How to set a pricing strategy that works for your business
A clear and consistent pricing strategy is vital for MSPs and VARs
A pricing strategy is the method used to price products and services so the volume sold produces a margin sufficient enough to cover operating expenses as well as enough profit to meet business goals. IT pricing strategies used to be as simple as having an hourly rate and an awareness of other products and services that can be added on, but the move to managed services has made it both more complex and more important to get pricing right.
For any VAR or MSP intending to create a sustainable revenue stream, a clear and consistent pricing strategy is crucial. Taking into account all the complexities related to managing pricing, it’s better to set standards rather than let sales teams manage it on a case-by-case basis.
But setting a pricing strategy is not always straightforward. Go with the market-driven rate and you’re playing a dangerous game. Set it too high and you risk putting off potential customers who can shop around for cheaper options. Set it too low and you could run the risk of derailing profit expectations.
A pricing structure must allow you to make a profit whilst covering the costs of the resources needed, as well as providing potential clients with an attractive service-based offering with predictable costs.
To help you navigate this tricky area and get the balance right, here are a few tips to help you determine your pricing strategy.
Use historical sales figures
The first place to start is by reviewing any historical quoting and sales data available. You’ll be able to set a successful and profitable strategy moving forward by working backwards to determine your gross margin goals.
Looking back and analysing past sales and results can also help to identify where opportunities may have been missed or to reveal patterns that can help you and the sales team learn how to manage pricing more effectively in the future.
Break it down into smaller goals
Simply setting a goal to generate more profit or sell at a higher price isn’t necessarily the best way to achieve successful and sustainable growth. Instead, breaking goals down into smaller, more achievable targets is a way of generating small but important increases in revenue. When doing this, remember to give your goals a deadline, and make them specific and measurable.
Here’s an example of some strategic points which would generate a more consistent profit margin across the year:
- Combined product and services gross margin (GM) must average 37%
- Cost of goods sold (COGS) must average 63%
- Every deal below 37% GM must be compensated with one or more above 37% GM
While these points may not be complex, they must be monitored and enforced as part of the overall pricing strategy.
Work out hourly costs
For those who have expanded beyond one-time professional services and products and into longer-term managed or cloud services, new streams of recurring revenue bring another layer of added complexity.
Recurring revenue can be a solid, steady income stream for MSPs, but the level of demand and varying pricing from clients can make margins unpredictable. In these cases, the budgeting and revenue forecasts must account for these variables to create a comprehensive pricing strategy that delivers the profit and gross margin needed.
A good place to start is by working out how much it costs to perform one hour of service. Taking into account how much your employees cost (including their wages, healthcare, paid time off and other costs), as well as your overheads such as utilities, equipment, rent and insurance, will give you a full hourly overhead cost. The profit is then added to this to give a full picture of the minimum charge per hour for your services.
Making an informed decision about pricing your services is an important part of ensuring you're earning a sustainable margin, while still providing value to your clients.
The clients that are to be targeted play a large role in determining an MSP's pricing strategy.
Once internal costs have been examined, it's best to weigh up the costs associated with particular clients. Support costs are known to widely vary from client to client depending on their specific needs. Looking at the number of users, amount of data, and the number of servers should provide a detailed picture as to what type of service the client requires, how much it will cost the MSP to provide, and how much the client can afford to pay. Types of business and vertical can also alter the scope and depth of services a client demands from an MSP.
The technology a client already has in place also plays a role. If, for instance, a client's IT infrastructure comprises difficult to maintain legacy systems, the MSP should set a higher price to reflect their own increase in cost. When a client is initially evaluated, a network assessment should be performed to reveal such obstacles, also creating an opportunity to recommend more appropriate technology.
Ultimately, you should not provide a flat fee. Instead, you should vary your rate according to the amount it costs to provide the services required. Needy clients with outdated systems cost you more, and this needs to be reflected in any price you agree.
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