establishing value

8/4/2019 Establishing Value

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Establishing theValue of Your

Managed Services

A PacketTrap Networks White

Paper and Brief


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Table of Contents

Introduction........................................................................................................................ 3

Overview................................................... 3

Research the marketplace.................................................................................................. 4

Software and technology expenditures.............................................................................. 5

Personnel and administration costs.................................................................................... 6

Understand contract longevity benefits and risks................................................. 7

Tiered pricing allows multiple sales and market approaches.............................................. 7Final steps and tools for pricing managed services ............................................................. 8

Summary...................................................................................................... 9


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Introduction

When managed technology services were first introduced in the technology chann

pricing was typically set up based on previous services experience or by what the mar

could and would bear. While this scheme continues in many products and services, tgrowth of competitors and awareness is forcing many companies to rethink their strate

around pricing

Today, IT service companies considering the addition of managed services to th

portfolio of offerings may encounter multiple competitors, as well as other market forc

that will affect the pricing model they adopt. This article will provide best practices

building a pricing system for a managed services business, with emphasis on the tools a

resources used by successful MSPs in that process.

Overview

While price is a key consideration for many prospective customers, MSPs should pla

more emphasis on the value of their services rather than creating the lowest possible fe

for their customers. Providers do need to take several factors into account, including t

competitive environment, their service mix, and the sales teams ability to convey t

value of their offering to prospective clients.

As competition grows in an area or business segment, natural market forces will dr

down the average providers revenue. The solution is to build unique offerings and

superior customer experience, and set your price based on the factors that create va

for your current and potential clients.

The complicated part of the equation is discovering a balance between the prices you

for the services your organization provides and your sales teams ability to convey t

value of that service to prospective clients. If none of your customers balk at the cost, y

are likely not charging enough. Remember that no matter how crowded the market, if y

provide the right value to customers, premium prices are easier to justify.


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You can have everything in life that you want if you just give enough oth

people what they want.

Zig Ziglar

While prices may be discounted to secure a deal, companies that set their fees too hi

risk alienating some clients or being labeled pricey. When providing a superior serv

or product, organizations should be able to command a premium, but they also need

review their approach with those prospective clients they dont win. If price is listed a

frequent factor for lost business opportunities, then they need to properly evaluate t

pricing, sales and marketing strategies. In some cases, the true objection is a lack

perceived value rather than the fee structure, and enhancements on the sales a

marketing side may be the best course of action. With a number of clients, pricing wbe an issue no matter what you do, but skillful negotiation that adds value witho

reducing revenue is the best course of action.

There are several essential keys when pricing a managed services offering, includi

market research, software and technology expenditures, personnel and administrati

costs and a predetermined level of profit. While this sounds simple, experienced MS

also plan for the unforeseen issues and costs that can consume margin over time


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Research the Marketplace

The first step to establishing the pricing of your managed services offerings is to evalu

any current and prospective competitors. This research should include existing rivals

well as any potential vertical or geographic markets you may target in the future.

Determine how many providers of managed services are in your geographic area, as w

as any potential areas you wish to expand to. This is a critical step in the process of build

a marketing plan, not just pricing your services. If there are an abundance of competit

offering similar services to your potential market, you need to properly assess the r

opportunity in that market or region. Metropolitan areas with a heavy saturation

businesses will support a larger number of service providers, but pay careful attentio

the vertical market needs of these markets and how well-established the competition become.

The target market review should include:

Number of businesses in your current and potential markets Vertical markets included Identify and profile each competitor in the current and potential markets

o Companyo Geographic coverageo Services providedo Vendors utilizedo Vertical markets/specialties

Successful companies understand the needs of their customers and what they are wi

to pay for. This is no different with managed services. For example, banks and finan

institutions have application and security needs that are quite different than the typ

client, with a variety of industry and regulatory compliance issues. Each requires an exp

with specific industry knowledge and expertise in securing their networks, data stora

and applications.


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Managed Services Pricing

Competition

MarketDemand

InternalCosts

Calculate Internal Costs

Software and technology expenditures

When converting a traditional services business to a managed services model, one b

practice is to create a list of current services offered and pricing for each. This establishe

baseline for the current revenue expectations, a reference point when evaluating n

services and pricing. The MSP must break down the cost of each individual service offe

before assembling packages or programs. For example, if providing tiered levels of mana

services, calculating an accurate expenditure for each software node, agent, and lice

(per devise) is important for each level.

Another best practice prior to setting tiered prices is to determine upfront project costs a

any set up fees to be assessed. It is an accepted practice to calculate full value for th

charges, which may be discounted later on if needed to secure the contract. Its typical

best practice to show the customer the full sticker value before taking a markdownthey are aware of the normal charges and the deal they received. As long as the origi

cost was, to some extent, comparable to a rivals fee, the client will either be willingly to

the asking price, or feel they got an even greater value if a discount is made.


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Variable software costs that may vary by tiers include remote monitoring, repair an

remediation, e-mail management, IT security, data storage, and print managed service

programs. The mix of applications should be based on the needs of the target customer

as well as the ability of the MSP to supply them. New cloud-based solutions should alsbe included in this category, as the charges are typically assessed per managed devic

per month.

Fixed software costs also need to be added to pricing calculations. These are typical

one time charges, amortized by the average number of contracts the MSP expects eac

month. This is an easy process if the number of clients isnt expected to chang

(historical data), but accurate forecasting is required for new providers or when makin

significant business changes.

Personnel and administration costs

The largest cost for an MSP is their employee expense, so calculating the appropriat

man-hours for each process, and assigning the proper resource (help desk, benc

technician or engineer) to the task is critical to profitability. If the organization sets fee

based on faulty man-hour estimates, it could be extremely detrimental to th

organizations financial health.

Labor rates may vary by the category of employee, but also by the individual. Typicall

scheduled and preventive maintenance is fairly easy to calculate based on the number

devices in each contract, but unscheduled service costs can vary significantly based o

the time and resource required.

Block hours are a commonly used method to ensure time is allocated for the emergenc

repairs, and some MSPs use historical data for each type of equipment to estimate th

total man-hours to include. A rule of thumb is to consider the most commo

unscheduled repair for each device or component, and calculate the man hours require

multiplied by the highest paid employee who typically performs the service. In a sing

pricing proposal, that is the easiest way to differentiate costs by resource.

Its also important to assess the impact of automated tools on the MSPs labor cost

When preventive and proactive maintenance is performed on schedule, it is typical t

expect a reduction in unscheduled repairs.


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The benefits and risks of longer contracts

Next, you need to establish the length of the managed services contracts you w

provide, with longer agreements generally preferred by both MSPs and their customer

The extended duration benefits a provider with future income security (though n

100%) and establishes a relationship with the client.

From a customers perspective, a managed services contract allows them to project

costs over a longer period of time, making it easier to stay in budget. With the remot

monitoring and remediation, the client should experience less downtime and great

productivity. When an MSP is capable of managing a larger portion (or all) of a client

IT systems, they can not only command a larger price, but also provide more assuranc

on the technologies reliability. When the provider has long-term control of th

infrastructure (such as the servers, network and desktops) and ensures all updates a

complete, it takes risk out of their managed services contracts. This is especia

important when contracts last two years or more. The longer the length of a contrac

the greater the potential liability the provider will assume for networks, servers an

other components of the IT systems.

When an MSP is able to audit and upgrade the technology prior to any service

obligations, it creates an optimal situation for the client and provider. The customer ha

a greater assurance that their downtime will be minimized,

Estimating labor costs for providing managed services is, in summary, a matter of addin

preventive maintenance, remote and on-site remediation, and after hours emergen

support man hours.


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while employee productivity is maximized, at least from the technology perspective. Th

MSP benefits from a reduced overall cost of maintaining a healthier infrastructure, an

can enter a longer-term contract with less risk.

Inversely, the greater the duration of a managed service agreement, the larger th

opportunity to generate revenue from that client. The assurance of long-term recurrin

revenue improves the financial outlook for an MSP, allowing them to invest in addition

services, marketing, and new client acquisition. In addition to growing the value of th

overall business (secure contracts are a valued commodity), multi-year contracts giv

providers flexibility with pricing. Its less expensive to give a margin break to a custom

then recruit a new one (marketing costs) or negotiate several smaller duration contrac

over the same period. After locking in a client for multiple years, an MSP should continuto investigate lower cost and more efficient tools and processes. Most providers create

couple contract options and sell each to clients based on value propositions tailored

each, making changes in length and terms as needed.

Tiered pricing allows multiple sales and market approaches

Tiered offerings can benefit an MSPs growth, especially when new to offering manage

services. The company can start with a very basic offering, such as remote monitorin

and remediation service for a set price.


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Value of Services Length of contract

Pricing is easy to calculate (software cost plus standard labor rates for a basic technicia

and it can be a good way to start off a new client if they are reluctant to outsource the

IT.

A Fully managed or Fixed-fee managed services solution is at the opposite end

the spectrum, including on-site and remote support as part of the program. Th

premium solution would include the providers full portfolio of managed services

Labor costs are not typically capped, which leaves the MSP at risk if complex suppo

issues occur, requiring more man-hours than estimated into the contract price. T

minimize this risk, providers typically gather at least six months of well documente

historical service history from the client, if possible. Pricing this type of contract require

thorough research of the market and each potential client. At a minimum, the MS

should include a full system audit and upgrade proposal (if needed) prior to signing a

prospect to a fixed-fee managed services contract.

Final steps and tools for pricing managed services

After assessing the market and pulling together all of an MSPs costs, the final step isgenerating and validating a pricing plan. Several organizations provide resources and

tools to assist members (association fees typically required) developing a managed

services business, such as MSP Partners, MSPAlliance, and MSP University. Vendors also

offer similar support, such as PacketTrap (part of Quest Software), which supplies a no

cost pricing tool and training for registered partners.


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Whether using a spreadsheet and chalkboard, or tools designed for this specific purpo

all the information gathered needs to be validated and then calculated. Competit

prices and the services each provides should be listed in a matrix, for comparison w

the target costs of the MSP.

Some providers calculate total costs for providing a few different managed servic

portfolios, based on the needs of their target customers and the costs of t

software/services available. After completing those cost projections, its imperative

compare the costs and service levels with competitors. The length of competito

contracts should be considered, as price adjustments may need to be considered

meet the increased overhead and labor costs an MSP could incur over the lifetime o

multiple year agreement.


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Summary

When developing a pricing plan for managed services, a provider should complete

proper market assessment, including the current and potential competition. Like an

business, a proper understanding of customers and prospects is crucial to create a valu

offering, and price is the last step in the process.

When market research is complete, technology and labor costs need to be calculate

before a price structure can be completed, with time allocated to evaluate sever

offerings to determine the best fit for the business and its prospects/customers. Th

validation process typically involves signing a few clients and making changes befo

rolling it out to the masses.

For more information on the PacketTrap MSP Acceleration Process including pricin

tools, go tohttp://www.packettrap.com/partners/msp_acc.aspx

Contact PacketTrap Networks:

118 2nd

St.

San Francisco, CA 94105

[email protected] 866.697.8360

http://www.packettrap.com
http://www.packettrap.com/partners/msp_acc.aspxhttp://www.packettrap.com/partners/msp_acc.aspxhttp://www.packettrap.com/partners/msp_acc.aspxmailto:[email protected]:[email protected]://www.packettrap.com/http://www.packettrap.com/http://www.packettrap.com/mailto:[email protected]://www.packettrap.com/partners/msp_acc.aspx

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