Tuesday, September 04, 2007

Managed Services in a Month - Part Two

[ KP Note: The entire "Managed Services in a Month" series has been collected, collated, and indexed. Still free. You may access it now at http://www.greatlittlebook.com/Seminars/managed_service_in_a_month.htm. ]

Context: This post follows on the previous two. See http://smallbizthoughts.blogspot.com/2007/09/managed-services-in-month.html and http://smallbizthoughts.blogspot.com/2007/09/managed-services-in-month-part-one.html.

Today's Topic: Create a three-tiered pricing structure

Last time we got the project started, presented some financial policies you'll use going forward, and generated some reports about where your money comes from.

Today we're going to create your three-tiered pricing structure.

This is not particularly difficult, but it is particularly important. And it's important for three reasons.

First, you will use it to define what your company sells. Prior to this it is likely that you simply sold whatever you wanted to sell. Well, from now on you're going to sell things that make sense, reflect what your company does, and make money.

Second, you will use this price structure in the sales process. You'll be able to hand it to a client and say "Pick One." Whichever one they pick, you'll make money. Better still, once a client picks one, you'll sign a service agreement and move them to prepaid billing status.

Third, you will use this pricing structure to organize the rest of your transition to becoming a Managed Services Provider. We literally have this posted on the wall in from of our desks. It guides invoicing decisions (is this covered labor?). It helps clients make decisions (e.g., If we do the work remotely, it's covered. If we're on site, we charge by the hour.). And so forth.

Get Started

Okay, so how do you put together your three-tiered structure?

First, you have to have names. Stupid as it sounds, you gotta have something at the top of each column. We use Platinum, Gold, and Silver. You could use Gold, Silver, Bronze. Or, for that matter, Parka, Coat, Sweater.

Why three tiers? I don't know. There's something magical and simple about three options. Some people want the "best," whatever it is. Some want the cheapest. People don't like to be sold, but they love to shop. With three tiers they can pick the one they want. Depending on how you structure it, the option they pick will reflect where they put the focus on technical support.

Truth is, we have a fourth column called Pyrite -- fool's gold. Pyrite lists our services without a service agreement: Much higher hourly rate. No monitoring, no on site support, no after hours support, no patching, etc. In fact, Pyrite is really just break/fix work at the highest price and is not really an option.

The best way to get started is to list all the services you provide. I think it's best to categorize these in terms of
- services on the server/domain
- services on the desktop or workstation
- other services (network, printers, ISP, etc.)

In our case, Silver covers servers only. Gold covers servers and workstations. Platinum covers everything we could throw in the mix.

So list all the services you provide. Remote support, remote monitoring, patch management, etc.

Don't worry that you don't have six pages of items. In fact, it should fit on one page! Your entire offerings and pricing list should be one page. One sided.

Our list is very simple. We list on site labor, remote labor, after-hours labor, and emergency labor. After that, it's what we do on servers, what we do on desktops, and what we do on the network.

You already have some tools for delivering managed services. At a minimum, you have SBS reporting. You might have free tools like Servers Alive. You might be using SCE and MOM from Microsoft. Or you may have invested in Zenith Infotech, Kaseya, or LPI.

Whatever you have, put it down as remote monitoring and patch management. You may wish to make these two separate categories.

If you have other services that you offer to your clients already, consider throwing them into the highest-level offering. That's what we've done with Exchange Defender. Platinum level clients can get this for free. They don't all want to, but it allows us to point to that add-on as extra value for their money.

Sort It Out

Now you have a list of the services you offer. And you have the headings for three columns. You know the rest. List your services on the left hand side of the page and put check marks or stars for the service offerings that include these services.

You may need to go through this several times. There's no magic here. You might need to fine-tune a bit.

Now consider what it costs to deliver these services. Remember that you're going to make more money providing remote support than on site. This is particularly true if you don't charge for travel. Throwing unbillable half-hour blocks of driving time into your day can be very expensive. What can you put into the Silver and Gold packages that's remote-only and as automated as possible?

Also consider what you need to charge for the Platinum package and how close you can get to "all you can eat" or "everything's included."

Remember that there will always be additional labor. Depending on how your structure your deals, you might selling twenty or thirty percent over the base of the flat-fee agreement. With a handful of clients you might double the base. For now, and for sales purposes, plan on 25%. So an agreement that has a flat fee component of $10,000 might actually bring in about $12,500 in labor.

Break Out the Excel

In both my Service Agreements book you'll find spreadsheets for figuring out what you'll get from various pricing structures. You'll find the Excel files on the CD.

Again, no brain surgery here. You simply enter the following variables:

- Client name
- Number of Servers
- Number of Desktops/Laptops
- Price you will charge per server
- Price you will charge per desktop

Run the numbers. Adjust price per device until you get in the ballpark of what clients are paying now.

From our last session, you have printouts of what each client paid for labor in the last year.

One lesson I learned after years of doing this: Don't go for the middle or lower end. Don't try to make your product cheap in order to keep these people. Set your sites on the top tier clients. You want to keep your best clients. And if you're happy with the money you get from them, then gear the pricing structure accordingly.

You might lose some lower-end clients, but you were going to do that anyway. It's more important to focus on the future: Your next ten new clients are going to be willing to buy a package that looks like your current top-tier clients.

Anyway, play with Excel. Noodle it one way and another. Play.

But don't use Excel as an excuse to not move forward! Pick a price and write it down.

You probably don't work in Sacramento, so my numbers are irrelevant. But just so you have some ballpark, our Platinum plan is $60 per desktop and $350 per server per month. We also have all the right tools (Autotask, Zenith Infotech). If you have a more manual process, you will need to charge more money.

Finalize Your Pricing

Print it up. Talk to a couple of your best clients. Talk to staff. Talk to other consultants (buy them lunch).

This is an iterative process. You're going to quickly cycle through what you've done so far. Next we'll look at weeding your garden. Then tick through it all again. Don't dawdle. Don't put it off. Just keep moving forward.

Ta Dah! You have a new pricing structure for your business. Congratulations. you also have a succinct description of what you offer and what it costs. Good job.


Next time we'll talk about weeding your client garden. That means coming to terms with the fact that you're going to get rid of some clients.

Remember, last time we adopted the rule that all clients must sign service agreements. So that means, very simply, that clients who don't/won't sign an agreement aren't your client any more.

Think about that. You don't need to take action today.

Instead, get to work building your pricing table.


  1. Anonymous7:26 AM

    Keep 'em coming Karl. This is all very helpful. You've convinced me to buy the books ;o)

  2. Anonymous5:13 AM

    This comment has been removed by a blog administrator.


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