The Art of Pricing – a guide for MSPs

Key takeaways

1. Pricing and billing are critically important to consistently win profitable service contracts
2. Back-office processes will be tested by the demands from scaling your MSP business
3. An increased focus on cash-flow is required, particularly for channel players early in their transition
4. There is a need to balance customer choice with the need to keep operations simple and efficient
5. Good business systems are required to drive operational processes at scale

Trends driving the importance of your pricing strategy

1. Purchasing and finance departments are increasing their influence over IT investment decisions
2. The commoditisation of IT infrastructure makes it harder to differentiate with technical features alone
3. Disruption to business models and economic uncertainty creates an aversion to capital expenditure. Technology-as-a-service becomes more attractive
4. Economic moats are getting smaller, putting pressure on cash flow and long-term capital investment. Flexibility is king.

You must have a competitive solution in place or your competitors will. We all know once someone else is running the infrastructure of your client, you have lost control.

When I first started out in the channel we operated a standard VAR model and as a result the pricing strategy was straightforward.  Building loyalty with clients enabled us to maximise gross margins by ensuring revenues exceeded the costs of goods. Maximising net profits was done in the most efficient manner by paying close attention to overheads.

Our accounts team had a simple job to collect monies as quickly as possible and pay suppliers. Consequently revenues could be recognised almost immediately. On the balance sheet we had little if any, deferred income liability. Therefore, a small back office team with off-the-shelf finance tools could handle the workload.

Building competitive solutions in data protection

The pricing strategy we needed to compete as a service provider had a much greater impact on our business. As a result, it consumed a growing amount of management time as our business model evolved.

As a pure-play data protection and backup service provider here are some of the things we considered when building our pricing model:

Pricing Metric

for backup and recovery-as-a-service we considered the following:

• Capacity stored
• Server or client count
• Data transferred
• Volume of backup schedules
• Restore requests

Invoicing frequency

• Monthly billing in arrears
• Annual in advance, with or without periodic true-ups
• Fixed or variable

Portfolio choice

We found that a service catalogue made our offering more attractive in the market by introducing several service level tiers. Operationally this meant different levels of customer response time depending on workload type or different hours of cover. Later, we brought in the use of higher performing storage classes for critical systems. This all had to be linked to the pricing model thereby increasing the complexity of our portfolio pricing.

Contract terms and pricing

We found pricing was significantly impacted by contract terms. For example, the length of the contracted period or the cancellation terms could trigger a complete re-think of our model.

If you plan to sell one or two contracts you can survive without investment in management systems. The challenge comes if you want to scale across tens, or hundreds, of clients.

Executing a well-designed pricing strategy should have a positive impact in the following areas:

1. Ensuring timely and accurate customer invoicing
2. Minimising time spent self-auditing for technology partners or suppliers
3. Calculating margins and paying commissions to sales staff or reseller partners
4. Easier filing of accounts, cash flow management and revenue recognition
5. Managing contract renewals

Whether you plan to offer a full-opex service or a basic managed model, allocating sufficient time to your pricing strategy will help you stay competitive and profitable.