Today I’m going to answer a question I get asked almost daily: What’s the most profitable way to structure my MSP pricing and packaging?
MSP pricing is one of my very favorite topics to discuss because it clearly proves how a sales-driven mindset directly impacts your bottom line, regardless of your company’s technical skillset or your capacity for differentiated specialization.
For those of you who’ve heard me speak in the past, or for those of you that have read my book which delves quite deeply into MSP pricing and packaging, you probably know exactly what I’m going to say here. For everyone else, this answer is likely going to surprise you.
Every single MSP that implements fixed pricing and packaging, and offers that up publicly, will find themselves growing at a significantly slower rate than an MSP that doesn’t.
How is that possible? Let’s take a look at how items are typically sold in a marketplace.
How consumer expectations affect MSP pricing and packaging
Every single type of paid product or service has expectations as to how their consumers are going to interpret pricing.
For example, it’s commonly accepted that if you go to your local grocery store, the price displayed is exactly what you’re going to pay regardless of how good you are at negotiating prices down. The price is what it is.
If you walk into your local jewelry store and are interested in buying an engagement ring, half the time they need to whip out a calculator before they can even tell you what that price is. Somehow that’s normal.
Think back to the last time you bought a new car. Cars have the biggest pricing stickers you’ve ever seen proudly displayed right on the window. Here, your ability to negotiate does matter, but the expectation is that even the worst negotiators in the world aren’t going to pay the price being displayed.
Services work in largely the same way. I want to have my car detailed so I call a car detailer. They ask a few questions and once those are answered my expectation is that the vendor is going to provide me with clear and concise pricing.
This kind of scenario is where a lot of MSPs find themselves getting off track right from the get-go. That’s because most MSPs start out almost exclusively handling work under a break-fix billing model. If someone calls asking what it would cost to fix any given problem, the MSP is typically expected to provide two pieces of information: the hourly rate and the estimated time it would take a technician to resolve the issue. There’s nothing wrong with that. In fact, that’s how it should be.
But many MSPs find themselves carrying that philosophy forward when trying to market their company under the managed services side of their house. There are few mistakes more catastrophic to growing an MSP than this one. Here’s why.
How fixed MSP pricing stunts your business growth
Every single customer you’ll ever encounter is unique in some way. That should change how you view them, both in terms of expected costs and expected profitability.
You’ll hear a lot of MSPs vocalizing pride in their bronze, silver, and gold packages (or something along those lines). What those plans are really telling prospective customers is that whatever their pain points are, you’re going to take them and toss them into one of three boxes. It doesn’t matter what they’re asking for specifically, their needs must conform to what you’re selling.
This is inherently backwards.
You should never form-fit your customer’s needs into a predefined box, especially because you really don’t know anything about them yet. Instead, you should form-fit your pricing to meet their needs. This is especially true because the needs they’re expressing to you over the phone or in an email are likely a fraction of their true needs, which makes predefined packages even more of a gamble.
One of the biggest misconceptions in this industry is that MSPs must, above all else, showcase as much value as humanly possible right out of the gate. We’re not going to delve too deeply into showcasing your value today, but I will say that at the very moment in time when you’re first speaking with a prospect, they couldn’t care less about the myriad of service levels you offer.
They care about your ability to sell them on the notion that you have the competency to resolve their pain points. You can’t do this when you’re focused on rifling off bullets in whatever predefined MSP package you feel you can best fit them into.
Not all customers are created equal
This spills over into the next reason why fixed MSP pricing doesn’t work, and that has to do with something called customer qualification. Again, I’m not going to delve too deeply into it now, but I am going to quickly explain how and why it matters.
If your fixed pricing dictates that every single prospect, without exception, is going to pay a set rate, you’re making the fatal mistake of assuming that all customers are created equal. They’re not, and they never will be.
Imagine for a moment you’re pitching bids for two seemingly identical offices. Each has 10 computers and 10 employees, and they’re expressing identical needs. Fixed pricing dictates your two bids will come in at the same price, regardless of how your fixed pricing is structured.
But what if during your qualification process you find that one office is filled with computer-savvy folks who can likely triage their own Tier 1 issues, while the other is filled with some of the most non-technical folks you’ve ever encountered in your life. I have no doubt you all know exactly the type of customer I’m talking about. 🙂
In what reality should those two customers be valued equally?
If you anticipate that the first office will consume roughly 10 hours a month of your technician’s time, while the other is expected to consume 20 hours a month, I’ll ask again, in what reality should those be treated equally?
You might be earning the same hard dollars per contract, but your effective rate for the second office isn’t $150 an hour (or whatever rate you’re targeting) like it would be in the first—it’s actually $75.
Think about that from a competitive perspective. Imagine if my MSP landed the first office under contract, and yours landed the second. Same contract, same work, right? Wrong. My MSP can actually close a second deal of the same size while consuming the identical amount of technician hours as your MSP, yet I’m now pulling in twice the revenue you are.
Look, I get it. In the grand scheme of things $750 may not seem like a big variance at first glance, especially when you’re first starting out. But as a sum of all the parts, if my MSP is earning $150,000 annually in labor revenue while yours is earning $75,000, while consuming the same amount of technician hours, I can theoretically hire a full-time technician due to that variance alone. That’s 40 more hours a week I’ve just bought myself in salable time. Best of luck ever catching up to me now.
Fixed MSP pricing artificially caps your revenue
The biggest downside to fixed pricing and packaging is that it creates an artificial ceiling over your head that quite simply doesn’t need to be there. I’m going to demonstrate this with a real world example that’s ripped right out of my book.
In the earliest days of my MSP I was going after any manner of clientele, even ones I had no business pursuing. My sole focus was on garnering as much firsthand knowledge as I could possibly obtain in the shortest amount of time.
One of the very first bids I made was for a small office, much like the ones we were just discussing. All of my business experience pointed to a fixed-pricing model being a huge mistake, but I’d read it enough times on virtually every MSP-centric forum or “thought leadership” piece that I had to see for myself.
This office had seven employees and seven computers, and I was initially charging $100 per. I really hadn’t settled on if that was going to be per employee or per computer at that point. Luckily, in this instance, they were the same so it didn’t matter.
While I hadn’t vocalized a price to this customer on the phone, I went in with every intention of signing them at $700 a month. This is what a fixed-pricing model would dictate.
The moment I sit down, the customer explodes into a diatribe about how their current IT provider sucks, they’re the devil, and pretty much every nasty thing you could say about someone was said. To make a long story slightly shorter, after that ended came the best piece of information you could ever hope to obtain from a prospect. They said, and I quote, “For $1,250 a month, you’d think we’d get way better service than this after being with them for years.”
Did you just say $1,250 a month? And you were paying that for years?
Now, I could pitch what I felt was superior service and response times at a whopping $550 a month cheaper than what they’d been paying for years from a clearly inferior provider—but why would I do that? In what world does that make sense?
At worst, this contract was now getting closed at $1,250 minimum. At worst.
Always be looking to maximize gains
Always know the true value of what you’re selling and never sell yourself short. Never. The opportunities we’re talking about now simply don’t exist in a fixed-pricing model.
If you aren’t sure what you’re truly worth, the answer is quite simple. I’m sure you’ve heard it a thousand times before: Your worth is whatever someone is willing to pay for your service. This story is a testament to the validity of that statement.
So let’s finish the story. If I know I can close the deal at $1,250, why would I try and close them at $1,250? My new target was $1,400.
I started to say, “You saw the level of service you were getting for $1,250, so we’re going to come in a bit more expensive than that.” Before I could even get to the $1,400 piece they blurted out, “Oh, that’s totally understandable.”
“So we’re going to come in right around $1,600.” They countered with $1,500, and we closed the deal on the spot.
This was one deal. One deal, and it closed at over twice what it would have if I had stuck with fixed pricing and that artificial ceiling hanging over my head.
Flexible pricing and packaging is the catalyst for MSP growth
Does every deal go down like that? No. But I can guarantee you that no deal will ever go down like that if you lock yourself into a fixed-pricing model. Fixed MSP pricing leaves money on the table by design.
To put it into perspective, this customer was with me all six years I operated my MSP. Even if I never once increased their rate (which I did by the way) that variance between what I would have sold them at under a fixed-pricing model, and what I did sell them at without one, was $800 a month, $9,600 annually, or $57,600 over the life of the customer.
I’ve just given you two clear examples of how one MSP could earn twice as much revenue for the same amount of consumed technician hours as another MSP.
One of the most common things you’ll hear me say over and over, and I’ll say it again here, is if you ever want to know how one MSP seems to grow so much faster than another, look no further. This is why. This is always why.
The most important thing to understand out of everything I’ve just written, is that no part of my approach required an ounce of technical acumen. This was not a complex customer. I didn’t need specialized talent to service them. I didn’t even need a decent tech to service them.
You’re going to hear me say this a lot: The MSP business isn’t won by those with the greatest technical acumen, it’s won by those with the greatest sales acumen. That’s what it means to run your MSP with a sales-driven mindset.
I want to hear from you
Hop into the Syncro Community Forums, head over to Ask Andy, and let’s discuss it further.
This is the first edition of Syncro’s new Ask Andy series. Have a question of your own? Go ahead—ask me anything about running a successful MSP by emailing me at firstname.lastname@example.org.