Erick Simpson’s MSP Newsletter | November 2022 | Truing Up Pricing for Legacy Clients

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Happy Thanksgiving

We are thankful for so much this year and wish you all a Happy Thanksgiving!

Truing Up Pricing for Legacy Clients

One of the challenges of growing your MSP business profit is the struggle to “true up” or align your legacy clients’ service rates with your current prices for new clients. In working with MSPs, after completing a pricing and bundling exercise to establish minimum 60% service profit margins, I find this is typically the most significant contributing factor to depressed overall blended service margins.

And it’s no secret how this happens – it’s the result of any number of factors, including:

  • Your cost of doing business was lower than today when you signed your legacy clients
  • Your operational maturity wasn’t what it is now, and you underpriced your past services
  • You haven’t done a good job of raising your rates consistently over time
    You have many cost-conscious “C” customers making it tough to raise their rates
  • You misjudged your legacy clients’ alignment with your ideal client profile as strategic
  • You “_____________” (fill in the blank)

Note how each of these reasons (along with others you might add to the list) begins with “You”? This is an opportunity for you to make some tough business decisions, starting with an objective assessment of each of your clients to determine which are paying less than they should. First, create an ideal client scorecard with all the values you feel make up your perfect client, with each value scored one to five, with 5 being best.

These ideal client profile values may include (modify as needed):

  1. Cultural fit: (1 2 3 4 5)
  2. Business growth potential fit: (1 2 3 4 5)
  3. Budget fit: (1 2 3 4 5)
  4. Profitability fit: (1 2 3 4 5)
  5. Rate fit (current rates): (1 2 3 4
  6. Strategic fit (value technology and security): (1 2 3 4 5)
  7. Geographic footprint fit: (1 2 3 4 5)
  8. Vertical market fit: (1 2 3 4 5)
  9. “Noise or Noisy” fit (existing clients): (1 2 3 4 5)
  10. PITA fit (existing clients): (1 2 3 4 5)
  11. ____________ “fill in the blank”: (1 2 3 4 5)

Next, use this scorecard to assess each of your current clients (as well as all prospects) and segment your client list into “A” and “B” clients and “C” customers. You’ll want to be as objective as possible in your scorecard measurement criteria to prevent emotional bias from influencing your responses. It would be best to involve your entire team in this exercise, as their perspectives on specific clients may enlighten you.

Among other factors, your scoring exercise should identify not only those clients paying less than your ideal rates but those that are the least profitable – and there’s a difference. You may have clients paying your current rates but are less profitable than others paying legacy rates, and vice versa. Less profitable clients paying current rates may be noisier than anticipated or suffer from deficiencies in your onboarding process, failure to integrate and automate your platforms to maximize efficiency, or because you have lost some technical staff, and replacing them has increased your labor costs.

After your client scoring exercise, you’ll now be faced with two decisions: how to exit those “C” customers that you can no longer justify moving forward with and bring your legacy clients to parity with your current service rates. When exiting customers that do not fit your ideal client profile, prioritize them accordingly and get to work. The longer you support them, the longer they drain your resources and prevent you from replacing them with more profitable clients that match your ideal profile.

To succeed in raising prices with your legacy clients, prioritize them based on their gap from your current rates – with the widest gap at the top and the lowest at the bottom. You may need to phase your increases over time depending on how wide the rate gap is. I’ve worked with some MSPs that hadn’t raised their rates for legacy clients for over ten years (!), and for some of their clients, it took several years of annual price increases to true them up, so don’t risk losing a good legacy client by raising their rates too quickly. After all, it took years to get to this point, so it’s reasonable to assume it will take some time to close the rate gap with them.

I’ve found that the best approach to having the “price increase” conversation with clients is to be honest, and direct with them, and I role-play this conversation with my MSP clients. I encourage you to take the “ask forgiveness, not permission” approach when announcing your rate increase and compose an email, followed up by a letter to your client letting them know how much you appreciate their business and remind them that their operating costs have gone up over the same number of years that you’ve kept from raising your rates, and unfortunately you are now forced to do so. Furthermore, let them know they will see the new pricing reflected on their next invoice.

Check out my Client Service Rate Increase Letter Here (60% off code below)

If you feel that you will have some massive customer service or satisfaction blowback…you won’t. Trust me; I’ve done this exercise with hundreds of MSPs, and their expectation of a gigantic roar from angry clients becomes a slight whimper from a client or two.

In my experience, you can expect one or two percent of your clients to complain, and when that small handful do, get on the phone with them and work it out. By working it out, I don’t mean to back down on your rate increase, but adjust it down a percent or two for those specific clients.

And if you do happen to lose a client over this, then THEY NEED TO GO AWAY. Count your blessings and replace them with a couple of new, profitable “A” clients. I’ll bet your support costs for these new clients would be close to that of one unprofitable “C” customer.

To make price or rate increases easier for you and your clients in the future, I recommend you add language similar to the following to your MSP agreements:

The term of the Service will be 36 months beginning the first full month of service following the date of signature at the rate of $___________, and be reviewed semi-annually to address any necessary adjustments or modifications for circumstances beyond our control that impact our business costs, such as the rate of inflation, supply chain issues, labor costs and the price of third-party subscriptions and services.

I’ll ask you again to “ask forgiveness, not permission,” with this language and add it to all new agreements and renewals. If a prospect or client pushes back, explain why this is included, reassure them that it isn’t your intent to “bait and switch” them, and clarify that this is for situations far outside your control to predict.

An excellent example for you to use is price increases for Microsoft 365 licensing or your internal service applications. If all else fails, you can offer to adjust the review period from “semi-annually” to “annually” and add “not to exceed” language (less desirable for you) to this section like:

These increases will not exceed ______% of the value of the current monthly fees due under this Agreement.

Takeaways:

1. Suppose you haven’t increased your rates to keep up with 2022’s impact on your business costs or to address other operational factors that have eroded your profit margins over the last several years. In that case, I strongly encourage you to do so right now.
2. Use these tips to help insulate your MSP practice from external economic conditions and maintain and improve your profit margins moving forward.

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There’s something to the old adage “it’s lonely at the top.” Many MSP business owners seeking guidance on how to grow their company have a scarce amount of resources to turn to for help.

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Help Us Gather Information on Your Employee Challenges

Got 5 minutes? Our good friend Karl Palachuk has asked me to promote a new survey on MSP employment challenges, and he needs our help. Please help us gather some information on your employment challenges and wins!

My MSP Sales App Prices Your Services & Creates Your Proposals, SOWs, and Business-Winning PowerPoint Sales Presentations in Minutes!

When preparing your sales proposals, statements of work, and sales PowerPoint presentations for new business opportunities:

  • Does it take way too much time to do?
  • Is it so complicated that it falls to the bottom of your to-do list?
  • Are you challenged when pricing to maintain consistent margins?
  • Do you have to use too many different tools/platforms/calculators?
  • Are you the only one that can do this critical function, hence the bottleneck?
  • Are late proposals to prospects and clients the norm, delaying new revenue?

If you’ve used tools like MSP Pricing Calculators and Sales Proposal and Statement of Work Templates, you know how time-consuming it can be to price your services for 3 distinct bundles and transfer all of that information between these distinct assets.

Or maybe you’re using a “Swiss Army Knife” platform for your business that promises to do it all, but is simply too kludgy and takes too many clicks and screens to deliver an unattractive, simplistic quote?

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I’ll say it again – with my new MSP Sales App, you can build and price your offerings customized for each prospect or client to maintain your margins and export a professional, consultative sales proposal, SOWs, and sales presentation in minutes!

See for yourself – click here for my short demo video

Erick Simpson
Founder & Chief Strategist
ErickSimpson.com
[email protected]
(800) 414-1441
2271 W. Malvern Ave., #169
Fullerton, CA 92833
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Erick Simpson built and sold one of the very first MSPs in the industry and co-founded MSP University, where he grew and coached a channel of 30,000 IT Solution Providers through their MSP transformation. He is the creator of the MSP Mastered® Methodology for business performance improvement that has been licensed by numerous IT channel distributors and vendors. Erick is a technology business & channel growth expert, influencer, thought leader, speaker and author with 4 best-selling books and 50 white papers to his credit, and he co-hosts the ChannelPro 5 Minute Roundup Podcast. He builds channel improvement programs for IT distributors and vendors and his consultations help IT organizations overcome business challenges to realize rapid, profitable growth. Erick’s industry recognition includes Channel Futures’ 7 Thought Leaders Defining the MSP Market, Jay McBain’s 100 Most Visible Channel Leaders, 2 Time ChannelPro 20/20 Visionaries, 2 Time MSP Mentor 250 and SMB Nation’s SMB 150 award recipient.
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