Value Based Pricing There are 3 primary mechanisms for pricing: market pricing, Cost+ and value-based. While all 3 can be used, value-based is the only one that defines pricing based on specific customer needs and how the customer defines and leverages what is being proposed. Key Value Drivers are: service excellence, peace of mind, trust, security of data, and availability of systems and applications price. As Service Providers we must start our discovery conversations with Why why we do what we do and then How How we do what we do and last with What we do. This is essential to forcing the conversations with a customer or prospect to uncover the things that matter most to them their value drivers. Value-based pricing means that 2 identical customers can be charged 2 different prices. This isn t good or bad yet it is the result of the customer that pays more is willing to because the service addresses the value drivers they require. As consumers we value base price all the time. We knowingly pay more for products and services when our value-drivers determine things like convenience, the shopping experience, customer service, etc. support a higher price. The same mindset is true for businesses buying IT services. To price using a Value-Based model the seller must take the time to understand what pain points and related value drivers exist. If the end-user has high availability requirements based on the fact that they do commerce over the internet then the proposal must address this and the price can be higher if this issue is addressed appropriately. The same can be true for Security, mobility, collaboration, etc. Define the proposal to highlight the items that are value-drivers and connect the price to the value-drivers to help justify the price. Proposal Process Establish Confidence Probe to Uncover Value Drivers Place $ Value on Drivers Position Value Drivers as Results Identify and Communicate Comparison Simple yet Comprehensive Proposal Frank Picarello, Managed Services Executive Council, COO of TeamLogic IT
Pricing Your Managed Services Offering Based on Margin #1 What You Must Know First When pricing your managed services offering based on desired margin, you must first know the costs of each service included in the offering, your hourly cost of service delivery, approximately how much effort it will take to support a client of that size, and the profit margin you want to make on that client. #2 Understanding the Difference Between Markup and Margin To calculate your pricing you must know the difference and between profit margin and markup and then decide which methodology you will use. It is best practice to use gross profit margin because it directly tell you how much of the sales revenue or product price is actually profit. Profit margin expresses profit as a percentage of the sales price for the product. Formula Example for Desired Profit Margin of 60% with a cost of $100: $100/(1-.60) = $250 Markup is the percentage you want to add on top of costs to determine price. Formula Example for Desired Markup of 60% with a cost of $100: $100 x 1.6 = $160 #3 Things to Do When Determining and Managing Pricing Check accuracy of service costs regularly Enter service costs into your PSA Consider client circumstances Have a process for adjusting fees for client growth #4 Pitfalls to Avoid When Determining Pricing Commoditizing services and listing or pricing them individually Picking a backend price per unit randomly Underestimating costs Nickel and diming clients #5 Measure & Adjust Review individual client and overall profitability regularly Adjust costs in PSA as they change, including added services, increased payroll, etc. Compare to competitive market offerings when possible While regular review is imperative, do not micromanage the process Vince Tinnirello, Vice Chair of Executive Council, CEO of Anchor Network Solutions
Service Plan Name Service Cost Units Total BDR $200.00 1 $200.00 Cloud file backup $40.00 1 $40.00 Local desktop backup application $5.00 5 $25.00 Management NAS $21.00 1 $21.00 Cloud file sharing/sync tool $24.00 1 $24.00 Antispam $1.50 1 $1.50 Managed Firewall $65.00 1 $65.00 Antivirus $1.00 5 $5.00 RMM $1.25 5 $6.25 Remote Login tool $2.00 5 $10.00 Remote Support $65.00 1.25 $81.25 Onsite Support $65.00 1 $65.00 Total Cost for users $544.00 =SUM # of Users 5 Cost Per User $108.80 =Total cost for users /# of users Desired Profit Margin 75% Resale Price Per User $435.20 =Cost per User/ (1-Desired Profit Margin) Resale Price Bundle $2,176.00 =Resale Price Per User*# of Users Vince Tinnirello, Vice Chair of Executive Council, CEO of Anchor Network Solutions
Growth and Critical Inflection All Businesses have inflection points that occur during growth and most of these inflections points can be predicted, prepared for, and assumed in a business plan. Inflection points are typically events that can alter the trajectory of business growth. If they are managed right, the business growth is more aggressive. However, if they are managed incorrectly, the business can suffer. There are three key areas where inflection points occur in our industry: business development, operations and employees. Business Development Marketing is a strategy You must always be marketing While Marketing and Sales are separate they are linked Leverage referrals Operations Hunting vs. farming Lead Nurturing get ready! Alternative measures Acquisitions Wallet share Inflection points typically involve investment or incremental spending in which a delay in revenue occurs. Said another way, inflection points can have a business reduce margins or possibly go negative before the positive impact of growth occurs. The visual is taking a step backwards to take 2 forward. Inflection points for our industry include: Early growth technical hires( moving from 1 tech to 2 or 2 to 3), adding meaningful marketing spending that recurs month over month, adding a senior technical resource that is more of a team lead and, thus, bills at a lower %, adding a level of operational management that does not bill, adding sales resources. These are just a few and each should occur during a time of need or the result of growth. Efficiency!!!! Leverage managed services tools Segment resources 100% tracking Inspect what you expect Employees Invest in them! Hire to attributes Train to Skills Effective labor rates matter Customer Service Skills Frank Picarello, Managed Services Executive Council, COO of TeamLogic IT
5 Considerations Managed Services Contracts 5 Important Considerations for your Managed Services Contracts There are several places to go for sample Managed Service Agreements and attorneys on every corner willing to make them legal in your state. With all of the options and experts available to help, how do you know what your contracts should look like? Here are five important questions you should answer before looking for any outside assistance. #1 What do your Third Party Contracts say? Some people may consider it odd that the first item on this list is about Third Party Contracts. Just about every Managed Service Provider bundles in services that they contract from a third party. Whether it be an Anti-Virus subscription, a BDR solution, a Cloud offering or a Remote Monitoring and Remediation tool that your staff uses each of this is provided to you with a contract of some sort. When you design or update your Managed Services Contract you will want to take a careful look at all of the third party offerings that you are providing to make sure that your agreements cover you at least as well as theirs covers them. If not, a catastrophic failure that is out of your control could leave you holding the bag in a law suit. #2 What are your goals? Most people do not consider their goals when looking at their contracts. Depending on where your company is in terms of growth phase, acquisition phase, looking to sell can change your perspective on some of the terms of your contracts. Everyone likes their own contracts to be iron clad and difficult or impossible to get out of. The real question is is it worth litigating?. Most small companies cannot afford the legal cost of chasing money. Similarly, smaller contracts are not worth pursuing financially if broken. Given these two facts you may want to think about making the contracts more attractive and easier to get signed and focus on providing a service that your clients can t live without. Multi-year contracts with automatic yearly increases and 90-120 day termination clauses may prove to be more valuable to you and others. #3 How protected do you want to be? Every contract must have all of the common protections for non-disclosure, non-solicitation, limitation of liability, indemnification and the ubiquitous Force Majeure. How about what really matters, the dollars? Do you have Errors & Omissions coverage? If not, you should. If you do, have you reviewed your contracts with your carrier? Remember, Insurance is a business as well. If you provide your carrier with a reason not to pay they will certainly take advantage of it. Have your contracts reviewed by your carrier and ask them for feedback on where you might be exposed. #4 What s included and what s not included? As difficult as it can be to think of everything, that s exactly what you should try to do. You must be sure to list all covered items on your Managed Services Contract. Excluded items can be generalized into categories or specific unsupported applications. For third party applications your involvement must be described in the contract as end users will not qualify an issue before deciding who to call. #5 How do you handle exceptions? Failure to address this issue in your contracts will assure you that there will be a dispute between you and your client. Setting up the billing rules, approval procedures and response times for excluded items ahead of time will keep you and your client on the same page. More importantly, the forethought and professionalism that you will demonstrate by doing so will help keep the client happy for years to come. Steve Alexander, CEO of MSP-Ignite, Managed Service Trustmark Holder