How to explain managed services pricing to customers

The managed services model is better -- and more lucrative -- than the break/fix model because it represents an alignment between your goals and your customers' goals.

When you run an IT services company that operates under the break/fix model, your most profitable customers are the ones who "break a lot" -- but not so much that they want to fire you. The break/fix model has a fundamental flaw in that your goal -- having lots of IT resources that need fixing -- is not in alignment with a customer's goal of having computer systems that run properly with a minimum of downtime.

In the break/fix model, if it takes you three days to fix a server, when you present the bill to your customer, they quickly ask why the server broke in the first place and what you as their IT person could have done to prevent this from happening. When you tell them there is nothing more you could have done, the customer may or may not choose to believe it and may or may not want to pay the bill.

Under the managed services model, on the other hand, the time spent fixing the server is covered under the contract so there is no bill for the incident. MSPs make the most money when their customers' IT resources are running correctly. Their goal and their customers' goal are in alignment.

But many solution providers have a hard time explaining managed services pricing vs. break/fix pricing to existing customers. Here are two scenarios that can help you explain this to your customer.

Scenario 1: Break/fix pricing

A computer at the customer's office stops working and displays a "weird error message." The person using the computer is a midlevel employee paid $20 an hour. That person spends 15 minutes (min) trying to fix it by rebooting, etc. After no success, he finds the employee on staff who is the so-called computer "expert." This expert was not hired as a computer person, but rather is a lower-level employee who has another job within the company and is paid $15 an hour. The expert employee then works with the midlevel employee for about 45 min, still with no luck. Then they call the computer manufacturer. Both employees spend about an hour on the phone troubleshooting until it is determined that the computer cannot be fixed remotely and the "real" tech needs to come on-site. The next day the tech is on-site, takes one hour to fix the problem, and the computer is good to go.

Now let's review how much this one hour of tech time has cost the company, including lost productivity and charges to the company.

  • 15 min for the $20/hour person = $5
  • 45 min for the $15/hour person and the $20/hour person = $26.25
  • One hour of phone time with the computer company for both people = $35
  • Eight hours at 50% productivity for the $20/hour person without his computer = $80
  • One hour of on-site tech work = $100

In this scenario, the total real cost for this one incident is $246.25. Keep in mind that this is a low estimate based on fixing the computer in one hour on Day 2.

Scenario 2: Managed services pricing

Customers that are transitioning from the break/fix model to the managed services model are worried they are not getting value for their money. You need to address this concern.

A customer has a $700-per-month managed services contract, which provides unlimited on-site tech support, unlimited remote tech support, 24x7x365 monitoring of all computer equipment, "virtual CIO" services and vendor management. A computer at the customer's office stops working and displays a "weird error message." The person using the computer is a midlevel employee paid $20 an hour. That person spends 15 min trying to fix it by rebooting, etc. After no success, he decides to call ACME Managed Services Co., knowing that there is no additional cost, beyond the $700 monthly managed services charge, to call. He contacts the help desk support team, and the MSP's tech logs in remotely and asks the customer to take a break while he troubleshoots the problem. The tech discovers that the problem relates to a bad Windows update, and the fix will be covered under the managed services rollback system. The total downtime for the customer is one hour, and the cost to the customer for this particular problem is $20 an hour.

The point of this exercise is to show the customer that in a break/fix model, fixing the problem involves both the hard cost of the payment to the computer repair company and the soft cost of the lost productivity. Once you start having that conversation with your customers it becomes much easier to talk about managed services pricing and justify the managed services cost.

Putting your money where your mouth is

Customers that are transitioning from the break/fix model to the managed services model are worried they are not getting value for their money. You need to address this concern. The way I do it is with the 100% money-back guarantee. If, after three months of managed services, a customer does not think it got enough value, I will return 100% of the cost of the managed services -- no questions ask. This gives customers a safety net to make sure this is the correct strategy for their company.

As the above scenarios illustrate, managed services is a win-win for you and for your customers. You get a steady revenue stream and are rewarded for setting up and maintaining computer networks that are working and reliable. The customer saves money, increases productivity and is protected against unexpected, expensive computer repairs. Managed services helps align your success and profit with the success of your customers' computer systems. You will make more money when the customers systems are up, and less when they are down. This dynamic helps to turn your relationship with the customer into a true partnership.

Jeremy Nelson is president of FCS Inc. and a member of The ASCII Group since 2013.

This was first published in July 2014

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