Channel Pro - January2010

MANAGED
SERVICES
PRICINg
LIke tHe PRoS

Setting prices for managed services needn’t be an ordeal, experts say,
if you follow this advice. by rich freeman

MOST NEWCOMERS to managed ser- vices struggle with price-setting. Adam Steinhoff found it easy. “It was probably a little too easy,” chuckles Steinhoff, who is president and CEO of DedicatedIT, a managed services provider in West Palm Beach, Fla. He just arbitrarily chose figures that sounded low enough to attract customers but high enough to earn a profit.

“PrICInG ShOuLd be baSed
On aCTuaL faCTS.”
DAVID SCHAFRAN, PRESIDENt
tRANSFORMAtION StRAtEGIES INC.

“Unfortunately, the first part was true [but] the second part was not,” he says.

Locked into money-losing contracts with his first wave of clients and eager to stop the bleeding, Steinhoff reached out for advice to peers, customers, and anyone else he could think of who had experience with recurring fees. He learned how to gauge his costs more accurately by including expenses like sales commissions that he hadn’t considered before. He replaced his one-size-fits-all pricing scheme with a tiered rate structure. And every three to six months, he refined it.

It took three years, but Steinhoff ultimately
arrived at the right set of numbers. “I think
we’ve finally got it nailed down,” he says. “Our
profitability per contract is very good.”
Steinhoff’s story is anything but unique.
In fact, most managed service providers
(MSPs) tell similar tales of anxious trial and
expensive error. But setting prices for man-
aged services needn’t involve hair-pulling or
guesswork if you know how to go about it.

CaLCuLa TInG COSTS Though managed service pricing strategies vary widely, most fall into one of two broad categories. Call them the bottom-up and top-down approaches. Bottom-up approaches focus on rigorous analysis of what services cost to deliver. Top-down approaches emphasize a more intuitive assessment of what customers are willing to pay.

Count David Schafran among the bottom-up guys. Schafran is president of Transformation Strategies Inc., a managed services consulting firm headquartered in New York. “Pricing should be based on actual facts,” he says. Start by measuring your labor costs, he advises, including salary and benefits. Then factor in overhead expenses such as marketing, rent, and license fees for your monitoring software. MSPs often neglect that part and end up undercharging, Schafran observes.

Be sure to think long term too, counsels Len DiCostanzo, senior vice president of professional services and business optimization at Autotask Corp., the East Greenbush, N. Y.-based maker of professional services automation software. Will you be hiring more technicians in a few months? Will you be moving to a bigger office? If so, build that into your cost estimates now, so you don’t dilute margins later. “Managed service pricing is a lot of forecasting,” DiCostanzo says.

Once you know your labor costs, DiCostanzo continues, make a list of your services and break them down into individual tasks, such as setting up a desktop or patching a server. Then figure out how much time you spend on average completing each task. Take an hourly share of your labor expenses, multiply it by the hours you devote to each task, and you’ve calculated your costs.