How do you come up with your monthly price for your contracts? Do you follow a specific formula? Do you share that with your customers?
This summer we did a customer survey around sales and pricing and there were some interesting findings.At Compuquip, we had a variety of ways to calculate pricing which I’ll share. We tried to triangulate the price using a variety of data points. And I must tell you that it’s important to factor in all of them because you could get insight from one of the questions that will dramatically change your price point.
Standard Pricing – What do you typically charge per end user? Or what is your goal? Typically, we shoot for $100/end user and when we could, we went for $125. However our ARPU (average revenue per user) typically was in the $75 – $80 range.
Cost To Deliver – It’s important to know your cost to deliver the service. What is your current burn rate for delivering services? I always wanted to know the cost to add on an additional end user to help me factor in my incremental margin but I never got to that. So I had to do a “back of the envelop calculation”, figuring what the direct cost to support would be. Do they need a dedicated resource onsite? If so add that. How many calls do you think you’ll have to take, what is your cost per call? A fail safe is what is your typical service margin and use that as the cost.
Current Cost – what is the prospect currently paying for services? If they are using another Managed Services provider its relatively easy to get an understanding of what they are spending. Just be careful to read the current scope carefully because they may not be getting everything they need included, hence why they are looking for another provider. If they have an in house team then you’ll want to factor in all the costs associated with those folks. You can take some of the direct costs I lists here on our Service Gross Margin blog post.
Cost to do this on their own internally – All companies at some point consider bringing IT in house, typically because they’ve been burned by an outsourced provider. So we used to always have that as a barometer. Typically, it required to hire a full time person which was going to be at least $35K plus benefits and overhead.
What will they pay for the service? - This is a question I ALWAYS asked my prospects. You’ll learn so much by the answer. If they are cheap with IT then you’ll get a low number, or if they want to be ball busters and negotiate, they’ll throw out a low number and you have another data point to factor. If they have been burned lately then they might be willing to pay extra for it.
Next time you have a contract to price, try this and put the numbers on the whiteboard. In my experience, the price points are typically within 20% – 25% of each other which helps triangulate the final price or at least get you a starting point.
How do you price your contracts? Let us know.