How to Raise Prices in Your MSP to Keep Up With Inflation

It’s been nearly four years since the pandemic shut the world down and turned the global economy on its head. Since then, business owners across the world and every industry have faced their fair share of ups and downs, including both a recession and the subsequent economic boom (and turbulence) that led to surging inflation rates.

While things seem to be back on more solid footing today, the looming cloud of another potential recession and inflation spike remains.

At the end of the day, most MSPs—and the customers they serve—are small businesses. People trying to make a living, put food on the table and transform their passions into professions.

That can make it tricky to find the perfect balance between pricing that’s fair and balanced while still allowing for healthy margins and growth. Add in some unexpected spikes in inflation and macroeconomic uncertainty, and it becomes difficult to know if what you’re charging is correct—and even harder to determine how and when to raise your prices.

When should your MSP raise prices?

As an MSP, you’re likely staring down cost increases for the hardware and software you supply to clients, the software and services you use to run your business, and perhaps most significantly, the wages you pay.

That means, to maintain your margins in a largely service-based business, you’ll need to raise prices at some point, and putting it off for too long can hurt your business in a big way.

“Pricing affects the bottom line—usually faster and deeper than almost any other business action. You have to make those decisions [about whether or not to raise prices] quickly while still moving forward,” Frank V. Cespedes, tells Oracle. Cespedes is a senior lecturer at Harvard Business School and the author of six books on sales and marketing.

Following Cespedes’ advice above, you’ll want to think about pricing changes soon. Of course, that gets tricky for your contract clients as you won’t be able to raise prices until their guaranteed contract term comes to a close. That said, start calculating and planning for those increases now. For hourly or month-to-month clients, you can move more quickly but be sure to give everyone lots of advance notice before they see a higher bill.

How much should you raise prices?

Rerun the numbers on your business to determine your current gross service margin. (To arrive at your gross margin, subtract your service expenses from your gross services revenue to get your gross profit. Then divide your gross profit by your gross revenue.)

While the jury’s still out on average gross service margins, a few dozen MSPs weighed in on a recent Reddit thread on the topic. The general consensus? Sitting somewhere between 15 and 20% is a comfortable spot, with tip-top MSPs achieving 70% or higher.

“The leading 25 percent of MSPs are commanding 20-30 percent higher subscription prices than their peers and achieving growth and profitability levels never seen before. The bottom half of the market, by contrast, is struggling with prices and margins that are too low.” – Gary Pica, President of TruMethods

So, how does your current margin stack up to what it was pre-pandemic, or even just a year or two ago? If it’s been dwindling, now is the time to push it back up. What increase would bring it back within your desired range?

A good rule of thumb though, Textel CEO James Diel tells Chief Channel Officer Kris Blackmon, is not to raise prices by more than 20%. Higher than that and “you run a risk of shedding so many customers that you actually lose revenue or at best break even,” he says.

Should you raise prices the same for everyone?

Nothing says you have to raise your prices the same amount for every client.

Let’s face it, not all customers are created equal. Some customers are more efficient for you to serve than others. Some are less of a hassle and more open to your advice.

While you should have added a multiplier to your contract for any clients you suspected were going to take more resources when you signed them, if you ever misread a client or blew an assessment, now’s the time to even things up. Perhaps a client with a lower efficiency score gets earmarked for a slightly higher price increase.

“[It’s advisable to] raise rates only on your most popular services—since you sell those most, an increase will have a happy impact on the bottom line.” Kris Blackmon, Chief Channel Officer, JS Group

But what if I lose clients?

Consumer psychology is your friend here. According to studies, customers feel that raising prices to maintain profit is fair, but raising prices to increase profit is unfair.

So as long as the increases aren’t extreme and you carefully communicate that they’re being made due to increases in your costs of doing business, many clients will stick around.

If you do lose a few clients, don’t panic. The ones who won’t pay more don’t see the value of your service and there’s a pretty good chance they were already losing you money or causing you stress. The higher margins on the clients who stay will help buffer things a bit as you work to find new accounts.

How to communicate MSP price increases to your customers

Perhaps the most important factor in whether you’ll succeed in raising your prices without losing accounts is how you communicate the news to customers.

Give them lots of notice about the upcoming change. You’ll likely want to start with a price increase letter followed by a phone call or, if relevant, an in-person meeting. Make sure you know  the ROI and value your MSP provides  to their business and remind them of that during the conversation, while remaining transparent and empathetic of the situation Remember that while no customer loves paying more, they’ll understand and return the empathetic sentiment if you’re honest and fair.

Work with your staff, from salespeople to technicians, to ensure they also have a good grasp of the messaging around the increase. No matter who your client reaches out to, you want to make sure they’re getting a consistent and positive story.

You’ve got this

Raising prices can feel like a daunting prospect, but in inflationary times the alternative is dwindling margins. Eventually, you’ll get to a point where the business is no longer sustainable and customer service suffers—and that serves no one. So start today with a careful plan for making increases and having honest conversations with customers. You’ve got this.

Learn more about how to design, deliver, and price your services to boost ROI in our profitability webinar with Rayanne Buchianico of ABC Solutions.

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