After more than two years of pandemic-induced economic turmoil, the world is now facing surging inflation. Globally, economists are anticipating a strong recession by mid-2023. In some places, recession has already arrived.
In your MSP, you’re almost surely 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.
I’m going to guess any rise you’ve seen in hardware costs is already being passed along to clients. But what about softer costs? Is it time to raise prices on your services to keep pace with inflation?
The answer is almost certainly yes.
“Many economists fear that inflation will be more persistent than originally anticipated,” Oracle’s Megan O’Brien points out in a blog post. Over time, some things, like energy bills, may come back down but other expenses, like wages, probably won’t.
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 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.
Failing to increase prices in response to market pressures can lead to “getting disrupted and becoming obsolete,” he says.
When should your MSP raise prices?
Following Cespedes’ advice, you’ll want to be thinking 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 your MSP 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.)
Average MSP gross service margins tend to sit between 40 and 60%, with top MSPs achieving 70% or higher. If your margin is under 50%, your first step is to see whether you can get it over that threshold with a reasonable increase.
If you’re already over 60%, how does your current margin stack up to what it was 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.
Kris Blackmon points out that you also have a lot of variables to work with. “Try raising rates only on the services that give you the smallest margins, so you can increase profit on activities that cost you time without getting you much revenue,” she says. “Or, raise rates only on your most popular services—since you sell those most, an increase will have a happy impact on the bottom line.”
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.
(The silver lining in the economic downturn is that more companies are planning to outsource their IT to MSPs in 2023.)
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.
Emphasize that the reason behind the increase is due to your increased cost of doing business. Remember that while no customer loves paying more, they’ll certainly believe it’s fair if you show them why.
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 understand the value your MSP provides to their particular business and remind them of that during the conversation.
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.