The "Best" MSP Pricing Model
User Based All In Seat Price (AISP)
What is your pricing model for your managed IT service offering? I know it’s a hotly debated topic. I personally like the all in seat price (AISP) model. Pricing by the user is the most business-friendly and easiest to scope. If you’re pricing your service correctly and standardizing the client environment, it shouldn’t matter too much how many devices the client has. The only caveat being if the environment has more devices than users. If so, just count the systems instead of the users.
Your client facing pricing should be as simple to understand as possible. Remember the client asked to meet with you because they don’t want to understand or deal with technology. If you present a pricing proposal that has 14 line items talking about endpoints, firewalls, APs, SQL servers, and others, you’re likely going to confuse them about what they are paying for.
“A confused mind makes no decisions.”
You may have a crazily complicated spreadsheet that you use to calculate your cost to support an environment based on the number of devices and that’s fine, but don’t make the client try to decode your cost structure. Do whatever calculations you want to scope your costs and adjust the price as required, but when you’re pitching your service to a prospect, just give them the simplest price possible.
I’ve heard some people argue that they like to have flexible pricing that people can mix and match in order to be price competitive. While this is good in theory, Portugal is a great example of how this can be maddening. In Portugal, they have service-based pricing for internet service. (Side note, this is exactly what we are fighting against when people talk about net-neutrality) This means when shopping for internet service your price list looks like this.
No one likes fractional service and up-sells for your internet access. This would drive me mental. I just want internet access, don’t tell me what I can and can’t use. This type of service would influence my perception of the service I’m getting.
Don’t discount your price and make your service modular. Set a fair market price that covers your costs and allows you to have some margin. Strongly enforce standardization with the clients and provide a full-service offering so they feel the value in partnering with you for IT service.
MSP Pricing Strategies
Let’s look at some of pros and cons of the most common MSP pricing models.
Fixed Fee Pricing
Allows you to set a price that is easy to communicate and includes everything a client will need to rest easy knowing that their IT partner is looking after their business IT needs with a comprehensive support package. They won’t be “nickel and dimed” with additional bills. The provider can rest easy knowing they have enough margin in the agreements to do the work necessary and be profitable.
Pricing is easy to understand
Allows necessary margins on agreements
Allows comprehensive support
Seriously limits the type of customer you can sell to
Strong standardization that may not appeal to all prospects
The industry favorite of gold, silver, bronze packaging. Allows a variety of service offering to appeal to various markets. The client can choose the level of service based on their budget or requirements. The provider can cast a wider net to take on a larger variety of clients.
Flexibility of price
Easier to sell to anyone
Prospect can choose price based on budget
Cheaper options can attract less mature clients
Complexity of offering makes service level standardization tougher for provider
Low cost option could create a poor value experience for new customers
A lot of MSP businesses use the per device model in order to manage the costing for complex environments with higher number of devices. This is important to consider when environments are unstandardized and therefore noisy.
Two important things that get missed a lot in using this model.
There is a high degree of complexity in managing the correct cost for this model as devices are added and removed from the environment. Providers often neglect adjusting the contract for new devices and end up eating the cost.
The need for a complex pricing model in this scenario is usually based on the fact that the client environment is not standardized. Costs for support are much more predictable if you standardize the client stack.
Price is variable based on device adds and removals
Provider has clear sense of what devices are supported under the contract
Contract is often not adjusted when devices are added or removed
Large number of technical line items makes the costing very confusing to the client
Administrative effort to manage billing can be taxing
Per User Pricing
Per user pricing model is my preferred approach. It’s easy to quantify, easy for the client to understand, scales well, and helps frame a more comprehensive support package.
The model is similar to the device model, but instead of charging 6 different low prices for each device, you simply charge a higher price person you will support.
I’ve coached several clients through this transition from device to user based pricing and the push back is always similar, “What about all the devices?” “My clients would never pay that price, etc.” I can appreciate where this fear comes from, changing your business model is not easy, but most cases I have them calculate the cost of the client contracts on a per user price of $125-150 pre user and compare to what they are charging. In most cases the cost comes out strikingly similar. The important caveat to this model is you need to be focused on selling a full value IT stack. Time and materials clients, monitoring only, and other fractional engagement models won’t work well in this selling model.
The beauty of this model is you can build the price based on whatever costing model you like. So you can still use device based pricing calculators to figure out how much you want to charge them. The end result should be an All-In-Seat-Price (AISP) that you present to a prospect. You don’t even have to charge the same amount for each client. Some may be $125/seat, others could be $200/seat. This variability allows you to build a more flexible solution that is not confusing to the client. In cases where there are part time users, just use a full-time equivalent calculation (eg. 8 part timers equals about 4 full-time users). Avoid confusion, encourage a standardized solution stack for all the users in the environment.
Simple for client and provider
Allows flexible costing behind the scenes
Filters prospects not looking for a full value IT partner
Cost conscious prospects may not see the value provided (or is this a Pro?)
Complexity in defining what is in your stack at what price
Requires strong client stack standardization
How a Mature Price Model Benefits Your Business
Never be afraid to go up market. Grow your business by increasing the value you deliver to your clients and increase the AISP to match the value provided. Stop focusing on hours of effort and devices. Instead focus on a valuable technology solution stack for all the staff members of that client. Don’t compete on price and stop treating every opportunity the same. Very small businesses may be better off using a low cost time and materials provider. Focus your business on growing a client base slower by seeking out clients that understand the value of a full service managed service provider. Long term your business will be more successful if you focus on higher margin business. Learn to be confident to walk away from lower value business and save your time and effort for the great long term clients that appreciate the value you deliver.