Debate on All In vs. Modular MSP pricing
The Managed Services business was created from the traditional suite of desktop management, backup, network and server support. Most MSPs now are offering various services outside the traditional managed infrastructure scope: application management, additional cyber security or virtual CIO services. This is the evolution of managed services, and the right way, however many MSPs have just reactively added some of these services to stay relevant to their customers and protect the core MSP services. They might call themselves "your IT department." Let's check out why it’s a problem and what to do about it.
The problems
Here’s a quick overview of the pitfall of adding more to our managed services delivery without proportional monetization.
- Application Management, IT Security, and vCIO services don’t fall into the core MSP value proposition. Mixing them into the Managed Infrastructure Services creates confusion. The current IT infrastructure expertise was not always so convertible to process, business, or security expertise. Clients may have trouble believing you’re qualified for the others.
- These additional services create confusion in your messaging as well. What makes you better than your competition if you can’t clearly differentiate ourselves? If you just mesh these services into the MSP package, they and the value perceived get lost as "features of the MSP program" rather than stand-alone products.
- As you add services, your MSP offering becomes more expensive. Your competition can still claim the same offering, though it isn’t, and at a lower price point. Clients will see no differentiation and not understand what makes you more expensive.
- If you stack all these services together, you lose flexibility. Clients may not need some of what they’re paying for, so you’ll lose the ability to deliver packages suited to the primary need/lower maturity/small client segment.
Differentiate yourself from your competition and become sales ready in 30 days
This all means if you keep doing the one-size-fits-all "we are your IT department" package, you’ll be lowering your shield to where the competition can hurt you and also dulling your sword in terms of new client acquisition.
What to do
Let's quickly cover some strategies you can apply to make this trend your friend and not your enemy.
- List out the value propositions you’re offering. Managed Infrastructure, Managed Applications, Managed NIST Cyber Security or vCIO. You can add to the list if you need, just make sure you define each as a value category that makes sense to the end client.
- List out all the services you do for your clients and try to place them into the categories. What you’ll see is your complex offering start to make more sense, with an internal consistency that’s both easier to describe and to get the client invested.
- Treat your listed services as your modular (e.g. LEGO) building blocks. Now you can start building up different service bundles based on those blocks. If you focus on the differentiation between Application Management, IT security or vCIO, you will see how you can actually have service bundles as stand-alone products rather than just added features.
Because all your services are going to be in bundles your tech people will have no difficulty knowing what each client has. Also because most of the categories are not related to their infrastructure job, you aren’t creating more complexity on the execution side.
- If you’ve crafted some bundles, you may consider create a basic and a premium offering for each product line. You can end up, for example, with four product lines, two versions each. A basic package will be good for entry level stuff like a small advisory as a vCIO and some starting IT security in the packages.
- Now you can deliver a proper service offering for each client and prospect based on their needs. For example, an accounting firm will have Premium IT Security, Managed Service and Basic vCIO and Application management, whereas an engineering firm will need Premium App management, vCIO, MSP and a basic security package.
Benefits and tradeoffs
Let's see some pros and cons for this strategy
Benefits:
- Now you’re able to give your clients a more tailored offering, and they’ll see that it suits them best, because you could give them a choice.
- Now you can maximize the monetization and profit for each package, because you don’t have to deal with competitive pricing.
- Now you can keep up-selling as their maturity grows, and eventually offer them all premium offerings in years to come.
- Now you can differentiate yourself and get into the battle where the prospect has a strong MSP but the IT Security, App management or vCIO is weak.
- Now you can communicate online and better convert on your website, as three value propositions are not commodities (only the infrastructure component is).
Tradeoffs:
- You have to productize the services and define each clearly (we’ve already defined 100+ services for you in high level of detail)
- You have to keep clients in their swimming lanes with proper account management and internal service management (quarterly business review with discussion is enough in most cases)
- You need a discipline to sell what you deliver and deliver what you sell. With production it’s not a problem, but still a new item.
Just for fun...remember… in 2008 it was only one iPhone available…. How about today? Why do you think Apple has more options in colour, size and storage today?
Conclusion
Consider the benefits and tradeoffs of moving to a different pricing model. Your managed service will be evolving in a more rapid pace as client needs evolve. It’s up to you to create a model which will manage these changes reliably. If not, you’ll have a very stiff and rigid model giving away a tremendous amount of value and sacrificing opportunity and service all at once.
Start vCIO with Quick Productized Projects
Starting vCIO services can be a struggle not just for you and your people, but for the clients too. There are some established expectations of vCIO services, which sets a hurdle right at their kickoff of these services. There is, however, a natural way of solving this problem: use easy to sell and easy to deliver productized vCIO projects.
Of course, developing such effective and elegant solutions does take time, so we’ve set up a shortcut to start, and let you build up vCIO Project products instead. Don’t worry - this isn’t taking on new work - just solve problems you’re expected to already, but start getting paid for all you do.
Let's see seven examples of typical vCIO products:
- IT Development Roadmap ($1500 - $4500) to build up a general IT roadmap, focusing on infrastructure while addressing typical business problems and recommending applications, security or compliance themes as well.
- IT Budget ($500 - $2500) to develop an IT Budget in detail. If the scope is limited to the infrastructure services/investments, SaaS subscriptions and software licenses, it’s a cookie-cutter and helps you sell additional services like regular budget checks.
- Application Selection ($500 - $1500) to select a typical SaaS based application they can buy online without any sales reps involved, such as a CRM, Project Management or any other light line of business application package. You help them set up the requirements, pre-select the candidates and facilitate the selection process.
- SaaS Audit ($500 - $1500) to audit all SaaS subscriptions they have and check whether they have the optimal package, exhibit alternatives and integrations available. They do the heavy lifting and you coordinate the process.
- Risk Assessment ($1500 - $5000) can be boring, to be blunt, but there is no better way to kick-off some IT security initiatives, open the discussion on compliance, or just assess IT risks beyond the scope of just their infrastructure.
- Productivity Workshops ($1500 - $3000) aren’t only useful to office workers, but anyone using to-do apps, project management tools, Office 365, note-taking apps, chat and email apps on various devices. Put together a curriculum you can go through onsite or online with the managers/power users to help them leverage technology better.
- Virtual IT Department Evaluation ($500 - $1500) deals with the many vendor, software and SaaS providers who constitute your clients’ virtual IT department. You can safely assume nobody is leading that herd. Evaluating the different parties involved, set responsibilities and required service levels and manage them accordingly to assure they get the most out of their vendors and services.
These are just quick tips, but how do you make them productized?
- Write down the target customer and the scope of the project.
- Write down the project deliverables as task lists and tasks to be able to establish the price.
- Put together a one-pager on the problems it solves and the benefits it delivers and print out 20-30 pieces, as well as a promotional email.
- Start promoting it with a discount to batch more projects into a given month so you can be more efficient.
- Wait and watch while these initial projects start to push you towards a stand-alone vCIO service.
My 7 Ah-ha! moments on the first MSP 2.0 boot-camp
We just finished our first ever live 3 day Managed Service Productization boot-camp in Banff, Canada. With 25 participants we worked to crack the code in scaling up the managed services. Jam-packed with real work, the workshop groups created amazing content and generated ideas that have been sparkling. I wanted to capture some of the more intriguing ideas the MSPs came up with.
I’ll be elaborating on these topics in upcoming weeks, since I see each topic as worthy of more than a blog post, but here are the main ideas. These are my personal Ah-ha! moments.
1. The main confusion and misalignment is within the service catalogue
Traditionally, the ad-hoc organic development of services and service catalogues creates major confusion for clients and employees. This has limited the scalability of MSPs. It doesn’t define your services nor categorize services into service categories and service bundles. The problem is the failure of proper categorization, service definition and articulated value propositions leaving too much room for interpretation of services. Luckily, we’ve experienced the power of service wireframing exercises which can lead to a well defined service catalogue.
2. Make the vCIO role more tangible, to lead to greater sales
Selling stand-alone vCIO services is easier by starting specific productized projects. The vCIO can be an intimidating and abstract concept for some clients: while the vCIO activities are solving their problems, they have no grasp of the how those abstract deliverables like IT Strategy, Quarterly Reviews, Monthly Reports, Budgets, Project Scoping or Stakeholder Interviews are working. It’s easier to visualize canned, productized project services solving one specific problem in demonstrating the vCIO work. In advance of developing ongoing vCIO services, therefore, it’s much easier to develop one-time vCIO projects in a productized way.
3. Misaligned agreements lead to client and profitability issues
A systematic approach is needed to realign clients annually, as a response to many changes in tech and the environment. Either the client’s expectations change and they feel under- or over-served, or our profitability drains from additional work. Every year we need a version change on the service offering. Over the course of a year the service provider is developing, changing services as part of the development process. New services are available to all clients as "beta" functions through the year, and at the end of the year all beta services go to official services and clients make decisions whether they need the new services (they pay for) or stick with the old package. Everything beyond this gets relegated into the realm of too much communication and too many agreements in the air.
4. IT strategy upfront or spare the onboarding
One company demonstrated a great use-case, to charge $4,500 per client prospect as an IT Strategy development process. It served to qualify and differentiate the prospects, as well as to release unqualified prospects from the funnel quickly. This strategy helps acquire higher maturity clients.
Another company's strategy was to push low maturity prospects through a very systematic and specific onboarding process to get their maturity to a manageable level. The final step of the onboarding was an IT strategy creation which defines the next steps once the understanding is set.
The strategies are perfect capturing the value for the different maturity prospects.
5. Fix a leaking boat before building a new one
All the promises you make to a client, all the expectations you set, even unintentionally, are potential drains in your profitability. The problem with non-productized services is their vagueness. Unlike a coffee mug where you see the shape, size and quality these services are not tangible. So make services tangible! Fix the big hole first! Create a totally new service offering by making your current services so well-defined they won’t slow you down during your company’s development period.
6. The eroded value proposition of the fully managed IT services
A lot of MSPs set their Value Proposition as a mission statement. While it is inspiring, it doesn’t give specific direction. Breaking up the big Value Proposition into smaller value propositions helps distinguish service categories. Breaking down further defines the services. Everything stems from an MSP trying to make their clients more competitive with technology, and drilling down to specifics is what’s missing. Without it the message is too general, doesn’t engage the clients and doesn’t focus direction to the service provider.
7. Headspace + Focus + Facilitated Workshops make miracles
Seeing the team slow down and merge away from the day to day operations to a higher level focus and headspace was amazing. We went through over 20 exercises over the 3 days. The impressive small group and larger group interactivity was able to dig out major issues and opportunities and create actionable items from vague ideas. The collaboration was most notable from Australia, US, UK, Germany and Canada. I think I underestimated level of wisdom, experience and knowledge in the group. This also made me aware of the need for major initiatives like implementing stand-alone vCIO services or productizing a service offering for that type of environment to make an effective change. Some things can’t be learned in days of emails, meetings and other distractions.
- Virtual CIOs in United States
- Virtual CIOs in Australia
- Virtual CIOs in Canada
- Managed Services Platform Virtual CIO report
- Managed Services Platform Account Management report
20% rule of vCIO pricing
Here’s a mystery you all know all too well - pricing your stand-alone vCIO services so you’re not robbing your clients nor yourself...that trepidation when you’re putting together the proposal, or trying to ballpark a figure in a meeting. It’s always been a gamble. There’s a way to find the proper middle ground, following a simple process to help you to close more deals without risking a critical over or underestimation, of your client’s expectation or your services. Here is the formula...
We just call it a 20% rule....
The formula is quite simple. We take the client’s current expenses in managed services calculate 20% of it. This will be our baseline for a starter stand-alone vCIO package. Use this as the main rule of thumb, and we’ll take a look at some cases where we have to turn from this calculation.
Example. You’re talking with a 40 person firm eligible for a $125-per-user managed services program. That’s a $5000 MRR for the managed services. With your 20% stand-alone rate the virtual CIO program will end up at $1000 MRR.
Structure, manage and automate
your account management and vCIO procesess
Client point of view
Most often you’re selling the vCIO services as an extension of your managed services, and you’ve seen eyes spinning at the mention of the cost. But you know about the pricing effect: if the add-on service is too small, like 10%, they can feel it’s not worth mentioning, and why isn’t it in the package anyway? If it’s too much, like 40-50%, then it’ll come with the price of a totally different service category. We must keep an eye on our psychological influences.
- 20 % is an easier upsell to an existing company
- 20% is what you can give as a month of free trial
- 20% is what they’ll readily risk for a 3 month trial period
So from a buying perspective, it’s not disruptive, complex, nor risky. It’s the predictably happy medium.
Your point of view
We need to check the viability of this service from your end too. As we design a vCIO offering we must list out the diverse activities which are part of the package, check how frequently we do those activities, and calculate an annual workload, for an honest basis for the price. Usually we use $200 per hour to calculate a monthly service fee. With the 40 person client as an example with $1000 MRR, we’ll see 60 hours budgeted for a year, or 5 hours monthly. That’s a reasonable amount of work for that size of client.
We’ve developed four different vCIO Packages:
- vCIO Light - typically a teaser service at a cost of $250/month to perform, and great for triggering stand-alone services. It’s also good for small companies (check later).
- vCIO Basic - $1000 - $1500 MRR, suited to 30-40 person companies or bigger companies with less maturity. This is the typical bare minimum with no weekly cycles.
- vCIO Professional - $2500 - $3000 MRR, for the 40-70 strong SMEs where you can start to develop seriously and begin to integrate with the management team.
- vCIO Enterprise - $5000 - $6000MRR - when you’re going to nearly substitute a full-time CIO/ IT manager. This is only viable for 70+ situations.
If you’re interested in these packages, make a quick call and we’ll show you the processes, marketing, sales materials, workspaces and all the associated reports and tools we provide for a complete, professional execution.
Remark 1: Projects
Projects are never included with a stand-alone vCIO program, just annual planning, budgeting, some project scoping, some application selection, quarterly planning sessions, monthly reviews and so on. Every project is a separate item. If their IT strategy is to choose and implement a cloud based CRM solution and integrate it with Zapier to their accounting system, that’s a separate project. We can manage it as part of the service portfolio if someone else manages the project. If, however, we’re responsible for the implementation, that again is a separate line item.
Remark 2: Small Companies
As you can see, if you have no budget for at least 30-40 hours of work annually, even at $150/hour (which will end up at around $400 - $500 MRR) you cannot really accomplish anything as a vCIO. The $400 - $500 MRR with the 20% rule will give you the $2,000 MRR MSP service. Even if they have a $100/user rate it will work with a 20 person company. This clearly defines the boundary, that below 20 people there is no viable, profitable vCIO service possible. You can’t generate enough revenue, and the client will have no budget to execute projects. You might quote a $200 - $300 upcharge for "Client Advisory" services to perform the basic Account Management activities like QBR/Annual Planning and some consultation every quarter. Though extremely limited, this is their call. If they don’t want to pay for it, you still can’t do it for free.
Conclusion:
Don’t complicate. If the client asks about vCIO, just say: "Our rule of thumb is around 20% of what you pay for the managed infrastructure services." If they’re not interested to the service with this estimate, there’s no way you can deliver your services viably with a lower price point.
3 previously posted Managed Services Platform blogs about vCIO sales:
- How to Become a Trusted Advisor With Strategic Client Meetings
- Managed Services Platform vCIO Report 2019
- Managed Services Platform Account Management Report 2019
3 previously posted Managed Services Platform research about vCIOs
