Pricing and Costs for Managed Service Providers: Defining Per User and Per Device Rates
The most common question from MSPs is how to define and adjust their prices. There is a trap to go down the rabbit hole of following the competition, as customers shopping for rates most likely will do a comparison. However, this is a risky approach, as MSPs have different cost structures, different services and different value they provide.
Last year, it posted about pricing for MSPs, advocating to target profit margins, and since I received multiple questions about specific examples, his post will expand on the topic.
The rates
In the US, depending on the level of service and technology stack deployed, expected per-device or per-user rates range from $50 to $300. The range is rather broad, as it really depends on what is included in the price. Some MSPs include all necessary productivity, management, and cyber protection tools in the cost and end up at the higher side of the range, while others charge separately for software licenses with little to no markup. And there is a wide range of options there. Some MSPs include only necessary tools like RMM, backup and security, while overs include everything that the customer needs.
The all-inclusive approach has its pros and cons. It is usually easier in the initial negotiation, showing customers that there is no additional cost and that the cost of the managed contract is fixed for at least a year. At the same time, it is much harder to upsell by adding additional tools and services even if the customer desperately needs them.
The margin
The usual range of margins in the US is between 30% and 70%. Most of MSPs design their offering target at the last 50% margin and end up at a 30-40% margin during the contract negotiations.
To calculate the rates based on the target margin, consider the cost of software, the cost of running the business with the customer, and the cost of the employee's time. Margin is calculated using a simple formula:
Margin = 1 – (Cost / Price)
Therefore, to calculate the Price, use the following:
Price = Cost/(1 – Margin)
Let’s say your cost per hour is $50 and your target margin is 50%, then your price shall be $100 per hour.
To estimate the time required per customer, make assumptions, and then adjust them based on reality. In most cases, you already have some experience with the ticket volumes and time required to handle the tickets. Also, it is a practice to look at your margins regularly, assess the profitability of customers, and make hard decisions about parting ways with customers if they become unprofitable.
The reality
The sad truth about meeting pricing is that customers will negotiate, and you will make concessions. A good rule of thumb is never to give up discounts without adjusting the level of service. If a customer demands a discount, estimate what you must adjust to maintain your profit margins. For instance, at a lower rate per device or user, you can offer longer response time for the support tickets – saving time for your technicians to serve over customers.
Another sad reality is that you will always have customers with incidents that will require a lot of attention and time, and those are hard to predict, as you never know if somebody will force a faulty update for the systems or if a customer will have administrator access, makes some funny changes you will have to fix. If the incidents become a norm, you must re-negotiate the agreement or drop the customer. Many MSPs continue to support customers that become unprofitable and, over time, destroy their own business.
Charging by an hour
With more and more MSPs switching to per-user or per-device pricing, the model for charging per hour of work is still alive, especially in complicated customer cases requiring a lot of extra effort. One option to consider with customers who use a lot of hours is to offer them much lower per-user and per-device prices while establishing an hourly rate for handling incidents. In this case, having the customer's history allows you to estimate the price using the same target margin approach.
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In any case, remember to sell on value, not only on price. At the end of the day, the customer cares about what you do for their business as long as your services save them money or allow them to make more money.