Determining your billing model is a key component to setting your MSP up for profitability.
You might have been told that all-you-can-eat (AYCE) managed services plans are the only way to go if you’re a “serious” MSP. I’m here to tell you that’s not true. And in fact, AYCE contracts can seriously hurt your business if not used properly.
Let’s go through the three main options you have for billing clients and how to use each one effectively.
An all-you-can-eat services contract is the most common way to bill your clients as a managed service provider. Under this model, also known as a flat-rate plan, your clients pay a set amount of money each month in exchange for services during that same time period—no matter how many hours you actually spend serving them.
Your business’s profitability rides on your ability to set the right contract price. Contracts can offer great profit margins if you’re efficient, but you’ll find yourself breaking even or even losing money if you’re not.
Be careful with contract terms
With termed contracts, you can be locking yourself into a monthly price for two or three years at a time. So it’s critical you pre-qualify each prospective client as accurately as possible from the start.
If you massively fail a pre-qualification on an AYCE agreement in the early stages of your MSP’s development, you’ll severely stunt your upward mobility with little to no way out, short of attempting to break said contract, along with all the negative ramifications that go along with that as well.
The pre-qualification process used to define contract rates and profit margin can be hard for emerging MSPs to do well, so as you ramp your business you may want to start with more break-fix and block-time billing work to build your confidence.
You might also consider shorter fixed-term contracts or month-to-month contracts, so you’re not hobbled for years by an early mistake. (Sean Vojtasko, executive VP at BlueWave Computing, swears by a month-to-month strategy as a way to acquire—and keep—happy customers.)
Keep an eye on contract profitability
After the contract is signed, you’ll want to meticulously track all the time you spend serving the client so you can stay on top of whether your contract is maintaining its profitability.
MSP operations consultant Rex Frank calls this your agreement efficiency ratio. He considers a 1.25 ratio to be best, meaning you do $800 of work for every $1,000 billed.
TIP! Spending some time upfront on defining useful scripts for your MSP can pay off handsomely in helping to keep your agreement efficiency ratio in a good spot.
Calculate an appropriate contract rate
OK, so you’re going to offer your clients an AYCE plan. But how do you figure out the appropriate amount for their monthly rate?
You obviously want something that covers all your time to serve the client and includes a healthy profit margin as well.
There are three common ways to arrive at a monthly number: by charging per device, per user, and using a hybrid of the two.
Charging per device
Charging per device makes sense when you have a high ratio of users to devices, such as at a school or hospital, according to MSP consultant Nigel Moore in his book Package Price Profit.
Charging per user
For clients where the number of users is similar to the number of endpoint devices then per user pricing is likely your best bet, says Nigel.
If you go this route, you’ll need to factor in costs to maintain infrastructure devices—which aren’t tied to individual users—into the per user amount.
Using a hybrid per device / per user model
Nigel recommends a hybrid billing model. In this model, you’d price per device for core infrastructure such as firewalls and servers, and per user for everything else.
Hybrid billing is highly scalable, easy-to-quote, and suitable for all types of clients. Most importantly, you avoid squeezing your profits as your clients grow because your bases are well-covered.
Don’t be afraid to add multipliers
If you see something—anything—that leads you to believe a customer you’re pre-qualifying for a contract will consume an abnormal amount of your hourly resources, will become overly needy, or might refuse to update hardware when it’s required (like outdated operating systems), then you have to account for this when coming up with your contract rate.
The notion that all customers are created equal is quite simply a fallacy. They’re not, and they never will be. Competencies vary. Hardware varies. Risks vary. In fact, there are times where it makes more sense to walk away from a prospect than it does to close them at unfavorable rates.
As difficult as it may be to walk away from money, it’s crucial to ensure you’re getting the most value possible for the finite amount of hourly assets you have for sale. If someone called you on the phone and asked you to send a tech out to fix their problem at $50 an hour, would you? If the answer is no, then don’t fall into the trap of repeating that here.
If you feel you might be spending 25% more time with Customer A than you would be with Customer B when everything else feels relatively identical, then you want to consider adding that as a multiple to your contract price. Consider charging them 1.25 times what you’d charge Customer B if all other conditions were equal.
Typically, multiples range from 1.1 to 1.5 of what your initial scoping tells you will be required. You’ll undoubtedly close fewer contracts as a result, but you’ll be ensuring you aren’t tempted into signing contracts that wind up equating to extremely unfavorable rates. Multiples ensure you’re fairly compensated for variables the standard per-device or per-user pricing models will fail to expose.
Hourly billing is how break-fix services are charged. Customers come to you with requests, and you charge for the time it takes to complete.
Many people will say your business should be on nothing but monthly service contracts if you want to be a “true” MSP. But even within a managed service provider business, there’s room for hourly billing.
In fact, there are two scenarios when hourly billing is especially beneficial: with needy clients and new technicians.
The more needy and liability-prone any given contract customer is, the more likely your time will collide with some other contract customer’s allotment of hours.
Collisions can be quite dangerous. If through sheer bad luck several collide at the same time, you could potentially breach an SLA because you’re dealing with too many emergencies at once.
Hourly work rarely, if ever, can collide with contract work, or other hourly work for that matter. You always want to have a subset of time allocated to hourly work for exactly this reason.
Hourly billing allows you to test out new techs without worrying about a lemon ruining a relationship with a longtime contract customer. Starting them off with low-liability jobs is a great way to test their capacity to deal with and solve customer problems before setting them free on your core revenue generators.
For these reasons, I always recommend reserving at least some time in your business for hourly work.
A block-hour billing model charges clients for a set number of discounted hours each month. Every time the client contacts you for support, they use up time from their block of hours.
Block-hour contracts are an MSP’s best friend. You’ll learn everything you need to know about closing deals, pre-qualifying customers, and negotiation strategies through block-hour contracts alone.
Mike Herrington, vice president of sales and marketing at i.t.NOW. agrees. “You really can’t lose because the client pays for every hour spent. If they go over their block of hours, you bill them more. It is a great model for clients where you have a significant amount of uncertainty about the amount of time it will take to support their network.”
Block hours can be great for clients too, who set their budget according to their needs and monitor their usage based on the available hours.
TIP! If your business is largely break-fix and you’d like to start transitioning clients to managed services, block-hour agreements can be a great way to do it, notes MSP consultant Richard Tubb.
Time tracking is everything
Regardless of the billing model you end up using, one thing is certain when it comes to maintaining profitability: tracking your time is critical. Your only true MSP business asset is your time. It’s the only item you have worth selling, and you can’t realistically create more.
So log anything and everything you do as a ticket, even if it’s just you in the business.
If you have internal tasks to complete, create yourself as a customer in your PSA and open up tickets against yourself. If you know you have fifty things left to do, log them all. Treat them like legit tickets. Make notes. Add time as you go, and resolve them when you complete the work.
As you’re doing this be sure to spend some time classifying proper internal ticket categories that you can define when opening tickets on your own behalf. This way you can use your platform’s native reporting system to see exactly how much time you spent on any given subset of tasks.
Make no mistake about it, properly accounting for time and maximizing the value you’re generating from is the difference between hiring your next technician in the next three to six months and hiring your next technician in the next two to three years. There is nothing that will have a greater impact on your business. Nothing.