Strong value pricing trend
The fourth annual Kaseya MSP Customer Pricing Survey was conducted in September and October last year and it attracted almost 700 responses from MSPs around the world. One of the strongest results to come out of the survey is the significant movement towards value-based managed services pricing and away from cost-based or market-based pricing. The chart below contrasts the differences between the 2013 MSP pricing survey results and the more recent responses. the trend towards value-based pricing is clear. The results support the notion that managed services customers are increasingly interested in business value and linking their purchases to key performance indicators (KPIs), such as system availability, or performance levels, or business outcomes.
High growth MSPs favor value-based pricing
The survey results also show that higher growth MSPs, i.e. those growing at double digit annual growth rates, predominantly adopt value-based pricing strategies. In contrast, MSPs experiencing lower rates of growth are much more likely to adopt cost-based or market-match pricing strategies.
The plain fact is, while every purchaser wants to make sure they pay the lowest price for a commodity, most business decision makers elevate value over price when purchasing products or services for their (especially their own) business. In particular, small and medium businesses are much more concerned about buying from a trustworthy service provider with skills and expertise beyond what they have in house. Training and skills development budgets have been slashed in recent years while at the same time information technology has become both more important and more complex. This has made it more difficult for them to maintain and optimize their IT environments. Only when they perceive services as commodities do they attach low values and become more concerned about price. Consequently it’s important for MSP to position their unique value proposition towards outcomes and business value.
Value-based pricing allows MSPs to compete on the basis of their skills and approach to managed services delivery and service levels e.g. the ability to describe how contracted SLAs and other outcomes will be delivered. Consider the pricing of a remote monitoring service. A cost-based pricing approach might result in a per-device price of $X, where X is some multiple of the cost of providing the service. Without any additional information, a client will likely see no difference between MSP A’s managed monitoring service and MSP B’s service. Both MSPs will talk about the number of prestigious clients they have and the number of devices they monitor successfully, but otherwise there’s no real differentiation. The likely outcome is that the client will chose the cheapest option.
A value-based pricing approach is designed to provide higher gross margins and prices that are reflective of the value that clients obtain from using a service. In the case of a remote monitoring service, what does the client hope to achieve by outsourcing monitoring? Certainly being able to free-up internal resources and minimize downtime; maybe to gain 24 x 7 coverage without having to resort to shift work or overtime pay; most likely to benefit from fewer employee disruptions and help desk requests created when users download untested patches or inadvertently introduce malware. Their productivity savings (both employee and technician) can be huge, and the positive financial and business impact even greater. Showing clients how a managed service will reduce disruptions and how they can be reliably delivered enables MSPs to position the price of the monitoring service against the business cost of doing nothing or of using in-house staff. Correctly done, the value provided will be an order of magnitude more than the price of the service and have a significant ROI.
Describing the processes you use, the details of your prior experience, and how your unique approach will ensure that benefits are achieved, generates trust, demonstrates differentiation and provides value even during the sales process. Seeing that value, clients are more likely to compare your capabilities and service attributes to those of your competitors than to directly compare prices. If you compare favorably they will happily pay a higher price for the additional value delivered.
Pricing MSP services for growth and profitability
These topics and much more are discussed in detail in our webinar Pricing MSP Services for Growth and Profitability. The webinar highlights the results of the Kaseya 2014 MSP Pricing Survey which was completed in September 2014.
Author: Ray Wright