As you might imagine, I speak to a lot of MSPs over the course of any given day. Probably the most common question I get is “how do I price by offering?” One of the benefits of speaking to so many MSPs is that I have had a wide range of experience in discussing pricing structures. Managed service providers are all over the map when it comes to pricing. But, as I have spoken with them over the years, I’ve had an opportunity to begin to see some trends.
There are four general groupings of pricing that IT service providers tend to follow. And while there are no hard and fast rules, if you stick within one of these four groupings, then you’ll find it a lot easier to pick a price that’s suitable to the service that you’re delivering.
Each grouping has several pros and cons and it is difficult to switch from one to the other, though, not impossible. So it is best to pick the right pricing structure from the beginning if you have that option. But don’t worry if you’re already started, this article will give you an opportunity to get a birds eye view of what other managed services providers are doing. Maybe it’ll give you the motivation that you need in order to take that leap of faith and switch your business around to a model that makes more sense for you.
Network Depot, the MSP that Virtual Administrator is associated with, began with one of these pricing structures and eventually switched completely to another one. But that story is for another article :-).
So without further adieu, let’s dive in and take a look at these four pricing structures.
Like it or not, the primary pricing model available to IT service providers is the basic break fix. I know you are probably asking yourself “why start with this one?” And the answer is simple: this price is not only the easiest to understand, it is also the easiest to get started with. So it is no surprise that most MSPs can trace their roots back to a standard break fix pricing model.
Break fix, being one of the simplest pricing models available to IT service providers, provides a clear way to tie the effort that you put in with the income that you make. This direct correlation between effort and income is comforting. If you’re working, then you’re making money.
Of course break fix is more than just waiting for the phone to ring. Break fix also covers consultative work and just about any hourly charge that an IT service company can justify. Basically, if you’re billing hourly then you’re doing a basic break fix pricing model.
So what do MSPs charge for hourly work? This is one number that is hard to quantify, but I can tell you this, most managed services providers have their advertised rate and then they have the rate they actually hope to earn and it seems like the two never coincide. While the advertised rate tends to be much higher than they hope to earn per hour on a job, I think many IT service providers secretly hope that they could make that their standard rate.
Hourly rates range from $80 an hour all the way up to $400 an hour. And while there are some outliers, it would seem that the average hourly rate tends to fall around $150-$200 an hour. Of course, it is not uncommon for IT service providers to deliver several hours of free service along with the regular hourly rate. This free service often gets broken out between phone calls and other basic consultation which IT service providers have difficulty justifying charging for, even though they probably could. So that brings the total earnings down a little bit, though, if you stick to your guns you can probably make an hourly rate that’s close to your advertised rate.
The obvious pros to a break fix pricing model is that your business income is directly tied to the work that you’re doing. The more you work (for customers) the more money you make. If you set your hourly rate at the right price you can make a healthy living working as a small break fix IT Company.
But break fix brings with it a universal complaint that often drives every IT company toward some form of managed services once they get past one or two employees. The lumpy income flow causes IT companies to fluctuate violently between feast and famine. If you aren’t working than you’re making no money and that is difficult when you have expenses such as employees, a storefront, or other general business expenses.
That aside, though, if you’re a one-man shop, or just trying to get your start, hourly work can be satisfying, exciting, and easy to sell to the customer.
The biggest issue with hourly, is that it becomes difficult to switch to another pricing model once it becomes entrenched within your customer base. So, if you’re planning to get started with hourly work, make sure you have a plan B in the off chance that you reach the success that you’re hoping for :-).
Monitoring combined with hourly work
This pricing model is the most common next step for an IT company charging hourly as they make their way into managed services. Usually, the way that this goes, is that the IT Company sells their client on a small per computer charge to allow them to install a RMM tool. This small charge allows the IT Company to cover their licensing costs and maybe an hour of work or two per month to monitor the machines. But the second something goes wrong, the IT Company falls back on hourly rates.
This is usually an easy sale for loyal customers since they will appreciate not having to call the IT Company quite as often and the service feels more seamless since remote control software is often bundled. Other licenses can also be included with the software such as antivirus and anti-malware licensing. So, in a sense, it actually saves the customer some money since they’re often bundling in other software that they would normally be paying for.
Since this is kind of the first step towards managed services, the same hourly pricing usually still applies, but there is the beginning of some monthly recurring revenue (MRR) which is the lifeblood of managed services. Pricing on the monthly service tends to be per computer and usually hovers at around $20-$30 per machine. It gives the company a nice base revenue to cover some basic expenses usually revolving around licensing so they can do a better job for the clients. But it’s not quite enough for you to be able take a vacation and know that your company is going to make money while you’re away.
This model is actually a bit outdated and was a lot more popular about six or seven years ago. Most of the companies who are using this model have moved further along the spectrum to a more pure version of managed services. This is, the last semblance of break fix in a company committed to becoming a managed services provider.
Unlimited remote support with on-site break fix service
IT service providers which are in a heavy state of growth and/or who are feeling a little undermanned can often turn to this style of pricing for the services. This is the first pricing model that we have talked about that would probably fit under the actual definition of “managed services”. The basic premise is that you offer as much remote support as your client’s desire but should you need to go on-site then you’re back to a standard hourly rate. This encourages your clients to allow you to try to resolve their issues in a more efficient manner and still give you an extra boost of cash when you have to get in the car and drive somewhere.
The biggest pro to this style of pricing is that the MRR will finally be at a level that can sustain your company and allow you to do things like hire employees and rent an office (or buy one) based on your monthly revenue alone. The stability that this brings your company will be a breath of fresh air for anyone who is used to working with an hourly rate. But, it’s not so far into the realm of managed services that you disconnect your working from your revenue. Since you’re still able to go on-site and make money you can increase the revenue of your company simply by working harder which appeals to many entrepreneurs.
Obviously, once you start to get into this level of managed services, things begin to get easier for you. You now have an opportunity to do things like set up vacation time, or buy health insurance. Since you will have revenue to be able to hire help and convert your company from a one-man shop into more of an IT business.
So what does pricing look like with this style of managed services? Managed services providers offering unlimited remote support rarely charge less than $60 per machine per month. But I have found that the average tends to sit closer to $80-$100 per machine per month. Hourly rates are still the same. Although, it is not uncommon for IT service companies offering this type of pricing to include a few hours of on-site service along with the unlimited remote support.
Because this type of pricing is still a little bit on the low side is usually prudent to still charge per machine so you don’t get crushed with licensing costs. As we will see in the final pricing model, another popular way to charge clients is per user which would cover things like a desktop and a laptop with one charge. While that is possible within these price ranges is difficult to do unless you raise the price a little bit higher.
All-you-can-eat managed services
The final, and purest, managed services pricing model is an all-you-can-eat model that allows customers to receive support when they need it for one flat monthly rate. This style of pricing is less reminiscent of an IT services company and more like an insurance company. Instead of billing for the work that you’re doing, you are charging a flat monthly rate to ensure that the client’s IT infrastructure remains operational and at peak efficiency.
The primary benefit for the customer is that when everything explodes their IT budget doesn’t necessarily change. This means that they can plan a budget for IT services that is consistent and doesn’t change on a monthly basis or based on how much work you are doing for them. Obviously, the downside for you as the MSP, is that you are liable for work which you may or may not be making a profit on. So it is vital, that this service get priced out properly, or your clients will take you to the cleaners.
But, when the pricing is done right, and you’re selective about the customers that you’re working with, this style of pricing can be the most liberating thing for you as the IT Company. If you rely heavily on RMM tools and try to reduce customer service requests by handling them before they happen, you will find that you are getting paid exorbitantly and regularly. As with the previous pricing structure, the monthly revenue allows you to build a stable business and support regular expenses such as employees, vacation time, a benefits package, and other standard expenses that are difficult to handle with the lumpy income provided by break fix style services.
Including just about all types of service under one price makes it very easy to quote new clients on a price for their company. Also, because this is one of the most expensive options, it is also possible to switch from a per machine pricing model to a per user pricing model. Customers like per user pricing because it is easier for them to understand and they feel like they’re getting a deal if they have multiple computers per user.
Pricing per user tends to range anywhere from $100-$300 per person. While this may seem exorbitant, you will be able to provide better service than an internal IT department at a fraction of the cost. It is important to remind your prospects that they aren’t just hiring any IT company but they are hiring a company to operate like their own internal IT department. Since your company will operate kind of like their own personal CTO, you will be able to do more than just fix their broken computers. It is not uncommon for managed services companies following this pricing structure to include additional services such as monthly or quarterly meetings to make sure that technical requirements are being constructed and met in the companies that they work for. As an MSP you have the opportunity to come alongside your clients and be more than just an IT guy, you have the chance to share all of your technical expertise to improve their company enhance their automation and make them more profitable. This can be a huge selling point to visionary CEOs who want to take advantage of your company’s technical expertise. Just make sure you price it right :-).
As you may have guessed, my favorite pricing model is an all-you-can-eat model. The reliability that it offers to your company is unparalleled. It may not be easy to sell it to clients who are just looking for a deal but, because of that, you will attract clients that respect your time and your expertise.
Because of the consistency of your income you will be able to grow your company quickly without breaking the bank. Your company will also be worth a great deal more should you ever decide to sell it since you will be able to prove monthly income and show consistency in your revenue.
Since you will be able to bring on additional employees you will also be able to do things like take a vacation every once in a while :-).
It is not easy converting a break fix company into a pure all-you-can-eat managed services company. It will take a great deal of dedication and you may find yourself firing clients who you have worked with for years because they can’t afford/don’t want to pay the pricing that you’re asking for. Make sure you understand the transition and what it means to your company before you try to go through with it. You may find that one of the other pricing models that I discussed such as an unlimited remote support with break fix on-site service is more reasonable and easier for your customers to swallow.
One thing I can tell you is that if you decide to make the transition to an all-you-can-eat managed services style of contract you are going to have to stop doing hourly-based work otherwise you will not attract the type of customer that you want.
Hopefully, this guide has been useful to you, and you now have a greater understanding of some of the pricing models that are out there. It would be awesome, and helpful to other MSPs reading this article, if you would take the time and list out your general pricing structure in the comments below this article. If there is one thing that is consistent across all managed services providers is that there are no two MSPs that are exactly the same. The numbers that I gave above are fairly generalized and are based on information that I’ve gathered over the course of four or five years and talking to well over 1000 managed services providers. But it would not surprise me if there is a completely new model or a new take on one of the models listed above posted in the comments. So take some time and share with the community what you’re doing because it will probably help another MSP become successful, and you may find something to help you become more successful as well :-).