Have you ever wondered why you’re not making enough money on fixed fee contracts? How can all of these other companies be profitable when you’re chasing every nickel? I hear this frequently in the Peer Groups and other places I talk to MSPs.

You MUST price your managed services offering for profit. So, how do you know if your offering is profitable? How do you fix it if it’s not profitable?  Building your offering with margin built in is critical for the long term viability of your business.  I’ll be talking about both on today’s ramble.

Stop Underpricing your Managed Service Agreements!

I’ve talked to a number of MSPs in my travels about their pricing. Most set their pricing at whatever dollar amount they thought they could charge and went with it.  When we dig into their books I often find that their agreements are wildly under priced.

For example: I was working with an MSP that found that they had trouble charging more than $99 per user. That’s the price they set once upon a time, and couldn’t figure out how to bring the price up and sell the value of their offering to match a higher price per user count.

The problem was that the $99 per user price included their tools like antivirus/EDR, SPAM Filtering, and several additional services BEFORE the support costs were considered. That rate couldn’t even get close to their support costs. The average tickets per user at that MSP was solidly around 1 per month, and the average time per ticket was about 0.75 hours each ticket. That means that every user required 0.75 hours per month on average. Factoring in the hourly rate of $150 per hour they needed to charge $112.50 just to essentially hit support margin targets.

Before we get started, it’s smart to have a decent handle on your MSP Finances. I have a post that walks you through MSP Finance 101 should that be helpful.

How do you price agreements with margin baked in?

The first thing you need to understand here is your Costs of Goods Sold (or COGS for short). You must know how much each user/workstation/server/network device/etc., costs YOU to support. There are a couple of components here though: You have stack/cloud COGS and you have support COGS.

Cloud/Stack COGS

It’s easiest to start with the different components of your monthly stack for your clients. Take all of the components that you charge monthly for. In this case I’m talking about SPAM Filter, Backup, EDR, Security Awareness Training, and those sorts of things. Basically all of your cloud stuff. Map out the COST to you to provide those products on a per user/device basis.

Once you have the COGS figured out you need to mark up the products at a reasonable amount. It’s not unheard of to mark it up 100% which gives you a 50% margin on the products. You can fine tune this, but this is a decent place to start.

Add all the marked up numbers together and this becomes your Cloud/Stack Revenue for your package pricing.

Service COGS

The slightly trickier part is on the Service side. I recommend working to figure out the expected hours per endpoint/device. If you and your staff log all of their time this is fairly easy, but if not you’ll have to make some educated guesses.

First, let’s talk about the time information you will need to capture. Look at the following data:

  1. Support time including triage and service manager time spent on tickets and client issues
  2. NOC time spent on actionable tickets
  3. Account management / Business Review meeting time

You are looking for the time spent by a human to support this client. If you use a PSA you probably have the data all you need. Simply output a report from your PSA for a month (or a few months) that includes total time spent. Then divide that by the number of endpoints you support. If you included multiple months of hour data, divide the number by the number of months worth of data you’re using and you’re pretty close to the number. Make sure to use all human logged time even if the tickets are on a NOC or proactive board. That’s all time you spend supporting your clients’ machines. Also, include Account Manager time for things like business review meetings and that sort of thing too.

The math looks like the following:
Total Time Spent in Hours / Number of Endpoints / Number of Months = Time per Endpoint per Month

If you don’t have the data you will have to make some assumptions. Look at the number of tickets, how busy your techs were and you will have to simply draw a line in the sand and make a decision on what you expect time per endpoint per month to be. It’s probably between 0.5 and 1.5 hours per endpoint per month.  Lean on the higher side of this to be safe. You’re going to be making an educated guess, so you will want to leave yourself some wiggle room and continually review this moving forward.

It also might be a good time for you to start accurately logging your time. This will help you validate the price you’re charging.

In either case you now have a number that signifies the hours per endpoint per month. Take this number and multiply it by your hourly rate. This becomes the service side of your package.

Putting it Together

This part is easy. Take the number from the Cloud/Stack section and the number from the Service section and add them together. You should plan to charge this much or more on a per device basis.

I like to round to the nearest number that makes sense. If you end up with $143 I might round up to $150. If I was at $164 I might go to $175.

Sell the Value

This is where the awareness around your value comes in. You need to be able to sell your services at this price. Prospects won’t be convinced by talking about how your techs are smarter or faster. You won’t get there by talking about how awesome your stack is. And most importantly, you won’t get there if YOU don’t believe that your services are worth that price. You must get there. Think about the benefits your clients receive by doing business with you. Think about how you help reduce their risk, how you can help their business improve by using technology, and how you can make their people be more efficient with their time.

If you behave like a commodity service provider you will be forever stuck in commodity pricing. This is a race to the bottom. You do NOT want that.

So, price your offering smartly by accounting for margin on both the stack side of things and on the service side of the equation. Then make sure you can sell the value of the service you bring forth!

With that, thanks for coming on this week’s ramble. I hope to see you on the next one.

By Adam

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