Pricing strategies for services: Managing solution provider margins

Find out about the methods and techniques solution providers are using to set IT services pricing, including setting baseline formulas.

Setting prices for IT services can be a tremendously tricky value proposition for technology solution providers.

Price them too high, and your company could find it hard to break into new accounts. Set them too low, and margins could be compromised by customers that demand more than expected. So how can a solution provider make sure it has priced IT services rates just right?

"We are going by what the market will bear," said Pat Grillo, founder of Atrion Communication Resources (ACR), a network integrator in Branchburg, N.J. "It's really important to know your minimum. A lot of times, in competitive situations, that's where you will need to be."

As they became more savvy about managing the margins for their business, most VARs and managed service providers have become far more methodical about pricing strategies for services over the past few years.

"Many guys I know will 'fire' the bottom 10% of their clients in order to keep a balance," said Marc Harrison, president of Silicon East Inc., a solution provider in Manalapan, N.J.

Creating a baseline formula

While that isn't something that Silicon East advocates, Harrison said IT services pricing is something that needs ongoing attention.

"It's where you really differentiate, and that requires focus," he said. "This is a highly intellectual kind of thing."

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While it wasn't the case even just 10 years ago, most technology solution providers now work with standardized pricing lists that draw on far more than just what specific technicians cost on a per-hour basis.

For example, calculates its services pricing backwards. It starts with the 60% to 65% margins that best-in-class MSPs can expect to earn and then factors in everything from the cost of sales to operational overhead, said David Dadian, founder and CEO of the Ho-Ho-Kus, N.J.-based solution provider.

Working within those metrics, Powersolution starts with a baseline monthly service price of $130 per device encompassing desktop management, IT vendor management, server support, security and business continuity. From there, it can adjust pricing by eliminating what it will support, Dadian said.

As part of its pricing strategy for services, Jenaly Technology Group Inc. uses an algorithm it developed in conjunction with consulting company Taylor Business Group. The algorithm is based on Jenaly's costs of doing business and the unique nuances of its delivery model.

"I price things based on that formula and my expectations about the amount of time that an engagement will take," said MJ Shoer, president and virtual chief technology officer for Jenaly, based in Portsmouth, N.H. "If I have some additional variables, I will adjust it."

Pricing strategy variables that matter

Some of those factors are rather obvious, such as making sure to account for the anticipated project management commitment or remembering to include pre-engagement consulting and hand-holding that might have gone into closing a deal.

Others are easy to overlook, which could be a big drain on resources, Shoer said.

One example is setting prices on a per-user basis. Shoer said that while that model might have worked in the past, it's dangerous in today's working environment, since some people are using three different client devices -- a notebook computer, tablet and smartphone -- to get their job done.

"In some cases, one user could represent three devices, and you have to account for that somewhere," Shoer said.

Another thing to consider is business cycles associated with the customer's industry. During the fourth quarter and first quarter of each year, for example, an accounting firm might expect higher service levels and more attention.

"A law firm, on the other hand, would be different. Their practice management system might be updated less frequently," he noted.

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