How to raise prices in managed services

Receiving the right MSP reward may be a science as much as an art, suggests Chris Gonsalves

Every IT services provider has been there: that moment during negotiations to re-sign an existing client when it comes time to say the number.

Do you maintain the price of the service for another subscription period? Do you offer a discount to ward off competitive threats to client retention? Or do you make the bold move and ask for a raise?

As tough as it sounds, the best option might be the latter. According to experts, raising prices does more than line your pockets with a few more ducats. It can actually improve the buyers' perception of your offerings and increase the likelihood of a sale or a renewal.

As social psychologist Robert Cialdini points out, price hikes can drive sales and boost the perception of value because in markets in which people are not completely sure of how to assess quality, they use price as a stand-in for quality.

So while no shopper would pay $50 for a bottle of soda, something easily compared to other options for price and quality, things get thornier when the 'product' is a more complex concept like IT services.

Price becomes more than just what they'll pay. It becomes how they rate the quality and comprehensiveness of a service they don't fully understand and would be hard pressed to compare to competitive offerings in an apples-to-apples kind of way.

This concept of pricing, particularly for managed IT services, has been on our minds here of late. We're conducting a US survey to benchmark the pricing of many common managed services and we're asking readers to take a few minutes to complete our questionnaire about pricing practices.

With help, we'll create a baseline of pricing data to help MSPs make better decisions about the prices they set and create policies to maintain price integrity.

The matter of pricing is important to the channel of late, especially when you consider the profit pressure that managed services providers appear to be facing, based on our latest 2014 Channel Profitability Report. Complimentary copies of the report are available.

It's important to note that while raising prices can have a beneficial effect on value perception and the bottom line, it's an exercise that needs to be undertaken with some caution. Writing in the Harvard Business Review, pricing strategist Rafi Mohammed, author of The 1% Windfall: How Successful Companies Use Price to Profit and Grow, points out there's a right way and a wrong way to mark up your goods and services.

Mohammed uses the recent and well publicised example of Amazon.com raising the annual cost of its popular Prime service from $79 to $99 as a case of a price increase done well.

This is no fringe category for the online seller; Prime customers spend roughly twice what non-Prime members spend and the company's hopes for profitability are strongly tied to this high-performing clientele. Messing with them is serious business.

"Raising prices is an angst-inducing ritual for all companies," he said. "The art of raising prices involves a clear yet sensitive dialogue with customers to justify the lift. As Amazon demonstrated, even a 25 per cent price increase can be palatable if pitched correctly."

The lessons in Amazon's successful tactics, Mohammed writes, are applicable to most businesses today, including:

Start by suggesting a higher number. Amazon "pre-announced" a price hike it said would be in the 25 to 50 per cent range. Customers had time to chew that over before the formal announcement that it would be just 25 per cent, the low end of the range.

The new price still seemed like a good deal to consumers who had a potential $40 increase in their heads.

Put the onus on costs. Customers don't want to get the sense that prices are rising to sweeten executive pay or bolster profit margins, Mohammed says. Amazon blamed higher shipping costs right out of the gate, a textbook move but an important one.

Make it seem fair and a bit of a bargain. Clients will be more receptiveif they think it's a fair deal and if they expect to get a little more in the bargain. Amazon made its case by saying it hadn't raised Prime prices in nine years and that new features like streaming radio might be added in the near future.

All of which was enough to earn Amazon a B+ in Mohammed's estimation.

So what might Amazon have done better? In a page torn right from the MSP playbook, the author suggests more granularity and pricing options to really give the impression of a complete services offering.

"To effectively grow a business, one price does not fit all," Mohammed writes. "Offering consumers a range of good-better-best options truly enables companies to profit and grow. Price-sensitive customers purchase the good option while consumers who highly value a product spring for the best. Since Prime is so critical to growth, it needs a lower price point entry version to attract new customers."

Are you making the most of your services pricing options?

Chris Gonsalves is vice president of editorial at Channelnomics

For more US-focused channel coverage, see www.channelnomics.com