When it comes to raising prices, many MSPs feel a sense of dread. The fear is that increasing rates might push clients away. It’s a valid concern, but the reality is that raising prices is often necessary for maintaining profitability and sustaining the quality of services you provide. However, it’s crucial to approach this with a strategy, not just a blanket increase across the board. Let’s break down the right way to manage this delicate balance.
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Understand Your Profitability By Client
Before even considering a price hike, the first step is understanding your profitability by client. Not all clients are created equal, and not all of them contribute equally to your bottom line. In fact, if you dig into the data, you might find that while some clients are highly profitable, others are dragging down your margins.
For MSPs, the average profit margin is around 9%—and frankly, that’s not good. Best-in-class MSPs achieve 18% or higher in net profitability. And remember, your salary as an owner is not considered profit; profit is what remains after you pay yourself a fair market salary.
Focus On The Problem Clients First
Once you have a clear understanding of which clients are profitable and which are not, you can begin to categorize them. Here’s a practical way to approach this:
- Clients Who Are Profitable: If a client is already providing a strong gross margin—let’s say around 50% or more—you don’t need to mess with their rates. These clients are the backbone of your business. Don’t poke the bear if you don’t have to.
- Clients Who Are Costing You Money: These are the clients who consume your resources more than they pay for them. If you’re losing money servicing a client—paying your engineers and covering tools without seeing a return—it’s time to raise prices or let them go. Typically, these clients will require a significant price adjustment, sometimes up to a 20% increase or more. This might feel uncomfortable, but you need to be firm. If a client isn’t willing to pay what it costs for you to stay in business, then parting ways might be the best decision.
- Clients With Room For Improvement: Some clients might not be unprofitable but are not generating the kind of profit they should. For these, consider revisiting the scope of services they receive. This is where you might re-evaluate their service package, treat them almost like a new prospect, and adjust their service agreement accordingly. It’s often necessary when a client has been with you for years and their original contract no longer reflects current market rates or your evolved service offerings.
How To Have The Price Increase Conversation
Talking about price increases with clients is never a conversation anyone looks forward to, but it’s necessary for sustaining your business. When approaching a client about raising rates, it’s crucial to come prepared with data and rationale:
- Highlight The Value You Bring: Explain the value of the services you’re providing and how they have evolved over time. Point out the improvements in technology, enhanced cybersecurity measures, and other valuable additions that justify a price adjustment.
- Be Honest About Costs: If the reason for the increase is due to a misquote or an underestimation of costs from the start, acknowledge that. Clients appreciate transparency, and this will make it clear that the adjustment is not arbitrary but a necessity for continuing the partnership.
- Set Expectations Clearly: Make it known that the new rates will help ensure high service standards. Frame it as a part of maintaining quality and the necessary adjustments to cope with inflation, increased tool costs, or enhanced service delivery.
Re-Evaluate Contracts Regularly
A common mistake many MSPs make is putting clients on a service plan and then setting it to autopilot. They sign a client and don’t revisit the service agreement for years. This leads to outdated pricing structures that don’t reflect the realities of today’s IT landscape.
A best practice is to establish a rhythm of regular account reviews, often during QBRs (Quarterly Business Reviews). When you do this, it becomes easier to justify price increases over time. You can position it as an upgrade to their existing package, pointing out new risks like cybersecurity challenges that have emerged since the original agreement. By aligning your service offering with current needs, you can move clients from, say, a “2022 service package” to a “2024 package,” positioning the change as a standard part of maintaining high-quality service.
Don’t Fear Some Client Turnover
Let’s face it—some clients may decide to leave if you raise your prices. And that’s okay. Losing a few low-margin clients is not necessarily a bad thing. It frees up your team to focus on more profitable work and can improve the overall health of your business. It’s a tough pill to swallow at first, but trimming the dead weight can lead to better long-term growth.
The bottom line is that raising prices shouldn’t be done blindly, nor should it be avoided out of fear. Understand your margins, communicate clearly with your clients, and take a nuanced approach to each situation. By doing so, you’ll maintain a healthy profit margin while continuing to deliver the quality service your clients expect.
