Cloud Service Pricing
Monday, April 04th 2016 by Kirill Bensonoff
Pricing and packaging services strategically for sustainable profitability is the key to success for many MSPs. Some struggle with pricing right: charge per device or per user? Monthly fee or yearly subscription? How to scale and up-sell? How to identify upgrade opportunities? There is never a fit-it-all answer: you should always consider different models and alternatives and make a wise decision that fits your personality and business model.

Intro: IaaS pricing models

To understand pricing MSP services, we need to look at current market trends: in particular, the pricing models used by the three behemoth IaaS vendors – Amazon Web Services (AWS), Microsoft Azure and Google Cloud. We know that the “cloud” consumption model is based on usage, and cloud providers reward customers who sign up for extended periods of time with a discount – AWS has Reserved Instances, Azure provides a 5% discount for a year commitment, and Google automatically discounts pricing based on 24/7 usage.

It’s clear that the Big 3 favor a consumption based pricing approach. However, this is not the only model for setting prices. There are many other pricing models which may fit your business better.

MSP Pricing Models

1> Per device

Per device pricing is fairly simple and widely used. Pricing across servers and desktops allows MSPs to develop a flat fee for each type of device which is supported in a customer environment. For example, a basic per device pricing model may designate a flat fee of $69 per desktop, $300 per server, $30 per network printer and $100 per managed network.

This pricing model is easy to quote and illustrate costs, and it’s handy to modify the monthly prices as the customer adds or removes additional devices.

2> Per user

Similar to the per device model, billing for this model is a flat fee per end user per month and it covers support for all devices used by each end user. This model has been gaining steam – a lot of users now carry more then 1 device or use BYOD, so charging per device can be tricky. This model is not without challenges – charging a flat fee on a per user basis means that the MSP must thoroughly understand their own costs and margins. Often a professional firm such as SmartBooks can help figure out the right price, and adjust as your own costs change.

3> Fixed fee or “cake pricing”

Many MSPs favor this: the fixed fee pricing or as termed by Gary Pica, CEO TruMethods, “Chocolate cake approach”. The flat fee is about charging a flat-fee price per user, and rolling in all of your services (such as helpdesk, NOC, cloud monitoring, etc). Prices range from $25-200 per user per month.

4> Tiered

Tiered pricing model is another popular pricing models amongst MSPs. This model is premised on a bundle package with each being increasingly expensive package providing more customized services to the users. This model may not work for budget-sensitive customers as they might end up choosing a package based on its price than its value.

5> Monitoring only

Many SMBs, as well as mid and enterprise environments opt for this model wherein cost only covers network monitoring, alerting and escalation services by MSPs.

6> Á la carte pricing

This pricing model allows users to customize and offers flexibility to create optimized solutions for each client. The services in this model are sold marked up so that MSPs can have profit margins.

While this model allows users to customize and choose their services , it is the most difficult one to sell and to sustain profitability. It can be daunting for client as more choices only makes it more confusing: they may end up skipping the services they really need.

Pricing For The Clouds

How do these pricing models apply to cloud managed services? With the elastic nature of the cloud, resources such as VMs and storage can be spun up and shut down quickly. Can the per-device model work here?

Our opinion is that the billing for each VM, database, etc, in the classic per device model does not scale with the cloud. It will get very difficult tracking all of the different resources, pro-rating partial, months and billing for them.

Two models can work – fixed fee, where the MSP bills a fixed fee per each end-user in there customer’s company, or a value-add approach. The challenge with the fixed fee model is that administering different services in the cloud could get difficult, and the number of users at the customer may not increase while the number of cloud resources goes up, in which case the MSP will be doing extra work without getting paid.

The Value Add model is simple and it works – the MSP charges the customer a certain percentage of whatever the customer pays for their cloud. Lets say your customer uses AWS and pays $1,000 per month. You would add an incremental 15-25% to this for providing managed services. This is the most flexible and transparent model, and easy to administer. In addition, there are additional fees to be earned for reselling AWS, Azure, Google and other cloud services.

Bundle Your Way To Profitability

The results show that faster growing MSPs are bundling their services and limiting their bundles to a small number of tiers. The ideal scenario is to sign prospects to a basic level of service and then upsell them to a comprehensive bundle.

Whatever way you choose to price your services, one thing is certain – the most important thing is crafting an easy to understand, flexible pricing structure, which can be easily understood by your customers and by your sales people alike.
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