Before we check out the significance of various methods of pricing, let’s take a quick look at how pricing affects your profitability.

Pricing and Profits

The way you price your services directly affects your profitability. While competitive pricing is essential to gain more customers, pricing your services too low will hinder your growth in the long term. Besides, this type of pricing will push you down the rabbit hole of low margins, low growth and low-value services.

What you need to focus on instead, is the value of your services. When you price your services based on the value you provide rather than the cost you incur or the comparative pricing of your competitors, you can attract quality customers who value your services.

Also, knowledge about price elasticity of demand (PED) can help you come up with a strong pricing strategy. Products or services that are highly sensitive to price fluctuations are considered elastic while those that remain stable under price fluctuations are inelastic. For instance, the demand for food products remains pretty much stable irrespective of pricing changes. As an MSP, you need to identify the price elasticity of your services before setting up the price.

This can be identified with the simple formula:

Quantity of the demanded service ÷ Price of the demanded service = Price elasticity of demand

In an ideal scenario, you would like your services to be inelastic (unaffected by price fluctuations). However, that may not always be the case. This simple calculation will help you determine the right pricing that doesn’t compromise your profits or future growth.

Pricing Strategies

There are different methods available for MSPs to price their services. Some of the commonly used pricing strategies are as follows:

• Per-device pricing: Here, a flat fee is charged per endpoint in the organization. The fee is based on the type of endpoint. For instance, support for a server costs more than a laptop or a mobile device. In this model, you can charge an additional fee only if the customer adds more devices.
• Per-user pricing: Here, a flat fee is charged for every user in the organization. The user may have different devices like laptops, smartphones, tablets, etc. The fixed fee includes support for all the devices. While organizations with plenty of devices may benefit from this model, it means more work and more support for MSPs.
• All-in-seat pricing (AISP): This is a highly recommended approach to MSP pricing. First, you determine your overall cost burden in providing service to an organization. This helps you determine a break-even price, and then add the required margin you feel is reasonable. For instance, if your monthly recurring revenue from a company is $150,000 and you support 1,000 seats, your AISP is $150 per seat.

When using the AISP model, you need to study the average purchasing power of your customers to make sure you are not charging too much. At the same time, you also need to consider your desirable margins to ensure you are not underpricing.

Factors to be Considered

The following factors are critical when coming up with the pricing strategy for your services:

• Cost overheads: Calculate your total costs, including salaries and rent, before coming up with a price.
• Value pricing: Costs alone should not dictate your pricing. Consider the value you provide and the intellectual capital you have invested in the service.
• Competition: You don’t always have to charge lower than your competitors. However, an understanding of the market price can help you come up with a better msp pricing strategy.

Remember, MSP pricing is not a one-and-done deal. You need to review your offerings every six months to make sure you are keeping up with the changes happening in the market. Also, when pricing your services, provide clear information to your customers about what they can expect from a package.

Want to learn more about MSP finance? Watch for our finance-focused webinar featuring Peter Melby, CEO of Greystone Technology, a globally recognized MSP, as he reveals how MSPs can reinvest and make money at the same time.

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The post MSP Finance: How to Master MSP Pricing appeared first on IT Glue.

Using Financial Statements

When you first go online and read about financial statements (income statements, balance sheets, etc.) you get a surface-level view, pick up a few financial ratio formulas and away you go. The key, however, is in the application of this knowledge. If you understand financial statements you can:

• Guard against fraud
• Make financial plans proactively
• Understand which levers to pull to impact your financial outcomes
• Increase the value of your business prior to exit

Know Your Goals

What metrics matter most? Well, it depends on what your goals are, which is why it’s important to have a clear sense of what those are. If it’s growth, you might not care much about your debt/equity ratio as long as your YoY revenue numbers are popping. However, if you’re looking to exit, EBITDA and the value of that equity matter quite a bit more.

Using Financial Ratios

All those fancy ratios are designed to tell you things about your business. Understand these well and you’ll be in much better shape than if you just take your accountant’s word for it. For example, if you notice that your current ratio has been stable for six months but your cash ratio is getting worse, what does that tell you? Well, it tells you that either your inventories or your receivables are spiking relative to your cash. If it’s inventories and you don’t know why, that’s not good. If it’s receivables, find out who the culprits are and talk to them.

The same thing applies when it comes to understanding the difference between, say, EBIDTA and net income. EBIDTA is the basis on which your business will be valued, so maximizing that is important if you’re looking to exit. Net income matters to the taxman and if you’re not looking to exit, it’s all about minimizing your tax burden.

The key here is that there’s more to strategy than just delivering great service, marketing well and running a tight ship operationally. Understanding what your financial goals are and what tactics will help you achieve those goals requires at least a fundamental understanding of financial statements.

Want to learn more about MSP finance? Sign-up for our upcoming finance-focused webinar featuring Peter Melby, CEO of Greystone Technology, a globally recognized MSP, as he reveals how MSPs can reinvest and make money at the same time.

Sign me up for the webinar!

The post MSP Finance: Understanding Financial Statements appeared first on IT Glue.

Obviously, you hire people to do your accounting, but it always helps to know a bit of financial matters yourself, if only to have intelligent conversations with the financial folks. For the month of April, we’re running a series of blog posts through which we’ll give you a rundown on some fundamental financial issues. In a perfect world, this would be a lot of Captain Obvious stuff. But if it were obvious, businesses wouldn’t struggle so much with financial matters.

We’re going to start with the most important one — MSP cash flow. If the cash isn’t flowing, that’s when solvency issues start to rear their heads, which also happens to be the cause of a significant percentage of small business failures. That’s why attention to cash flow is, to say the least, mission-critical. Without cash, you can’t pay your staff or your bills, so watch your cash at all times.

Forecast Cash Flow

If you have no way of knowing how your cash is flowing, you’re screwed. Cash flow forecasts give you a picture of what’s coming in and when. Understanding your inflows makes it easier to time your outflows. This is why the break-fix business evolved into managed services; with the latter, it’s a lot easier to know what your future inflows look like, which puts you in a position to plan better. Make sure your MSP cash flow forecasts are up to date. That also means that if your projections are off, you need to find out why. Have you overestimated how much revenue you’ll get from a service type or a client?

Pro Tip: Account for bad debts. Don’t assume every customer will pay you on time, every time. Use past data to estimate how much to set aside for bad debts and account for that in advance.

Managing Cash Flow

Let’s say you’ve identified that your flow could be flowing a little better. Maybe your biggest customer just went under and your forecast flipped from black to red. How do you deal with this?

Tighten Receivables

Extending credit to clients is pretty standard in a lot of lines of work. But you’re not a bank, so don’t get carried away with letting receivables slide. If you’re not getting paid upfront, keep an eye and make sure that receivables aren’t stretching out too far. You don’t have to be a jerk about it since the pandemic made it clear that sometimes your customers get smacked with unforeseen issues. But be wary of customers who should be paying but aren’t. That could indicate that they’re in trouble and you definitely want to tighten up on those clients, lest they default on you.

Stretch Payables

This is the reverse, and yes, it signals to your vendors that you’re having some issues of your own. This tactic makes the most sense when it’s a one-off, unusual scenario. For example, maybe you had to settle a lawsuit that left you a bit strapped this month, but your operating budget hasn’t actually changed, so you’ll be back to normal next month.

Increase Sales Without Increasing Your Costs

I mean, who wouldn’t do this? However, the point is to look for other ways to increase revenue that usually tend to be overlooked. Ensure your billing is aligned with service delivery; often, items get out of whack, especially if your clients are growing. Sell as many of your services to your clients as possible. Maybe they’ve changed their tune about cyber insurance or disaster recovery since the last time you talked. Leave no stone unturned.

Increase Efficiency

Shameless IT Glue plug? Sure, but there are other ways to increase efficiency as well. We just know that our partners get efficiency gains from standardizing their processes and cutting out space between the knowledge their techs need and the tools that hold that knowledge. Increasing efficiency can help you grow your business without increasing expenses.

Know Your Sources of Financing

Growth can be a massive cash flow sink, especially if you invest in growth first and don’t see a return very quickly. While this is a bigger issue in industries that are more capital intensive than managed services, it still pays to be aware of your options for aligning the costs of expansion with the benefits of it. This is one area where financial accounting and cash flow accounting can yield completely different perspectives on your finances – spending big on items you amortize doesn’t brutalize your income statement. However, if it puts you in a bad spot in terms of cash flow, you can still get into trouble. Align your outflows and inflows.

The main thing to remember about cash flow management is this: If you think about MSP cash flow proactively, you should be fine. If you think about cash flow retroactively, after you notice you’ve got a problem, you have much less flexibility to fix things.

Want to learn more about MSP finance? Sign-up for our upcoming finance-focused webinar featuring Peter Melby, CEO of Greystone Technology, a globally recognized MSP, as he reveals how MSPs can reinvest and make money at the same time.

Sign me up for the webinar!

The post MSP Finance: Mastering Cash Flow appeared first on IT Glue.

The Basics

Activity-based costing seeks to determine the true cost of doing something. If you’re looking at this at a client level, which is a good idea for an MSP, you’re determining the cost of servicing that client. The obvious benefit is that you can align what you charge a client a lot more closely with what it costs to service a client.

Let’s say you have two clients and you charge each of them the same $150/seat, and they each have 20 seats. That means each client is worth $3,000 a month in revenue. Company A is low-maintenance. They use your full stack and hardly ever send in tickets. Your service desk spends 10 hours per month dealing with them and each hour of your service desk costs $75 all in, which means they cost you $750 each month. This is a great client.

Company B is a complete dumpster fire. They have all sorts of old equipment, refuse to adopt half your stack, and because they are all useless with technology, they call in for tickets all the time. Your service desk spends 50 hours per month dealing with them, costing you $3,750 a month.  

Obviously, I’ve made up these numbers just to prove a point, but I think we all accept that some clients cost more to service than others. If you can apply hard numbers to that, you can make a case to them to a) adopt your stack, b) pay more or c) both. It also makes it easier for you to feel good about letting go of a client if you have good numbers and those numbers show that a client is routinely losing you money (or even just coming in below your cost of capital).

Probably the most difficult thing about this concept is getting the data. Pay attention to whether or not the tools in your stack are delivering the data that you need to have accurate costing information, and then make the best decisions on pricing.

Want to learn more about MSP finance? Sign-up for our upcoming finance-focused webinar featuring Peter Melby, CEO of Greystone Technology, a globally recognized MSP, as he reveals how MSPs can reinvest and make money at the same time.

Sign me up for the webinar!

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