Top 3 cloud Managed Service Providers (MSP) pricing models

Re-curing revenue is the main differentiating factor between managed services and other business models in the IT solutions provide space. IT solutions providers typically pursue a break/fix model, where their services are priced on a material and time basis; for example, billing an hourly rate for repairing their client’s equipment then charging for replacement gear. Providers that perform project work such as computer systems integration and installation are able to charge a fixed price for services and products. In general, conventional IT solutions providers are able to generate revenue on one-time basis from every project they complete because the nature of their business is mainly transactional.

A managed service providers revenue stream has the potential to create a more stable and predictable business base. The prospect of a steady revenue stream is attracting multiple traditional solutions providers, like value-added re-sellers, to the MSP business model. However, it’s not all rainbows and daisies on the other side. An MSP business model demands the adoption of varying performance metrics, infrastructure components, sales compensation plans and technology infrastructure, among other real challenges. Gartner recently predicted the twenty percent of MSPs would fail. The key to succeeding in the space boils down to pricing models.

Know your Offering – Then Price it Accordingly

MSPs typically rationalize their service offerings. In an attempt to seem unique and competitive, they provide clients with highly customized packages. While this may be beneficial to clients, the approach is simply too bespoke and may end up hurting the business in the long-run. The biggest mistake providers make is placing their focus on getting a clients business instead of managing cost and expectations. In the end, clients begin complaining because the provider can’t deliver on their promises or boost their revenue, forcing the MSP to struggle to support their requirements.
Its important for MSPs to understand that the customers themselves are not sure about what they want. The responsibility therefore falls on the provider to develop a workable solution that is both profitable and beneficial to the client. That’s why its crucial to define the cost upfront and provide a package. The moment the customer clearly understands what they are receiving and at what cost, it becomes easier to make a profit. Based on the costs associated with services the business provides, pricing can dramatically vary, and getting it right is dependent on formula-driven, proven, well-researched MSP pricing models, coupled with a carefully curated array of services. The goal of a well established pricing model should not only be to maximize profits but also meet the client’s requirements by understanding how much they are willing to spend. The impact IT services will have on the customer’s business – whether due to competition, regulation or industry type – will play a huge part in their willingness to work with a managed services provider, and should therefore be factored into establishing a good pricing strategy.

I. Per-User

Per-user MSP pricing models share a lot with per-device pricing, with the main difference being that the fixed-price is billed per user on a subscription basis and includes all the devices used by each user. It is extremely attractive to clients because its easy to understand and gives them a predictable IT service cost, which keeps Service Level Agreements (SLA) simplified. The pricing model is ideal for companies who have employees that have to remain connected 24/7 by multiple devices. The account for multiple devices can easily be adjusted, while service delivery remains unchanged.

II. Tiered

This pricing model involves building multiple bundled services or packages with every increasingly more expensive package offering more services to the client. For example, a tier one package may include basic remote and phone support for an entry-level fee while a higher priced second tier package includes on-site visits, on top of the remote and phone support. There are numerous ways an MSP can choose to tier their services. They can differ based on the number of devices or priority of level of support. Organizations with a need for zero downtime may choose higher tiers so that they don’t have to worry about waiting for service desk help. When structuring a tiered model, it is crucial for MSPs to note that too many choices can stall or slow a clients decision; and most clients will automatically opt got the lowest-cost option.

III. A La Carte

A La Carte, which provides flexible customization options that are geared towards optimizing a solution for the client. Most MSPs who use this model resort to marking-up prices in order to achieve a profit margin. As mentioned above, there is trade-off for the freedom this package provides. It is the hardest to sell and the hardest to sustain profitability. Clients are bombarded with a superfluity of options that may or may not be relevant to their specific environment. Writing up a service level agreement for this pricing model may also be unnecessarily time-consuming to both parties.

Another viable MSP pricing model includes monitoring only, which offers a bare minimum approach to managed services. The provider only remotely monitors specific aspects of the customer’s IT infrastructure.

Author: Gabriel Lando