How to price a managed services offering can be a frustrating topic for a lot of MSPs, new and veteran alike. I wanted to offer some ideas on how to really simplify your pricing strategy, and how to protect your managed services margins, whether it be for cloud or managed services products.
One of the trickiest aspects to setting a price for a managed services offering is that too often we look at managed services as a product. This can be particularly tempting if your company used to be a VAR. For new MSPs particularly, setting prices can be difficult because there is no comparative service catalog against which you can baseline the value of your own services. This is why so many MSPs contact us asking what the other MSPs are doing. Nobody likes to be outside the group norm.
Start with Margin
It’s all about the margin. No matter how you price your services, if you don’t make enough margin you will ultimately go out of business. So, step one is to build into any managed services offering (yes, this includes cloud) a set margin. I’ll use 50% gross profit margin as a good starting point. How did I come up with that number?
Anything below 30% gross margin and you are deemed to be an “at risk” MSP. MSPs going through the UCS audit process must show gross margins of at least 30% or greater, otherwise they will be viewed as having risky corporate health. So, at 50% gross margin, any MSP product you deliver ought to be well insulated against margin erosion.
Service Costs
By now, some of you are asking how to arrive at gross margin. Well, let’s say gross profit margin is the price of the service minus the cost of goods sold. This means you’re going to have a know how much it costs you to deliver that service, whatever it may be. Start with your human costs and your service enabling technology tools and work from there. Each MSP company is different so your COGS (cost of goods sold) may be different also. But, if you can establish what your service costs are, then you at least can make adjustments on the expense side or the pricing side, to arrive at the right margin.
Margin must be protected. Making changes to your pricing or your service costs, without knowing the other side of the equation can be dangerous.