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by Dan Phillips, CEO and Co-founder CloudHealth Technologies
Today we continue our third post in our blog series dedicated to helping MSPs accelerate their business success. In this post, we want to focus on the key topic that is near and dear to every service provider...How do I price my services and what do margins look like?
The Managed Service Provider (MSP) market we know today was born in early 2000. The transition to an MSP model was due to increasing margin pressure for the thousands of value added resellers (VARs) that sold and maintained hardware. This market, previously dedicated to selling hardware solutions, began looking for ways to increase margins and gain recurring revenue.
Initially, VARs began migrating their business models to include remote monitoring, management and remediation for premise-based IT infrastructure primarily for the enormous SMB market. As the market gained momentum, several companies emerged as leaders by developing platform technology that delivered remote IT monitoring and management, as well as training programs and packaged services that enabled VARs to deliver “managed services.” Some of these companies include: N-Able, Kaseya, Level Platforms...and my former company, SilverBack.
Now it’s all changing, again!
Companies, large and small, are moving to public cloud providers like AWS for their IT infrastructure needs. The ability to spin IT infrastructure up and down in minutes and only pay for what they use is too compelling to pass up. Just as companies needed help managing premise-based infrastructure, they are now learning that while the cloud is easy to access and use, the complexity grows exponentially as their infrastructure grows. They need help reporting on cloud infrastructure, managing resources, optimizing cost and performance, and ensuring security and governance policies are met. Today, they need help managing their cloud infrastructure.
VARs that transitioned to remote IT MSPs now need to take the next step and become Cloud MSPs. The same services and solutions are still required for customers: monitoring, management, and remediation services, as well as migration services for companies moving their IT infrastructure to the cloud. The big difference is how to package and price value added cloud services for business success.
In the old on-premise world, MSPs typically priced per managed device or per user. As an example; servers might cost $200 per month, network devices $100 per month, and desktops $50 per month for full monitoring, management, and remediation. The business model was that an MSP could provide better, faster, and less expensive management of IT infrastructure than a customer could on their own. The trade-off for a customer was how much it would cost to hire and manage an IT person vs paying for the service. The goal for the MSP was 40% gross margin.
But the cloud changes everything. In a cloud environment assets and resources can spin up and down and change on a minute-by-minute basis. Prices for these assets and resources are based on hourly usage with numerous pricing options and wide discrepancies on-demand vs reserved. Pricing models based on per device or per user won’t work. Pricing based on cloud infrastructure cost or usage does work.
MSP Cost Breakdown and Analysis
Let's look at what a cost breakdown might look like.
You need an MSP Team. This will be the team hired and trained that is dedicated to delivering managed cloud services. The initial team and associated costs will most likely resemble the following:
Of course this will vary according to the cloud environment. But the team described above should be able to manage multiple cloud customers with total usage around $300,000 per month in AWS cloud spend.
You also need tools designed to monitor, manage, and remediate cloud environments. A basic rule of thumb is that these tools will cost approximately 10% of monthly AWS infrastructure cost. In the scenario described above this equates to $30,000 per month to manage $300,000 per month in AWS infrastructure.
Your total managed service cost is now: $71,666 per month.
If our target gross margin for managed services is 40%, an MSP would charge each customer 40% per month of their AWS monthly spend for full management, monitoring and remediation of their cloud environment. As illustrated in this model, our List Price for services on $300,000 per month of AWS spend under management would be $119,443 ($119,443 = 40% of $300,000 per month in AWS spend).
Customer Perspective and Analysis
Here are a few cost analysis scenarios from the customer’s perspective:
- A customer spending $5k per month in AWS will pay $2,000 per month for the managed service. This equates to spending $24k per year vs hiring an AWS certified solutions architect @ $100k including burdened cost.
- A customer spending $10k per month in AWS will pay $4,000 per month for the managed service. This equates to spending $48k per year vs hiring an AWS certified solutions architect @ $100k including burdened cost.
- A customer spending $15k per month in AWS will pay $6,000 per month for the managed service. This equates to spending $72k per year vs hiring an AWS certified solutions architect @ $100k including burdened cost.
There will be a point when financially it makes sense for a company to hire their own staff as opposed to contracting with an MSP. However, the benefits of expertise, flexibility, management, and accountability an MSP can offer may significantly extend that point in time for a customer. Remember, it's all about the value added services the MSP provides.
This is just one example of pricing for a full suite of management, monitoring, and remediation of a customer’s AWS environment. There are a wide variety of services and offers MSPs can package and deliver for cloud customers. We will explore these in more detail in future posts of our MSP success series.
There's a lot of good news here in terms of market opportunity for MSPs looking to build a business. The elasticity, flexibility, ease of deployment, and low cost of the cloud means that companies are actively looking to move their IT infrastructure to the cloud. The shift from premise-based and data center infrastructure to the cloud is inevitable. The opportunity for cloud MSPs is now because the complexities for managing cloud infrastructure are rapidly increasing for most organizations.
So, if you're an MSP with cloud expertise looking to accelerate your business with high value services, check out CloudHealth Technologies. We have solutions you may want to add to your portfolio to enhance your offers and deliver value to your customers.
For more information, you can contact us at firstname.lastname@example.org.