MSP Pricing and Profitability: How to Price Service Offerings, Calculate Labor Costs, and Measure Contract Margins

Caitlin Good: Welcome to MSPs: Boost Your Profitability with Smart Service Offerings, Pricing and Automation. I’m Caitlin Good, the Program Marketing Manager at Syncro. I’m very excited to be here with Rayanne Buchianico owner of ABC Solutions, which provides accounting, tax and consulting services to IT professionals throughout North America. She is a certified QuickBooks Professional Advisor in QuickBooks Desktop and Online. She also holds a degree in accounting and is enrolled to practice before the Internal Revenue Service. Rayanne is also a partner with Sell My MSP, with expertise in managed service providers. Sell My MSP provides unique guidance through the merger and acquisition process, including business valuation services. Rayanne, I’ll let you take it from here.

Rayanne Buchianico: Thank you very much, Caitlin. And welcome to everybody. Thank you so much for joining.

You can email me at Rayanne at ABCsolutionsFL.com. Don’t forget the FL, as in Florida, or it will go to somebody else. You can also catch me on LinkedIn or at our website, ABCsolutionsFL.com. I may point you to our website a couple of times today because I have some handouts you can download.

Thank you to Syncro for inviting me today. What I really want to talk about is pricing your service offerings, developing your service offerings, pricing them appropriately, and measuring the profitability of them. There are four components we’re going to focus on: costs, because we need to know what our services cost in terms of hard costs; the labor rate, also known as the burden rate, and some simple ways to calculate that; how to measure utilization of your employees and resources; and profitability of your services and clients. Then we’ll talk about pricing, because if you’re not making the profits you want, you may need to adjust your prices.

I do want to encourage everybody to post questions as we go along. Caitlin is monitoring the chat and Q&A windows. If I can’t get to something right away, I’ll be sure to address it at the end.

Rayanne Buchianico: So the first thing we need to do is understand our costs. Inside your PSA, whether you’re using Syncro MSP or some other PSA, you need to make sure your costs are entered accurately. As you’re putting together your agreements and contracts, there are going to be hard costs.

Whether you’re charging by the seat, by the service, or by the device, you need to figure out what each of those things costs. Whether you’re talking about the RMM cost, the components themselves, all of your cloud resale costs, the actual dollars you take out of your company’s bank account to pay your vendor to provide those services or tools to your clients.

You need to go through your vendor bills and determine how much you’re paying per device for each tool, and make sure you get that unit cost inside your contract. That’s going to help your PSA understand your profitability. If the information is accurate when it goes in, it has a much better chance of being accurate when it comes back out on a report.

Those hard costs are the cost of goods sold, your COGS. The cost of your tools, your RMM, your 365 licenses that you’re reselling. You pay one amount and you invoice your customers a different amount. Only the difference is the gross profit on that amount.

Rayanne Buchianico: The next piece is the burden rate, or the labor rate. How much does your labor cost you?

The fully burdened cost of your service delivery team is not just the hourly rate you pay them. Let’s say you hire somebody at $25 per hour. But that’s not what it costs the company. On top of that $25, there are other things you’re paying: payroll taxes, benefits that the company pays on behalf of the employee, worker’s comp insurance, a fraction of overhead. There’s a long list.

There are two ways you can calculate your burden rates. You can parse out all the different components, or you can use a standardized percentage. I’ll show you how that standardized percentage comes really close to the actual number.

If you’re a detail-oriented person who likes to play with numbers, go for the actual costs. I’ll hand you the worksheet that makes it easy. Or if you’d rather use the standard percentage because it seems to work, that’s great. As long as you’re making some calculated estimate that helps you understand it, you’re fine.

Why do we need to do this? Why can’t you just put in a dollar an hour into the PSA? First, people who shouldn’t see pay information shouldn’t have access to it, so set up your security roles inside your PSA to limit visibility. But the other reason is: when you’re running reports at the end of your contract year, about a month or two before renewal, I go in and run a profitability report on that client and that contract. I want to see how much time we spent on average, because a lot of the work we do is all-inclusive.

And often there are plenty of people who will take advantage of that. You know, “Can you change the ringer on my phone? Can I make my phone ring on my computer?” They will ask you everything when it’s an all-inclusive offering. You want to track time to make sure the contract stays profitable. Otherwise you find yourself working overtime to keep a client happy and making about $0.05 an hour on the account.

Rayanne Buchianico: I built a spreadsheet you can find at ABCsolutionsFL.com/resources. It’s called “MSP Labor and Pricing.” It’s a simple Excel spreadsheet. Here’s how it works.

You put in a monthly or annual gross wage for your employee. Say $60,000 annually. The spreadsheet divides it automatically and shows both monthly and annual amounts. I built this for the United States, so those in other countries may need to adjust for local taxes.

We have Social Security, Medicare, and federal and state employment taxes, all with their standard percentages and wage caps. Every state has a different unemployment wage cap. Florida’s is entered in the default. You can update it for your state.

Some people use the overhead expenses portion, and I encourage this. The people who work in your company do take up a percentage of those resources. I use 5% of salary to allocate overhead. That’s 5% of this person’s salary, not 5% of total company overhead, which keeps it simple when you’re onboarding someone new. Add worker’s comp premium, medical or dental benefits, pension and retirement.

Here’s what happens: you get the total costs over and above salary, and now you have a fully burdened monthly cost. An employee receiving $5,000 per month is actually costing the company $6,200. Annually, that’s $73,000 against a $60,000 salary. Divide by 2,080 working hours per year and you get an hourly burden rate. That is the number you enter into your PSA.

I also built a simplified method. 30% is a reasonable flat add-on to annual salary in most US markets. High cost-of-living areas like New York or Los Angeles: bump up to 34%. Lower cost areas: 27-28% works. At 30%, that $60,000 employee costs the company $78,000 annually, or $37.70 per hour. That’s the number you want in your PSA.

Rayanne Buchianico: Now we know how much things cost. What do we do with that information?

We want to measure it and use it for planning, budgeting, cash flow forecasting, and pricing. I took a screenshot of the ticket efficiency by technician report. You can see company averages and individual technician performance, including how many tickets were completed and how long each took.

For example, if one technician had one ticket and it took almost three weeks, you can see whether your people are working efficiently. How many tickets can someone close in a day? Run this report weekly or daily. Post it on a screen inside the service delivery room. People will start to compete with each other, want to make sure their resource efficiency is in the green, start to close tickets faster, meet SLAs, and track customer satisfaction.

If your team knows you’re watching these numbers, they will start to pay closer attention.

We have a rule at our company: all time is real time. We run the start-stop clock for each ticket. The timer runs while the technician is working, then the timesheet gets completed. Every day, everyone is expected to have eight hours on their timesheet. If they don’t, the office manager sends an email at 9:30 the next morning. If the timesheet is still not complete by 12:30, a second email goes out with the manager copied. It takes about two to three weeks to establish full compliance. It works.

I know you’re thinking you don’t want to be the timesheet police. But the time that lands on those tickets is what gets billed to the client. If the time is not accurate, either the client is overbilled or you’re under-invoicing. Either way, inaccurate time is costing somebody money, and that is not why you’re in business.

Rayanne Buchianico: If you take the number of tickets, say 241, and the total hours worked to close them, say 225 hours, you get an average of 1.1 hours per ticket. That should prompt a question: do I have a training problem? Are requests coming in especially complicated? Is there a configuration issue causing a time sink?

You should also look at support revenue versus payroll costs for your support team. If payroll is around 26% of support revenue, that’s a solid number. If it creeps above 35-40%, you need to ask whether you’re overstaffed, because you’re not generating enough to cover those employee costs and overhead. The target is around 30% of total revenue.

Enter all costs and time accurately. Build policies for consistency in posting time, revenue, and expenses. When you sell hardware, invoice the customer and pay for the hardware in the same month. Your accounting staff should always ask: when was this customer invoiced, and what ticket does this vendor bill correspond to? Every purchase should have a purchase order number or ticket number, and those two should align.

If you’re expecting a 20% margin on products, taking your product revenue and multiplying by 0.8 should come close to your total hardware costs. Keep revenues and costs aligned so you can sanity-check margins at a glance.

Caitlin Good: We have a couple of questions. Alex is asking: if you’re just starting out and your current burden is your own time, how do you recommend calculating that?

Rayanne Buchianico: Great idea to assign yourself a reasonable salary, whether you pay it or not. You still want to make money on your own time, and you need to be able to measure it. A helpful tip: if you’re a one-person shop, you’re going to want to pay yourself more than you’d pay someone you’d hire off the street.

If you just left a job and started an MSP, take what you made at your last job, add $5,000 to that annual salary, and build the burden rate from there. If you’re a sole proprietor taking cash distributions, convert those distributions into an hourly rate. If you need $5,000 a month to pay your mortgage, feed your kids, and keep the lights on at home, that’s your baseline. Any reasonable salary you assign yourself is fine.

Caitlin Good: There’s also a question about isolating performance by ticket complexity using the ticket efficiency by technician report. You can isolate by ticket type in Syncro, which maps to ticket complexity.

Rayanne Buchianico: Great idea. If you can customize ticket types, you can use them as a complexity proxy. Complex tickets take longer than a password reset. So yes, you can isolate by type and account for that in your benchmarks.

Someone else asked about tracking 365 subscriptions in the PSA. Absolutely yes. I track them because they appear on the invoice and I want them tied into the overall profitability of that client. My benchmark: any contract that is less than 55% profitable needs a price increase. I review those once a year at a minimum.

Rayanne Buchianico: On profitability reports: what do I like to look at?

I want to see who my highest revenue earner is. If they’re paying a significant amount, I want to make sure they get white-glove treatment and that they stay happy. My lowest revenue earner deserves attention too, not because I want to ignore them, but because they may just need a little hand-holding. “We can help you with this, we can help you with that.” They are low-hanging fruit for upsells.

The most profitable customer is not necessarily the highest revenue customer. Somebody paying you $10,000 a month at 40% profit may be less valuable than someone paying $5,000 a month at 65%. Look at the top line, but also look at profitability per client.

And you know what they say about the least profitable customers: they’re probably your biggest headache. Constantly complaining, late on payments, requesting custom invoice formats. If you keep your eye on the least profitable customers, you can decide who to upsell and who to fire.

There’s a book worth reading called The Pumpkin Plan by Mike Michalowicz. He talks about weeding your garden at least once a year. Profitability by contract is key to keeping your business running.

Caitlin Good: Can billings sent from Syncro PSA to QuickBooks Online charge the client’s credit card once transferred?

Rayanne Buchianico: Syncro has autopay built in. QuickBooks Online does not come with a native autopay option, so any auto-payment plan has to be managed outside of QuickBooks Online. Syncro has it built in.

Caitlin Good: Yes, recurring invoicing is one of our best features. It’s all connected.

Rayanne Buchianico: Right. And there are not too many others out there without paying for a third-party solution. That’s always been one of my favorite features.

Use your dashboards and customize them as best you can for information that is useful to you. It will keep you from having to pull reports constantly. Reports are very 20th century. We’re in the era of widgets and automation. You can get details right in front of your face. I’ve recently come to embrace dashboards and widgets. Because of them, I stay focused on what needs to get done today, and my timesheets look better because of it.

Rayanne Buchianico: Let’s talk about pricing. Once you gather your costs and start measuring profitability, and maybe some pricing adjustments are needed, here’s a simple four-step process.

First, determine your costs: hard costs, COGS, whatever you call them. Second, enter the gross profit margin you want. If you’re getting 40% and you want 55%, enter 55%. Third, enter the number of units: machines, users, seats, or whatever you sell by. Fourth, calculate the unit price and extended price for the contract.

In the pricing spreadsheet, which is the third tab in the same Excel file, you enter your desired margin and a multiplier is built in. You list all your services, the number of units, the unit cost, and the unit price. The spreadsheet calculates extended price automatically.

For the labor component: estimate how many hours you expect to touch each machine per month. If you estimate 30 minutes per machine, and the burdened hourly rate is $37.70, that’s $18.85 per machine per month. For 12 machines, total labor cost is about $226 per month. At the corresponding billing rate, you’d need to charge approximately $1,175 for that labor across 12 units. Combined with the hard costs, the total monthly charge for a 12-machine agreement works out to $1,680.

That’s how you can easily calculate your prices. The spreadsheet is available free at ABCsolutionsFL.com/resources. No email capture required.

Rayanne Buchianico: One more concept: not all users in your client’s company need the same services.

If you have a kiosk employee at a warehouse whose entire job is scanning parts and printing packing slips, maybe they just need email, antivirus, and a phone. You can offer three kiosk user seats at $89 each. Ten office staff users at $119. Five leadership users at a higher tier with the full stack.

It’s still a tiered model, but it speaks to the client differently. They don’t have to pay the premium rate for employees who won’t use half of those services. If you only offer one package, you’re forcing clients into a price that doesn’t fit their staff mix.

Caitlin Good: An anonymous attendee is asking: do MSPs tend to offer a fixed monthly price, or break it down by component like RMM, AV, and backup? And are there pros and cons?

Rayanne Buchianico: There’s a solid mix of both. I’ve seen MSPs include 365 in a bundled package and also seen them split everything out. What I’ve done for quite a few MSPs: separate every component on the contract with its cost assigned but with a $0 line item price, and then present a single “Monthly Managed Services” line item as the total. This reduces the opportunity for clients to pick and choose which services they want.

Clients always think they know what’s best for themselves. But no matter what, you should have a baseline. A minimum level of service, a bare-minimum protection requirement, that you require before doing business. If a client won’t protect their computers and users at that level, you need to make the decision to walk away.

There’s no objectively better approach. The best way is the one that works for your business and your clients. They all work.

Caitlin Good: Someone asked whether customizable dashboards are coming to Syncro, specifically the ability to add multiple dashboards for different roles. Not that I’m aware of currently, but you can always submit a feature request on our community forum. We’re always looking there for inspiration and are focused on listening to partners and building what would be most valuable to them.

Rayanne Buchianico: There are a number of third-party dashboarding systems you could sync your Syncro data with and customize. Keeping an eye on what’s going on in your business through dashboards is genuinely important.

Caitlin Good: We do have a Team Plan that includes a Power BI integration, which lets you bring in your Syncro data and build custom views from there.

Those are all the questions I’m seeing right now. Thank you, Rayanne, for juggling so much. If anyone has any last questions, please add them to the chat.

Rayanne Buchianico: Thank you to everybody who attended and to Syncro for inviting me. I hope we can do this again. And thank you to everyone for your input and participation. It always makes it so much more fun knowing someone is on the other end.

Caitlin Good: Yes, thank you. I’ve pasted Rayanne’s contact info in the chat. You’ll also see our Syncro free trial and demo links there. Thank you so much, Rayanne.

Rayanne Buchianico: One more thing. Jeff in the Q&A is asking if MSPs use Syncro to track projects and if so, how, without destroying response time. I’ll plead some ignorance on the projects module inside Syncro. Caitlin, do you have any insight?

Caitlin Good: We don’t have the most robust project management right now, I’ll be honest. Our ticketing is continuously being improved and automation is increasing, so you can track work that way. But for dedicated project management, there are options.

Rayanne Buchianico: I’ve seen MSPs use Monday.com for project tracking when their PSA’s project module didn’t meet their specific needs. Smartsheet is a low-cost option. QuickBooks actually has a projects manager and workflow module built in. Asana is a good tool, as Robert mentions. We use Microsoft Planner internally, and it’s built right into our 365 tenant. You can attach files, collaborate on Teams, and assign tasks.

Alex asked whether pricing service offerings is something I help MSPs with directly. Yes, I’ve helped quite a few MSPs build their offerings and an appropriate pricing scheme. Happy to help. Grab my contact info from the chat.

Caitlin Good: Excellent. The recording will be available within the next couple of days. You’ll receive an email, and the registration link will turn into a recording page. Thank you everyone for joining us. Have a great rest of your day.

Rayanne Buchianico: Thank you so much, Caitlin. Bye.