One of the greatest blunders made by MSPs is charging too little for their IT services. It causes a lot of problems in the business, including an excess of IT tickets, low profit margins and no opportunities for MSP business growth. Does this sound like you?
MSP pricing is a tricky topic for many IT service providers. On one hand, you want to offer competitive prices to make your service offerings appealing. On the other, you need to run a profitable MSP business.
But, let’s make one thing clear: Lower prices don’t equate to more business. They only lead to employees being spread too thin and a business that’s barely getting by.
Learn how to calculate the best price offering for your company, and use this MSP pricing model to increase your profitability.
It’s All About Leverage
Leverage is the foundation for knowing what you should be charging customers. It’s the relationship between an hour worked and a dollar billed to your clients.
You’re trying to maximize the amount of service revenue you bring in with the minimum number of employees. The more you charge for fewer employees to work, the greater your leverage is – and the more money you earn. When you maximize your leverage, you also maximize your profit margins.
To make this happen, you have to present the right service offering at the right price. There are two numbers that signify whether you’re charging the right price for your service and operating profitably:
- AISP: What’s the average price per seat that your business supports? To determine your AISP, or all-in seat price, start with your monthly recurring revenue. Divide that number by the seats you support to get your average AISP.
- Average MRR: You also need to determine your average MRR, or monthly recurring revenue per client. Take the total amount of monthly recurring revenue you earn each month and divide it by the number of customers you support. That’s what your average customer pays your company per month, or your average MRR.
Both of these metrics have a huge impact on how you leverage your service offering and what you charge clients. Once you’ve calculated the numbers, you’ll have an idea of where to improve. You’ll know what you should be charging per seat and how much monthly recurring revenue you must achieve in order to be profitable.
What Should You Be Charging?
We see AISP prices that range anywhere from $50 to $200. That’s a huge range! So, how do you know where you fall in that range, and what should you charge your clients?
Let’s look at an example. In the chart below, both companies are supporting an average of 20 seats. But, one of them is charging $120 per seat (the right price), while the other is charging $75 per seat (the wrong price). By multiplying the AISP by the number of seats supported, you get each company’s monthly recurring revenue.
Look at the right company. With 50 clients, they’re bringing in $140,000 per month. Compare that to the $95,000 that’s brought in by the company charging the wrong price.
Which company seems the most similar to your MSP? If it’s the company charging the wrong price, imagine what you’d be able to do with the extra $45,000. That kind of money could change your company!
Need-To-Knows For Pricing Success
Here are a few additional tips to help you along your pricing journey.
- NEVER ask clients or employees how to price your service offering. They will both tell you that your prices are too high. You need to bundle the right services and charge the right price to deliver the right results.
- NEVER share your MSP pricing logic. You may be calculating many numbers or using multiple determining factors to come up with what you’re charging your clients, but they don’t need to know that. Most of the time, we don’t even discuss AISP with clients until they sign an agreement. You never want the entire sales conversation to be focused on explaining price calculations.
- NEVER underestimate the power of averages. This is how we make money. Always keep an eye on your average MRR and AISP. Monitor and adjust your goals for both as you grow.