Pricing for Managed Service Providers
New MSPs are frequently obsessed with learning of the prices other MSPs on the market charge. Quite often, they try to compete on price — offering the same package of services to the same customer segments at lower prices than others. This path leads to nowhere. Margins are getting smaller (and there is already a lot of pressure on margins), competition responds with matching prices, and everybody loses in the end.
While working at Microsoft with hosting providers, I have seen the same situation unfold in the web hosting market, helping them sell more services on the Windows platform. Initially, pricing competition caused hosters to lose money on lower tiers of shared hosting plans and small virtual private server (VPS) instances, making money only on larger VPS and physical server hosting. After some time, most of the smaller players were pushed out of business, acquired by larger players, or introduced additional services, making web hosting a way to acquire customers while making money by offering a variety of add-ons.
Knowing the market and competitive pricing is useful. However, fixation on pricing only eventually leads to huge issues with the business. Effective price is based on the value that MSP delivers to their customers. There is a massive opportunity for differentiation based on the variety of services, technology stack, and service level agreements (SLAs). At the end of the day, the best MSP customers are looking for a reliable IT partner, not for the lowest price.
The pricing strategy I suggest to MSPs is to calculate backward from their target profit. They target the profit, estimate the profit margin, and then estimate the pricing and number of customers needed to achieve the target profit. They evaluate how realistic the goal is regarding the number of customers and estimate the service offering that would allow them to provide the level of service they need.
When competition attacks you on price, you can respond by comparing the value of services and the cost of transitioning from a trusted partner to a partner offering a lower price.
Key takeaways
- Price is based on value, not competition.
- Design prices based on profit margin target.
- Compete on the services’ value, not the price.