MSPs finally appear to be gaining some pricing leverage

Posted by Mike Vizard on Jan 31, 2017 9:48:22 AM

MSP pricing.jpegValue is one of those things that’s usually in the eye of the customer who beholds it. Managed service providers have long complained that competition over pricing for their services has been so fierce it’s difficult to turn a profit.

But a recent survey of more than 900 MSPs conducted by Kaseya suggests that MSPs that experienced the most growth in the past year increased prices for their services. Specifically, the survey finds that half the MSPs that saw revenue increases of 10 percent or more last year found ways to increase pricing for their services despite the level of competition they face.

A big factor in that shift is the fact that more MSPs than ever appear to be relying on value-based pricing models. A full 64 percent of the MSPs surveyed said they are basing their pricing on the perceived value of their services to the customer, as opposed to 24 percent that are relying on a cost-based model, which all too often winds up being less profitable. By combining value-based pricing with more focus on mid-market customers, 57 percent of the MSPs also reported that the average size of a monthly contract is now well north of $1,000.

Customer cost considerations

Most end customers know what it costs to acquire a specific set of technologies. What most MSPs don’t have enough insight into is what it costs an internal IT organization to manage those technologies. Companies are always under pressure to keep a lid on the number of full-time employees they hire. The IT staff is often viewed more as a cost of doing business, so however many full-time employees an organization can afford are allocated to whatever good or service that organization delivers. Unless IT is core to the delivery of that good or service, there’s a natural inclination to rely more on an external service that doesn’t require the organization to add another full-time employee.
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The rise of cloud computing has further amplified that inclination. More senior business executives than ever want to be able to treat IT as an operating expense by employing cloud services that in terms of cost can scale up and down as needed. In addition, if IT is delivered as a service the cost of those services winds up being a tax write-off. There are still organizations that prefer to treat IT as a capital expense. But in the era of the cloud, there are more organizations moving toward the operating expense model with each passing day.

Responding to an opportunity

Naturally, the willingness of customers to haggle over pricing will vary by market. But with more customers looking to employ managed services, there’s going to be a positive impact on a supply versus demand equation in favor of the MSP. That’s especially true when it comes to services involving technologies such as security where the amount of expertise available is severely constrained.

In addition, MSPs appear to also be getting savvier at bundling multiple services in ways that make the customer less inclined to drive down the price of any one specific service at the expense of the profitability of the MSP. Put it all together, and more MSPs than ever have the financial wherewithal to walk away from unprofitable deals.

Of course, the ability to take advantage of what appears to be a significant shift in how managed services are consumed may only be a moment in time. So MSPs should seize the moment while they still can.

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Topics: IT Services Trends

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