Providing Services Profitably
Whether you are an MSP or an ISV you will be providing services. How do you price your services to ensure profitability?
When I started selling services, I used charging by the hour (or fraction of an hour) as it is used extensively. Being a reasonably quick learner, I soon stopped using this method as it is the least satisfying for the customer and least profitable for the service provider. If you charge by the hour, your customer will, naturally, compare you with others who are offering the same skills and unless you are the lowest price in the market, the customer will feel that you are overcharging. Essentially you have commoditized your offer, which is why this pricing method is least profitable.
My next pricing strategy was bundling a group of services to deliver a project. This is more profitable and generally leads to higher customer satisfaction - assuming the project is successfully delivered. The project should, ideally, have a fixed scope and deliverables allowing fixed costs and delivery time. Any scope or deliverable change should be subject to a change management process and potentially chargeable. As every customer is unique, and therefore every solution to the customers problem is unique your offer is less open to price comparison. You can then compete not on price, but value. This means that even if the customer gets multiple quotes it is easier to illustrate your unique value if your price is higher that your competitors. Project profitability can be further improved by asking for an upfront fee on project commencement.
My favourite pricing strategy is bundling a group of services and offering the bundle as a managed service. This provides the best opportunity for profit. In this pricing model you provide a clearly scoped set of activities with a service level agreement while the customer pays a monthly fee. As part of the scope, you should try and incorporate something that is unique. For example, the use of some of your intellectual property. This can be as straightforward as having a documented methodology. Customer satisfaction in this model is no longer a matter of pricing, providing your service has something unique about it, the customer either values the service and buys it, or they don’t. Customer satisfaction in managed services comes from how well you interact with the customer as you perform the service. As well as the opportunity to charge an upfront fee at commencement of the service, you have continuous dialog with your customer enabling you to identify other needs they may have that you can profitably service.