WHITE PAPER HOW TO SET MANAGED SERVICES PRICING BY KARL W. PALACHUK

WHITE PAPER HOW TO SET MANAGED SERVICES PRICING BY KARL W. PALACHUK

Price is what you pay. Value is what you get. Warren Buffett INTRODUCTION Whether you re moving from on-demand support to managed services or starting a new company focused on managed services, one of the most important decisions you need to make is how to set your pricing. If you look at online forums you see people quoting everything from $5 to $250 per desktop, or $10 to $150 per user. Pricing is all over the map and so are the services offered. Let s start with some basic terms. To me, managed services covers the maintenance of the operating systems and software at your clients locations. Every word in that definition is carefully chosen. It is maintenance, so it does not cover adds, moves, or changes. In other words, there is no all you can eat pricing. It also covers the operating system and software, so it does not include hardware. From the client s perspective, managed services provides fairly flat pricing. There will always be projects and little things, but the core technology expenses are predictable every month. In exchange for this, the client receives regular preventive maintenance and a higher level of reliability. KARL PALACHUK IT CONSULTANT ABOUT THE AUTHOR Karl W. Palachuk has been an IT Consultant since 1995 and is one of the pioneers of the managed services business model. He is the author of 15 books and owns a managed service business in Sacramento, CA. His books include Managed Services in a Month and The Network Documentation Workbook. Karl is a frequent trainer and speaker in the SMB Community. His popular blog can be found at SmallBizThoughts.com. He also serves on advisory panels for several hardware and software companies. As a service provider, you receive a predictable level of income (recurring revenue). In exchange for this, you are obligated to monitor client systems, apply patches on a regular basis, and fix things when they go wrong in most cases for no additional money. So the question is, how can you price your service offering so that you are guaranteed to make money given the services you are providing? This is a bit of a chicken and egg question since the profit depends in large part on the collection of services you need to deliver. Your offering (bundle) and pricing are directly related to one another. HOW TO SET MANAGED SERVICE PRICING 2

CONTENTS Introduction... 2 Start With Where You Are Now... 4 Step One: Where You Have Been... 4 Step Two: Play with Excel... 5 Step Three: Per User vs. Per Device... 6 Step Four: What are Your Bundles?... 8 Step Five: Tweak the System... 11 Some Closing Thoughts... 11 WWW.SOLARWINDSMSP.COM 3

START WITH WHERE YOU ARE NOW It takes a bit of work, but you need to start your planning with the reality of what you have been doing already. This includes both the services sold and the money collected the chicken and the egg. This work is worthwhile because you re molding your business model so that you re virtually guaranteed to be profitable. That s not going to be easy. Here s the process we re going to go through: 1. Define very clearly where you are (what you have been doing) 2. Play with some proposed pricing to get in the ballpark 3. Consider per-device and per-user pricing options 4. Define your unit bundles of services 5. Six months from now, evaluate whether changes need to be made to bundles or pricing STEP ONE: WHERE YOU HAVE BEEN? Start by running some reports to determine what you have been charging various clients. Between QuickBooks and your service board or PSA, you should be able to determine what you sold and how much you charged. From those reports, isolate the core ideal clients. After all, if you re making some changes in your business, you might as well build around the kind of clients you want. In QuickBooks, or another financial package, you should be able to run a Sales by Client Summary (or Detail) Report. If you run the detail report, you ll need to manipulate it a bit to separate hardware, software, services, and labor. Isolate what you consider to be your best clients, however you define that. You re going to structure your future pricing based on your best clients. HOW TO SET MANAGED SERVICE PRICING 4

Sales by Client Summary Jan - Dec 16 Client AB $9,000 Client CD $17,405 Client EF $20,026 Client GH $94,112 Client IJ $6,000 Client KL $111,100 Client MN $34,876 Client OP $12,556 Client QR $16,800 Client ST $23,500 Client UV $13,350 Client WX $14,200 Client YZ $24,509 Total $397,434 STEP TWO: PLAY WITH EXCEL Next, create an Excel spreadsheet that includes a very simple table with the number of servers across the top and the number of workstations down the side. Fill out this table with actual sales figures from the past year. For example, a client with one server and 25 workstations may have spent $30,000 with you last year. In a spreadsheet similar to the one below, plot out actual sales for each of your best clients. In this example, the outlined cells are input fields (I ve populated them with $60, $500, $250, and $0). As you change the proposed price for PCs, servers, and network, the total amounts charged below will change. Play with combinations of these until the numbers approximate what your clients actually paid last year. Note that you may have one or two clients who were way outside the norm last year. Ignore them for now. WWW.SOLARWINDSMSP.COM 5

STEP THREE: PER USER VS. PER DEVICE Now that you have a ballpark idea for what you should be charging perdevice, you can look at similar options to give you an idea whether you prefer to go with per-user pricing. If you ve already decided whether you re using one or the other, just run those numbers. The simple reverse-engineering looks like this, based on the clients in the table above. Client Spent Last Year (Per Device) User Per User Per Month Client AB $ 9,000 5 $150 Client CD $23,500 8 $245 Client EF $16,200 9 $150 Client GH $20,000 12 $139 Client IJ $26,100 15 $145 Client KL $28,500 18 $132 Client SE $34,400 20 $143 Client CA $32,800 25 $109 Assuming you made money on all of these clients, it looks like your sweet spot is in the range of $130 $150 per user per month. Of course, your numbers will be different! At this point you should feel okay to adjust the per-user and per-device pricing so they both seem to reflect your business. For example, let s say you come out with these proposed numbers for your offering: Per User = $150 for complicated networks; $130 for simple networks Per Device = $500 per server; $65 per workstation Under per user pricing, a client with ten users would pay somewhere between $1,300 and $1,500 per month. Under per device pricing, this client would pay $500 + ($65 x 10) = $1,150 per month. HOW TO SET MANAGED SERVICE PRICING 6

Per user pricing takes a different approach, charging a flat fee for each warm body in the client s office. Some clients will be very close to what they paid last year. Some will be charged more; some will be charged less. At this point, you can revise the numbers and take another stab at it. A few thoughts on Per User vs. Per Device pricing. Per device pricing has been the most common, historically. This pricing is based on how many servers and how many workstations you maintain. In the example above we charged $65 per workstation and $500 per server under a Platinum per device plan. Per User pricing takes a different approach, charging a flat fee for each warm body in the client s office. This approach evolved for a couple of reasons. First, many servers are being replaced with cloud services. Second, some clients have a lot of little devices that need a little attention, but you can t realistically charge for every cell phone, table, or IoT device attached to the network. In the example above, the price for Platinum service varies from $130 per user to $150 per user, depending on the average number of devices, the complexity of the network, the age of the equipment, and how easy the client is to work with. WWW.SOLARWINDSMSP.COM 7

People don t like to be sold, but they love to shop. With three tiers, they can pick the one they want. STEP FOUR: WHAT ARE YOUR BUNDLES? After lots of experience in the trenches, I highly recommend that you create a three tiered price offering. Why three tiers? I don t know. There s something magical and simple about three options. Some people want the best, whatever it is. Some want the cheapest. People don t like to be sold, but they love to shop. With three tiers they can pick the one they want. Depending on how you structure it, the option they pick will reflect where they put the focus on technical support. There has been some great research about creating tiered offerings. Basically, you start with your top level service and your entry level service. Then you create a middle service that costs almost as much as the premium, but is missing a key component or two. The result is that a few people will buy the Silver plan, everyone else will buy the Platinum plan, and no one will buy the Gold plan. We ve offered just one plan. No one wanted it because they were already happy getting great service and happy with the price. So we turned it into our Platinum plan and created the three tiered offering mentioned above. As we ve evolved, we ve used per device pricing, per user pricing, and a bundled cloud offering. In twenty years, we ve never sold a Gold plan. Anyone tempted to Gold bought Platinum instead. The best way to get started is to list all the services you provide. I think it s best to categorize these in terms of: Services on the server/domain Services on the desktop or workstation Other onsite services (network, printers, etc.) Other cloud based services (hosted email, hosted spam filtering, etc.) Note: One of the major goals for the client with managed services is to flatten their monthly IT budget. So you need to include all the things that happen only once a year or once a quarter. Bundle it all into the entire year s services and then divide by twelve. If you can be within 10% of what they paid last year, they re going to sign without any questions. HOW TO SET MANAGED SERVICE PRICING 8

The important thing is that you price your bundle so you can t lose money. Start by throwing everything you can into the Platinum offering. This might include: Free remote labor for maintenance (Note: Excludes projects and add/ move/change) Quarterly business review meetings Remote monitoring Patch management Service board/ticketing system Monthly maintenance of servers Access to emergency help line Three hours labor toward installation of new PCs/Laptops Antivirus Spam filtering Microsoft Office (365) licenses Management of network equipment (routers, switches, printers) Two hours of in-house training per quarter Mobile device management Of course you should also throw in anything you specialize in, such as hosted VOIP, security cameras, signage, and so forth. Adjust prices accordingly. WWW.SOLARWINDSMSP.COM 9

Once you ve defined the big package of everything, you ve got your Platinum service offering. Let s say this is about $140 per user per month. Next you need to define your Silver offering. Remember that Silver is super basic. It might be monitoring only (no labor, no spam filtering, no antivirus, etc.). Or it could cover just servers and not workstations. Basic, basic, basic. Silver pricing can be at a huge discount. For the per device model, it might be $350/month for servers and cover nothing on workstations, network, etc. In a per user model it might be $30/month for basic monitoring and patch management with no labor included. Next you define your Gold offering. It should have a lot of the Platinum offering, but not everything. For example, you might exclude Microsoft Office, network equipment, training, and the free labor with new machines. Now price it very close to the Platinum price, maybe $125/user instead of $140. On a ten user network, the difference between Gold and Platinum in this example is $150/month. That s small enough that everyone will simply buy the Platinum and feel good about it. HOW TO SET MANAGED SERVICE PRICING 10

Decide whether you re going to price per user or per device. Look at the whole picture and verify that you feel good about it. STEP FIVE: TWEAK THE SYSTEM Once you ve taken all of this into consideration, go through the first four steps again. Re-evaluate your clients. Re-examine pricing options. Verify that your bundles are different enough and definitely profitable. Decide whether you re going to price per user or per device. Look at the whole picture and verify that you feel good about it. Now deploy it. There may be a lot of work up front, so don t freak out if implementation takes more labor than you had hoped. That s part of your investment in a client base that will never leave you. Six months from now, evaluate whether changes need to be made to bundles or pricing. As a rule, I encourage you to adjust your prices up every January. Consider whether that will be nominal ($5) or a major bump because you were way off base in your estimates of profitability. SOME CLOSING THOUGHTS Overhauling your entire business and your prices IS a major undertaking. Go through it carefully. Be as precise as you can. Create as much value as you can with your Platinum bundle. Literally throw in everything you can think of so that you almost never have to send supplemental invoices. It sounds a bit corny, but you should absolutely love your business when you re done with this process. You ve defined your favorite clients. You ve designed an entire business around making them happy. You ve bundled things together so you can t lose money. You have literally married your clients to your business with a well-crafted service offering. You should feel good about that. You will also keep tweaking the system, year after year. The service offerings for small businesses keep evolving. You change over time. Your clients change over time. So you can repeat Step Five every year forever, and it will be good for business! Have fun. Dig in. Enjoy. Take your time. But DO IT! Note: All the numbers presented here are for example purposes only. You MUST generate real numbers from within your own business. If you don t have real numbers, get as close as you can. - kp WWW.SOLARWINDSMSP.COM 11

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