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| Friday, 25 February 2011 22:00 |
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Taylored Comments Determining Managed Services Pricing By Josh Peterson, Senior Consultant Introduction Pricing managed services is not a science, it’s not an art. It’s simply viewing information in front of you and making a decision based on the facts. There are over twenty calculators available to you from your vendors, your competition, your friends, and yes even some that you’ve made yourself. And guess what? They are all right, even if they spit out different answers. The caveat is that they are all right for the person making the calculator and what their approach was going to be. I like to compare pricing managed services to launching a website. It would seem natural that imitating a successful website would be the right answer. If Coca-Cola has the best website for sodas and if I’m going to start any beverage company I might as well do what Coke is doing? Wrong! Coke developed a strategy based on their target market and their product offering to come up with the most appealing design and function. If I imitate that for my little company it’s going to seem “off” somehow because it doesn’t match my internal vision for my company. Same is true of pricing managed services. If I take a vendor’s calculator and start plugging in numbers they will be “off” somehow. The reason is because I don’t understand how and why the person who drew the short straw of creating the calculator came up with his formulas. As MSPs, VARs, and IT Solution Providers you get hit from every conceivable angle with a vendor trying to simplify your life and give you a formula on exactly what to do. Well, I’m here to tell you that in our experience, no cookie cutter spreadsheet is going to get you where you need to be. It’s going to take some hard work, some number crunching, and some data collection on top of having some financial goals of where you want your company to land. As we get started, please consider the following so you can decide how you need to be pricing your offering:
We are going to address each of these items directly or indirectly throughout this exercise. Let’s get started! Gather your data Step 1 You need YOUR numbers to have the best results when you price your managed services offerings! Below are the numbers you need
You can gather this information from your PSA application and your accounting package in pretty short order. Step 2 Start making a spread sheet. Make columns for the items above. Play with the numbers a little bit. Become very familiar with patterns. When you see spikes in the data, figure out why and research the anomalies. Step 3 Learn your top 20 client’s top line revenue. This is the hard step but one of the most important. Since they are your top 20 clients, we can safely deduce that they are your target client. Therefore you want more like them. Once you learn their revenue you can apply a rule of thumb that most firms will spend 4.5% of their revenue on IT. Put that information into your spreadsheet as well and see how their spending with you compares. Do additional research using resources like Gartner Group, CIO Magazine, and specific industry publications to get actual data on what they spend. 4.5% is a rule of thumb and we all know what rules of thumb are best for…measuring thumbs! Time to make some choices with what model you will use! Device Model of Pricing Using the numbers you researched and collected, you can begin seeing what you might need to charge per specific device. Simply divide the total service revenue by the number of devices your clients have. You can get very granular by calculating on a per client basis. You can also divide just by the number of servers or just by the number of workstations. If you’re saying to yourself that this will only help us maintain the same revenue, you are correct! However, you must remember that increasing top line revenue is only half the story. Through your Remote Monitoring & Management tool you will gain many efficiencies thus leading to less engineering hours and subsequently greater GROSS PROFIT which is really the name of the game here. PROs of this model
CONs of this model
Pricing this way is perfectly acceptable. It’s like the saying in the 90’s regarding computer sales; “You’ll never get fired for buying an IBM.” Likewise, you’ll never go too far wrong pricing this way! Let’s look at an alternative Per Person Model of Pricing This is not a new model by any means but it is gaining some very interesting discussion and adoption among top level MSP’s around the world. Calculating is similar to above. Take the total service revenue and divide by total number of employees that were supported. You do have that information right? At this time, the Taylor Business Group is making the recommendation that our clients utilize this method of pricing. Read the pros and cons and see if you agree? If not, TERRIFIC, you’re a critical thinker and you made an informed decision. PROs
CONs
Validate Your Decision Congratulations! You’ve followed the steps to pricing, your marketing and sales engine are humming and you’re taking on new clients as quick as you can get the contracts in front of them. Now what? This is the REST OF THE STORY. I sit with well over a hundred owners and managers every year and when I ask them the contract gross profitability I can count on 95 of them looking at me with a deer in the headlight expression. No sooner is the question out of my mouth when they have the “AHA” moment. They can’t believe that they have no idea. I don’t need to cajole them, teach them, or convince them. It is so obvious but they aren’t taught that in most of the calculators I’ve seen. THIS IS THE MOST IMPORTANT DECISION MAKING TOOL AT YOUR DISPOSAL! Here’s the formula for calculating: Gross Profit = Revenue – Cost of Services Sold Gross Profit % = Gross Profit/Revenue *100 Here’s an example: ABC Managed Services Provider sells a contract for $2,000 per month. They pay their RMM $6.00 per license and they use 15 licenses. Joe the engineer’s unburdened cost is $32 per hour. Joe was the only engineer to work on this client this month and he put in 14 hours. What is our Gross Profit %? Revenue = $2,000 Licenses - $6 * 15 = $90 Labor = $32 * 14 = $448 Gross Profit = $2000 – ($90 + $448) = $2,000 - $538 = $1462 Gross Profit % = $1462/$2000 = .731 * 100 = 73% Target = 65% In this example we passed the Gross Profit test since we are making 73% on that contract. Moving Forward
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