under price fluctuations are inelastic. For instance, the demand for food products remains pretty much stable irrespective of pricing changes. As an MSP, you need to identify the price elasticity of your services before setting up the price.
This can be identified with the simple formula:
Quantity of the demanded service ÷ Price of the demanded service = Price elasticity of demand
In an ideal scenario, you would like your services to be inelastic (unaffected by price fluctuations). However, that may not always be the case. This simple calculation will help you determine the right pricing that doesn’t compromise your profits or future growth.
There are different methods available for MSPs to price their services. Some of the commonly used pricing strategies are as follows:
- Per-device pricing: Here, a flat fee is charged per endpoint in the organization. The fee is based on the type of endpoint. For instance, support for a server costs more than a laptop or a mobile device. In this model, you can charge an additional fee only if the customer adds more devices.
- Per-user pricing: Here, a flat fee is charged for every user in the organization. The user may have different devices like laptops, smartphones, tablets, etc. The fixed fee includes support for all the devices. While organizations with plenty of devices may benefit from this model, it means more work and more support for MSPs.
- All-in-seat pricing (AISP): This is a highly recommended approach to MSP pricing. First, you determine your overall cost burden in providing service to an organization. This helps you determine a break-even price, and then add the required margin you feel is reasonable. For instance, if your monthly recurring revenue from a company is $150,000 and you support 1,000 seats, your AISP is $150 per seat.
When using the AISP model, you need to study the average purchasing power of your customers to make sure you are not charging too much. At the same time, you also need to consider your desirable margins to ensure you are not underpricing.
Factors to be Considered
The following factors are critical when coming up with the pricing strategy for your services:
- Cost overheads: Calculate your total costs, including salaries and rent, before coming up with a price.
- Value pricing: Costs alone should not dictate your pricing. Consider the value you provide and the intellectual capital you have invested in the service.
- Competition: You don’t always have to charge lower than your competitors. However, an understanding of the market price can help you come up with a better msp pricing strategy.
Remember, MSP pricing is not a one-and-done deal. You need to review your offerings every six months to make sure you are keeping up with the changes happening in the market. Also, when pricing your services, provide clear information to your customers about what they can expect from a package.
Want to learn more about MSP finance? Watch for our finance-focused webinar featuring Peter Melby, CEO of Greystone Technology, a globally recognized MSP, as he reveals how MSPs can reinvest and make money at the same time.