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Priced to Win: Build an Optimized Pricing Strategy

IT Service Providers must optimize their pricing strategy to maximize profit margins and add value to customers

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  • Lack of competitive intelligence and market insights to support decision making around pricing
  • Lack of dedicated staff with pricing skills and management processes
  • Misalignment between the cost of offerings and the value they provide
  • Lack of knowledge about how pricing works
  • Lack of understanding of internal and external factors that impact a pricing strategy

Our Advice

Critical Insight

  • Cost-based pricing strategies dominate the price of products and services among ITSPs
  • ITSPs must broaden their input horizon to optimize a pricing strategy
  • Packaging and bundling offerings improves value delivery and profit margin

Impact and Result

  • Optimize profitability, business growth, and customer satisfaction
  • Align with strategic priorities, market share growth, and expanded margin
  • Determine the right price for offerings based on the customer and market
  • React to supply chain issues or changes in consumer demand 
  • Stay competitive among peers in the market
  • Maintain and improve profit margin, a 1% improvement in pricing can increase 11.1%

Priced to Win: Build an Optimized Pricing Strategy Research & Tools

1. Priced to Win: Build an Optimized Pricing Strategy Deck – This storyboard will help you to increase your profit margin and align your engagement types with the right pricing strategies while adding more value to the offerings.

How you price your products and services will help determine the success of your organization. The right pricing strategy can do wonders for IT Service Providers (ITSPs) by increasing profit margins.

The key to creating effective and successful pricing around your offerings to drive maximum profit is to have the dedicated resources and skills to build an optimized pricing strategy. This storyboard will assist you in developing your repeatable pricing strategy based on various external and internal factors that influence the strategy at the different stages.

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Priced to Win: Build an Optimized Pricing Strategy

IT service providers must optimize their pricing strategy to maximize profit margins and add value to customers.

Analyst Perspective

Price your offerings using optimized pricing strategy

How you price your products and services will help determine the success of your organization. To win in your market the pricing strategy must consider:

  1. The cost to produce, market, and distribute your product or service.
  2. The value of what you are offering to potential clients.
  3. The competitive pricing environment.
  4. Packaging and billing models for your offerings.
  5. Market forces that may shift the demand for your product or service (and if supply chain issues could disrupt getting your product or service to market).

The right pricing method or strategy can do wonders for IT Service Providers (ITSPs) by greatly increasing profit margins. Unfortunately, pricing is one of the areas where organizations have struggled due to a lack of dedicated resources, skills, and internal inconsistency.

The key to creating effective and successful pricing around your offerings that drive maximum profit is to have dedicated resources and skills to build an optimized pricing strategy. This storyboard will assist you to develop your repeatable pricing strategy based on various external and internal factors which influence the strategy at the different stages. Further, this storyboard strategy will help you to align your engagement types with the right pricing strategies.

This is a picture of Brijesh Kumar, Research Specialist, Industry Practice, at Info-Tech Research Group

Brijesh Kumar
Research Specialist, Industry Practice
Info-Tech Research Group

Executive Summary

Challenge

You are having difficulty pricing your products and services. Most IT service providers leverage the cost-based pricing strategy because it is easy and simple to implement.

You lack an effective or optimized pricing strategy. Not having an effective and optimized pricing strategy can cause misalignment between the cost of products or services and the value they provide to customers. This could potentially result in losing profit margin and additional revenue opportunities.

Obstacles

There are many unknowns to discover. ITSPs must understand what factors can impact their pricing strategy and eventually the price of offerings.

Pricing strategy often fails due to a lack of competitive intelligence and knowledge of customers willing to pay for offerings.

Most of the ITSPs lack dedicated staff with pricing skills and management processes, which leads to ill-informed decisions and a gut-driven approach to price products and services.

Info-Tech Approach

Understand the challenges and opportunities to optimize your pricing strategy.

Follow the three-step method guide to align your pricing strategy with your offerings: pricing strategy, packaging, and billing models.

Improve Net Income After Tax (NIAT): ITSPs must keep customers and value addition at center stage while building an optimized pricing strategy for their offerings. This will help ITSPs to follow a customer-first approach and differentiate their offerings from competitors.

Info-Tech Insight

For business profitability, organizations have mostly focused on cost-cutting, acquisition, improving operation processes, and product innovation. The need to have dedicated resources and skillsets to build an optimized pricing strategy have been overlooked long enough.

Insight summary

An optimized pricing strategy is key to desired profit margin

Price is one of the key pillars among the other P's (Product, Promotion, Place) in a marketing strategy and drives revenue and profit of companies. Business and technology leaders leverage different pricing strategies/methods but face multiple challenges to building an effective and optimized pricing strategy that is aligned with the value of products and services and customer willingness to pay. An optimized pricing strategy is crucial for any organization to generate the desired profit margin while continuing business growth.

Cost-based pricing dominates

Different models of pricing (hourly rate, project based, daily rate, value based) are commonly used across the IT service providers industry. However, the most common strategy employed is cost based because this strategy provides straightforward calculation and lower effort to price products and services.

Broaden your input horizon to optimize pricing strategy

Pricing your product and service is not as simple as we think sometimes. It needs input from customers and thought-out research around external and internal factors that influence the pricing of the offering. Lastly, how much profit margin one will make depends on how differentiated your product is among competitors, its value to the customer, and the customers' willingness to pay.

Packaging and bundling improves value delivery and profit margin

ITSPs do not price every product and service based on value because different customers assign different values to alike products. However, it is possible to add more value to all the offerings of ITSPs which can differentiate you in the market among peers. (Examples: adding some education, training, consulting, or engagement hours with the client.)

Pricing is part of a marketing strategy

Pricing is an important part of the overall marketing strategy

A marketing strategy is vital for any business and includes four P's:

Product

A good or service that addresses customer needs or solves problems.

Promotion

Differentiate your product from competitors.

Place

Where customers will find the product.

Price

A price is based on the value of the product.

"Pricing is by far the biggest tool for earning improvements."
– McKinsey, 2019

"Pricing is the only revenue-generating element in the marketing mix (the other three are cost centers – that is, they add cost to a company's cost)."
– MaRS

"Prices are now transparent. Partly because of this, the price has become perhaps the most important pillar."
– Prisync, 2021

Pricing influences profitability

Pricing is a key lever to optimize profit

Impact of change in different factors on profitability

A bar graph is depicted, which displays the following data:  Fixed Cost-2.6; Volume-3.6; Variable Cost-6.7; Price-12.3

"Pricing has three to four times the effect on profitability than other improvements."
– Richard Hayes and Ranjit Singh
Source: Deloitte, 2013

Effect of pricing profit

A scatter plot graph is depicted, showing the bell shaped curve of profit (y axis) and Price (X axis)

"As you raise your price (moving left to right), your profitability goes up – to a point. It's at the point where you've raised your price by too much that your profitability goes down."
– Eric Dolansky
Source: BDC

ITSPs struggle to price their offerings

ITSPs face challenges and make decisions that affect profit margin

CHALLENGES

Understanding their market

Lack of competitive intelligence, including pricing

Lack of ability to assess the value of offerings

Understanding their clients

Lack of client/market insights to support decision making around pricing

Lack of understanding of drivers that impact pricing strategy

Understanding pricing optimization

Lack of pricing experience in evolving market

Lack of knowledge of how a pricing strategy works for their offerings

MISTAKES

Overlook profit and pricing

Focus on revenue largely ignoring factors that impact the cost

Hold prices at the same level for too long

Using a sub-optimal pricing model

Attempt to achieve the same profit margin across different offerings

Companies fail to segment their customers for appropriate value propositions.

"Many companies focus on acquisition to grow their business, but studies have shown that small variations in pricing can raise or lower revenue by 20-50%. Despite that, even among Fortune 500 companies, fewer than 5% have functions dedicated to setting the best price possible."
Source: ProfitWell, 2021

"Pricing is a balance of art, math, and psychology, and generally, people are brought up in one discipline or another and can't balance the inputs. So, there are very few people who have experience or skills broad enough to consider all of them when pricing a product or service."
– Eric McCullough
Source: LinkedIn, 2019

Factors that impact price of offerings

EXTERNAL FACTORS

Competition

helps to determine a price range of similar offerings based on the competitive landscape

Market

create an understanding of the specific needs of customers and position your offerings

Demand

influence the pricing of offerings depending on demand in the market and global disruption in the supply chain

Perceived value

determine a price range based on customer willingness to spend based on the value of offerings

Price anchoring

initial price can determine the perceived value and influence demand for future price change

INTERNAL FACTORS

Uniqueness helps to determine a price range of similar offerings based on the competitive landscape
Margincreate an understanding of the specific needs of customers and position your offerings
Cost to serve influence the pricing of offerings depending on demand in the market
Revenue goal determine a price range based on customer willingness to spend based on the value of offerings
  • Pricing Strategy
    • Cost to build
    • Revenue goal
    • Market
    • Competition
    • Margin
    • Uniqueness
    • Demand
    • Price anchoring
    • Perceived value

ITSPs need an optimized pricing strategy

An effective pricing strategy not only helps you to increase profitability
but also:

  • Increase repeat purchases/loyalty
  • Improve brand perceptions
  • Portrays better product value
  • Builds trust
  • Increases confidence in products
  • Higher satisfaction

Pricing strategy

Definition:

  • A pricing strategy is a method that helps you to place a dollar number on any product or service based on:
  • the cost to create the product or service and add a mark up with an intended profit.
  • perceived value of the specific product or service by the customer.

Paybacks of an optimized pricing strategy

  • Optimize profitability, business growth, and customer satisfaction
  • Align to strategic priorities, market share growth, and expanded margin
  • Determine the right price for offerings based on the customer and market
  • React to supply chain issues or changes in consumer demand
  • Stay competitive among peers in the market
  • Maintain and improve profit margin, a 1% improvement in pricing can increase the profit 11.1%

Source – ProfitWell, 2022

The five most common pricing strategies

An organization may choose one or more strategy to price their offerings

  1. Cost-based pricing
    • Calculate the total cost to build an offering and add a mark-up
  2. Value-based pricing
    • The price is based on perceived value and what customers will be willing to pay
  3. Competitive pricing
    • Determine the price based on what competitors are charging for the offering
  4. Penetration pricing
    • Set a low price to enter the competitive market and increase the price later
  5. Skimming pricing
    • Start with a high price of product and lower the price as the market evolves

Cost and value options are primary choices

Cost-plus and values-based pricing strategies are the most popular choices among IT service providers

  • Cost based is most popular: 65% of ITSPs leverage a cost-dependent approach to price their products and services.
  • Value based is not often used: Only, 17% of the ITSPs utilize value-based pricing, which indicates either they are not aware of the value of their offerings delivered to customers, or they struggle to align a value-based pricing strategy with their offerings.
  • The same billing method can be cost plus or value based: Hourly, daily, monthly, and project-based billing can be cost plus or value driven, but is most often cost plus among ITSPs.

Info-Tech Insight

Most businesses end up using cost-based pricing because it is easy and requires the least effort to build price offerings for products and services in comparison to value-based pricing and other strategies.

Different billing methods used by ITSPs

A pie chart is depicted, displaying the following data: Hourly rate	23%; Project based	31%; Daily rate	12%; Value based	17%; Monthly retainer	15%

Use Info-Tech's three-step method to create an optimized pricing strategy

  1. Pricing strategy: How do you set the price?
  2. Packaging: How do you present the offering to customers?
  3. Billing models: How do you bill the customers?

An optimized pricing strategy is key to increasing profit and delivering value to customers.

Pricing strategy:
How do you set the price?

Cost-based pricing: a classic and one-dimensional model

The price of an offering built upon cost is a common strategy

What is cost-based pricing?

It is a method for pricing a product or service when the company desires to make a certain percentage of profit over the total cost of that product or service.

Cost-plus pricing
Add markup to the cost of your product or service, generating profit from the beginning.

Example of cost-plus pricing

Example of cost-plus pricing

Fixed dollar increase

Percentage-based increase

Unit cost $100

Units sold 150

Fixed dollar increase amount $20Mark-up %20%
Unit selling price $120Unit selling price $120
Gross revenue

$18,000

Gross revenue$18,000
Gross margin$3,000Gross margin$3,000

Rule of Thumb:

To generate a higher profit, ITSPs must focus on profit margin rather than revenues. The benefit of this approach is that it covers fixed cost primarily and then a markup is added.

This is an image of the rule of thumb for Cost Based pricing

Info-Tech Insight

A markup of products and services is common among ITSPs because of the nature of some of their offerings. This strategy appears straightforward, still, IT service providers should periodically revisit the price of offerings and cost-based pricing strategically, considering external and internal factors to maximize profitability and business growth.

Ensure you capture all costs

The inventory list will help you to cover all the overhead and offerings associated costs

A funnel chart is depicted with the following inputs: Fixed Costs; Variable Costs; Products and Services Costs

  • Fixed Costs
    • Rent
    • Utilities
    • Permits
    • Employee salaries
    • Taxes
    • Equipment
    • Buildings
  • Variable Costs
    • Packaging
    • Marketing
    • Royalties
    • Sales taxes
    • Travel
  • Products and Services Costs
    • vCIO/vCTO/vCISO
    • Technology business review
    • IT processes assessment
    • Office 365 license
    • Network support
    • Security solutions and services
    • Training personnel
    • Time for consultants

Rewards and risks: Cost-based pricing

The benefits and rewards to both the parties delineate success of your pricing strategy

ITSPs

Rewards

Risks

Easy pricing structure
Simple to calculate the cost to produce and serve offerings.

One-dimensional
Does not consider the customer's perspective or willingness to pay.

Invariable profit
Provides consistent profit margin relative to the cost of service.

Internally focused
Does not consider external factors such as market demand, brand strength, or value to the customer.

Transparent
Price is easy to understand, and customers readily accept price changes.

Money on the table
The price of offerings can be significantly different from the market rate, impacting profit margin.

Client

Rewards

Risks

Easy to understand
Easy to understand the pricing structure of offerings.

Low-cost driven
A price-driven client is likely to go to an ITSP who charges less for a similar offering.

Predictable forecast
Future increase in price based on inflation is easy to predict.

Poor quality offering
Possibility to compromise with the quality of products or services when the cost is the sole criteria to decide.

Pricing comparison
Ability to compare price of similar offerings on the market, ensuring client is not overpaying.

Limited choice
Cost-sensitive clients limit their choices to a few products and services.

Cost-based pricing discards value

The cost-based pricing of an offering includes the total cost to build and serve to customers but often ignores the perceived value of the offering to the customers

Cost-based pricing

Value-based pricing

A funnel chart is depicted, with the following Inputs: Fixed Costs; Variable Costs; Products and Services CostsA funnel chart is depicted, with the following Inputs:  Perceived Value; Fixed Costs; Variable Costs; Products and Services Costs
Final Price of OfferingsFinal Price of Offerings

Adding the Right Value: Building Cloud Brokerages That Enable

The price of an offering built upon value is a preferred strategy

What is value-based pricing?
"Value-based pricing is the method of setting a price by which a company calculates and tries to earn the differentiated worth of its product for a particular customer segment when compared to its competitor." – Utpal Dholakia

Subjective Interpretation
The value of a product or service is interpreted by future benefits to be accrued, external factors recognizing additional value, and customer willingness to pay for the benefits and added value.

Example of value-based pricing

Fixed dollar

Unit cost $100

Units sold 150

Customers' willingness to pay $150

Profit margin $50

Gross revenue $22,500

Gross margin $7,500

Thumb Rule:
For value-based pricing, ITSPs should never charge for offerings more than what the customer is willing to pay, but the price should not be much lower than the perceived value.

This is an image of the rule of thumb for value-based pricing

Info-Tech Insight

To mark a successful pricing strategy, understanding how customers perceive value is imperative to sell products and services on value rather than price. The perceived value is the driver of the tradeoff between perceived benefits for the customer and the price for purchasing the offering that delivers benefits and outcomes. Always remember that adding value is about solving the client's problem with tangible and intangible outcomes/ROI, not just selling products or services.

Know your cost and value before you price

Cost

  • Expenditure required to create and sell products and services
  • Ascertained by the perspective of the producer of product and service
  • Results in the outflow of money
  • profit/margin not included in the cost
  • Mark-up is calculated based on cost
  • Business aims to reduce the cost
  • Cost is ranked before determining the price of products or services

Value

  • Client willingness to pay for an offering
  • Benefits and advantages of a product and services to clients
  • Competitive differentiation contributes to the value of a product and service
  • Being a brand and trusted partner in the marketplace adds more value to your offering
  • Tangible and intangible outcomes and ROI increase the value of an offering

Price

  • Amount of money expected from consumer or customer in exchange for a product and service
  • Ascertained by the perspective of the consumer of product and service
  • Results in the inflow of money
  • Profit/margin included in the price
  • Margin is calculated based on price
  • Business aims to increase the price
  • Price is ranked after determining all the costs and value associated with products or services

Info-Tech Insight

A mindful and well-researched discussion to determine the cost, value, and price of products and services can result in an increase in profit growth.

Determine perceived value and all costs

The inventory list will help you to cover all the overhead and offerings associated costs

A funnel chart is depicted, with the following Inputs:  Perceived Value; Fixed Costs; Variable Costs; Products and Services Costs

Perceived Value

  • Outcome
  • ROI
  • Customer satisfaction
  • Peace of mind
  • Improve business operations
  • Increase revenue growth

Fixed Costs

  • Rent
  • Utilities
  • Permits
  • Employee salaries
  • Taxes
  • Equipment
  • Buildings

Variable Costs

  • Packaging
  • Marketing
  • Royalties
  • Sales taxes
  • Shipping

Products and Services Costs

  • vCIO/vCTO/vCISO
  • Technology business review
  • IT processes assessment
  • Office 365 license
  • Network support
  • Security solutions and services
  • Training personnel
  • Time for consultants

Value pricing requires consumer and offering insights

The value of a product is determined by consumers and their input

Focus on customer

The value of a product or service should be targeted to a single segment of the market. It is hard to use value-based pricing until you know your targeted customer/segment.

Customer survey

The survey aims to identify the problems of consumers and ask certain questions. What are the currently available solutions? How much are they willing to pay for a better solution?

Best alternative

You must compare your offering with the best available offerings on the market to determine why the customer should buy your product or service.

Differentiated worth

Customers should be able to differentiate your offering with the best available alternatives. Desired outcomes and ROI will help to justify the value and worth of your offering.

Place a dollar amount

The hardest part is to place a dollar amount on your differentiated offering. Here, the customer survey will help to figure out how much they are willing to pay for your offering.

Rewards and risks: Value-based pricing

The benefits and rewards to both the parties delineate success of your pricing strategy

ITSPs

Rewards

Risks

Less effort to sell

Easy to sell offerings once the outcomes and ROI are clearly understood by customers.

Communicate value

If value of offerings are not communicated succinctly, ITSPs will have tough time selling the offerings.

Trust and brand

Build a trusted partnership, and brand, gain confidence when solving customers' problems and justifying the value-based price of offerings

Client knowledge

If market research is not done properly to understand the client's willingness to pay, value-based pricing can negatively impact business revenue.

More profit

The profit margin is much more in comparison to profit margin when using cost-based pricing.

Value disparity to ROI

ITSPs will lose profit margin significantly if value-based pricing is not charged in proportion to the value and ROI created for a client.

Client

Rewards

Risks

Enhanced experience

Clients receive better experience from the outcomes and ROI delivered by ITSPs.

Inadequate value delivery

Inefficient explanation of business problems makes receiving the full value from offerings a challenge.

Gain of trust

Based on the values delivered by ITSP, client sees ITSP as a trusted and strategic partner.

Lack of growth

Clients who do not opt for value-based offerings may lose business growth opportunities and competitive advantage in the market.

Better satisfaction

Customer is more satisfied with value-based pricing once educated on all the values associated with offerings

Low customer satisfaction

The inability to deliver value corresponding to the price of offerings can result in lower customer satisfaction.

Info-Tech Insight

The onus is on the ITSP to educate customers on the value of their offerings. Value-based pricing is not about the time you spend with the customer, but the unique and differentiator experience and outcomes delivered by ITSPs.

Value-based considers the client

Value-based considers the client

Value-based pricingResearch to determine perceived value for proposed product or service; Determine the cost of the product or service; Set price based on perceived value; Monitor competitive pricing

Cost-based pricing

Determine the cost of the product or service; Set price based on a markup to achieve desired margin; Monitor competitive pricing

"Cost is what you pay, value is what you get."
– Warren Buffet

Market research determines initial value

Select market research techniques best suited to determine the value of your offer

Qualitative Research

Quantitative Research

Price sensitivity models

Discrete choice models

Focus Groups

InterviewsSurveyGabor GrangerVan WestendorpMax-DiffConjoint

Qualitative research is exploratory

A deeper understanding of the emotional impacts of pricing

Helps set a range of pricing and bundle options for quantitative research

Not representative of the population

  • Same benefits and limitations as focus groups
  • Allows for one on one, deeper discussion with potential clients
  • Works better for sensitive topics or high-end relationship-based models
  • Quantitative approaches are best used for business-case projections
  • A simple survey testing the pricing that potential clients are willing to pay
  • Monadic design (separate representative sample groups) can test varying pricing concepts for comparison
  • Provides a price sensitivity curve that allows you to select the maximum price your customers are willing to pay
  • Gives a range of prices and asks the respondent their likelihood to purchase the product or service at those price points
  • Price sensitivity monitor provides a range of pricing clients are willing to pay
  • There are four response options that range from "too low to be acceptable quality," to "too expensive to consider"
  • Intersection of responses provide the optimal price point
  • Also known as Best-Worst
  • Respondents rank a set of features and pricing options from best to worst
  • Trade-offs are analyzed to determine the optimal features and pricing
  • The most advanced statistical approach that also closely simulates market conditions
  • Respondents are given a set of offers to choose from, and this process is repeated
  • Statistical analysis determines optimal features and pricing

Test & learn to continue optimizing price

A pricing test is a deliberate step to increase revenue

Stop guessing, start testing: Three price testing methods

  1. Secondary Research
    • Competitive review
  2. Primary Research
    • Internal data review
  3. Statistical Analysis
    • A/B testing
    • Multivariate test

Price Testing Steps

SET GOALS

Determine objectives to achieve with the price test

CHOOSE OFFERING

Select the product or services you are planning for price testing

SELECT TESTING METHOD

Choose the method to perform the price test that best fits your goals

COLLECT DATA

Collect enough data to drive any formal decisions for a price change

ANALYSE RESULTS

Examine the change in profit/revenue after applying the price change

"Parker Hannifin (a $9 billion company) was struggling with their profit margins, so they modified their pricing strategies.
They grouped their 800,000 products into categories based on their level of differentiation in the market. For their most highly differentiated products with little or no competition, they raised prices substantially. Then they implemented less dramatic increases for more competitive categories. As a result, they generated an additional $200 million in operating income."
– Marketing MO

Case Study

ITSPs delivered outcomes and compensated centered on value-based pricing

INDUSTRY

  • Master Franchise of a Leading Global Fast-Food Chain

SOURCE

  • Sajid Pathan
    Business Analytics Consulting Group (BACG)

Challenge

The CFO wanted to increase the business revenue and launched a burger as a new product at a discounted rate between noon to 3pm among 40 stores at different locations. Twenty-one of the stores were way below the targets they had set for that promotion. The CFO wanted to know the why half of the stores were not meeting promotional targets and approached BACG, a consulting company, to seek solutions.

The client explained the business problem to BACG consulting, who understood the client's challenge and obtained the client's consent to pay an engagement fee based on the financial results of the pricing optimization.

Solution

After 15 days of promotion, BACG leveraged data analytics and a report was generated to deep dive into every store's new burger sale, numbers of staff, and location and found the stores in residential areas were the ones not meeting the target because most of the people go to work during promotion hours. In contrast, the stores in commercial areas met the target because people working nearby were buying the promotional burgers during lunchtime. Also, these stores were busy, and staff struggled to serve customers due to the high demand for the burger.

The consulting company used data analytics to discover the client's problem and strategize a plan to overcome the challenge.

Results

With the help of insights derived using data analytics, the CFO was able to strategize and developed a customized plan to roll out the new burger promotion at all the stores with necessary changes. Promotion timing was changed to evening for the low-performing stores to target people living in residential areas. The stores meeting promotional goals were allocated more staff to meet demand during promotion hours. As a result, all the stores achieve targeted goals and contributed to business revenue.

The consulting company delivered the financial results and was able to charge the client on value-based pricing.

Monitoring competitors' pricing keeps you in the game

Knowing your competitors' price is good and bad for staying competitive

Competitive pricing brings both advantages and disadvantages to your pricing strategy

Advantages

Advantages

  • Easy to apply: Simple to calculate and understand since it looks at competitors' prices in the market.
  • Lower risk: Stay close to the average market price the customer is ready to pay based on the competitor's price.
  • Evolves with the market: Your pricing continues to align with the competitors' pricing.
  • Prevent market share loss: Consider competitors' prices dynamically and respond to price changes in real time.
  • Disconnected: May ignore other market factors such as consumer and cost to produce and serve offerings.
  • Trusting competitors: the competitors' pricings do not always fit with your offering price.
  • Ignores customers: Does not consider customers' behavior in response to the change in offering price.

Source: ProfitWell, 2020; Medium, 2018

Packaging:
How do you present the offering to customers?

Packaging of offerings is crucial for pricing strategy

Different packaging methods allow ITSPs to differentiate their offerings in the market

  1. Bundle
    • A set of offerings based on the needs of clients and the value they bring together
  2. Tiered
    • Different bundles to serve various segmented clients in the market
  3. A-la-carte
    • Only pay for the service you need

Info-Tech Insight

Packaging enables ITSPs to sell their products and services in a different capacity to segment customers by targeted value proposition in the dynamic marketplace. These customers are willing to pay based on value and cost-based pricing.

Bundles enable maximized profit and value delivery

ITSPs easily meet clients' needs with an effective bundling of products and services

  • More value: Offerings in the form of a bundle allow demonstrating the value of products and services to customers.
  • Differentiator: Bundling products and services is a crucial step because it helps ITSPs to differentiate their offerings from those of the competitors.
  • Standardization and streamlined operation: Bundles of various offerings enable ITSPs to standardize their services and streamline clients' business IT operations.
  • Recurring income: The bundling of products and services helps ITSPs to earn predictable monthly income.
  • Improve retention: Customer retention increases when offerings are consumed in bundles since it increases interactions with clients. Services in bundles are "stickier" than single services.

Example of an IT Bundle

  • Email
    • Office 365 Enterprise License
    • Spam filtering
    • Calendars and collaboration
    • Email backup
  • Security
    • Endpoint security
    • Network security
    • Password management system
    • Anti-virus
  • Cloud
    • Cloud-based infrastructure
    • Management of cloud-based applications
    • Cloud cost management
  • Training
    • Security awareness training
    • End-user training
    • Technology adoption sessions
  • Management
    • Build IT budget
    • Monthly executive reports
    • Technology review meetings
  • Support
    • After hours support
    • Guaranteed response time
    • Server support
    • Onsite support

The tiered model meets needs and provides value

Three service tiers must include the most common service with those that offer the most value

  • Cost to value: Usually, offerings are packaged into three categories, good, better, and best. "Good" will indicate the cost-friendly and limited value package, whereas the "Best" package will be the most expensive and deliver the most value to clients.
  • Flexibility to fit needs: Tier-based model that renders ITSPs the flexibility to design various packages to suit different clients, fitting their demands and requirements.
  • Favorable: This is one of the most favored offering models among ITSPs especially because it manages service providers. It is easy to build, and clients understand the models without effort.
  • Differentiator: ITSPs can differentiate themselves among competitors in the market by strategizing their offerings into tier systems that deliver distinctive value to clients.

Good

Email

  • Office 365 Enterprise License
  • Spam filtering
  • Calendars and collaboration
  • Email back up

Basic Security

  • Endpoint security
  • Network security
  • Password management system
  • Anti-virus
  • Managed firewall

Cloud

  • Cloud-based infrastructure
  • Management of cloud-based applications

Support

  • Unlimited remote support

Better

Good +

Training

  • Security awareness training
  • End-user training
  • Technology adoption sessions

Cybersecurity

  • Multi-factor authentication
  • Intrusion detection system
  • Data loss prevention

Support

  • Unlimited onsite support

Best

Better +

Management

  • IT documentation
  • Monthly executive report
  • Build IT budget
  • Technology review meeting
  • Asset and inventory management report

Support

  • Unlimited after-hours support

Disaster recovery plan

Business continuity plan

The a-la-carte model is least favorable for ITSPs and more favorable for clients

ITSPs sell discrete products or services specific to clients' needs

  • Less profit: An offering on its own may come at a lower price since the client is paying for a certain service, which makes this model less profitable to ITSPs in comparison to the bundle-based offerings.
  • Flexibility: Some IT experts believe that the a-la-carte model is preferable since it gives them more flexibility to serve clients with a range of products and services to choose from.
  • Cost-focused clients: A-la-carte models usually attract clients who are primarily focused on cost and invest in less expensive options. For ITSPs that are seeking long-term business profit and growth, this model is not sustainable and suitable.
  • Customized package: the a-la-carte model allows customers to select the services they need, which also allows them to build a customized package of IT offerings.

Example of A-La-Carte Model

A client can choose an offering from a given menu

Email

  • Office 365 Enterprise License
  • Spam filtering
  • Calendars and collaboration
  • Email backup

Security

  • Endpoint security
  • Network security
  • Password management system
  • Anti-virus

Cloud

  • Cloud-based infrastructure
  • Management of cloud-based applications
  • Cloud cost management

Modular offerings deliver high value

ITSPs need technology experts to increase profit and revenue

  • Diagnose and solve problems: Modular offerings can profoundly rely on industry expertise and knowledge of ITSPs. These ITSPs are proficient at identifying clients' business obstacles, which impedes business revenue and profit.
  • Business and technology alignment: ITSP must align technology with business goals and objectives. The modular offering enables ITSPs to become strategic business partners to their clients and lead technology initiatives.
  • Value delivery: Value delivery is the key ingredient of modular engagement that involves offerings in areas such as strategy and management. For pricing based on value, ITSPs must make a strong business case for delivering tangible and intangible outcomes to their clients.

Example of modular offerings

Virtual CIO as a service

  • IT business alignment assessment
  • An industry-aligned technology expert
  • High-quality suites of deliverables
  • Executive leadership representation
  • Annual IT budget planning

Virtual CTO as a service

  • Digital strategy creation
  • Digital transformation planning and execution
  • Cloud migration
  • IT operations modernization and automation

Billing models:
How do you bill your customers?

Billing for Consultants

Time based, milestone based, and flat fees are the most suited ways to invoice customers

Time based

  • Post-paid time: ITSPs charge their clients based on the hours, days, weeks, or months they put in as part of an engagement or a break-fix service. To get suitably paid, the rate must reflect your skills and expertise.
  • Prepaid time: Clients can buy a block of prepaid hours, typically at a discounted rate, and they can use these hours however they want.
  • Time variation risk: The IT spend can vary for a client from month to month based on the engagement of hours, making it difficult for both the client and ITSP to manage and plan the budget.

Milestone based

  • Achieve goals: ITSPs leverage milestones as agreed-upon outcomes or deliverables as billing deadlines. This helps ITSPs to remain focused and milestone-driven to receive the payments.
  • Manage large projects and fees: In case of a large engagement or project fee, this method helps the client space out payments in small amounts to manage the cash flow over different milestones of the project.
  • Continuity risk: The milestone method may not work for projects that do not have concrete deliverables or outcomes.

Flat fee

  • Fixed cost: This method allows ITSPs to give the exact cost of a service or an engagement to customers, which they like. ITSPs guarantee 100% profitability regardless of when they finish the project.
  • Easy to bill: ITSPs don't have to worry about bills when the client is paying a flat fee for IT services on monthly basis. Also, this method allows for the prediction of yearly revenue.
  • Estimation risk: Determining a fixed cost can be risky since project estimates can be way off – especially if ITSPs have not completed a project of similar scope.

Billing for Managed Service Providers

Per device, per user, and per ticket are the common scaling units utilized by MSPs

Per device

  • Flat fee: Charge a flat fee depending on the device. However, the price can be different for various types of devices (laptops, computers, printers, servers etc.).
  • Scalability: Easier to stack on a per device when a customer adds more devices.
  • Cost: It is easy to illustrate costs to prospects and customers.
  • Suitability: Suitable for industries that have a high user to computer count with rapid user changes.
  • Multidevice users: Most users have more than one device of different types and complexity. It challenges how ITSPs can charge because clients want to cover all the devices without paying for them.

Per user

  • Flat fee: Charge a flat fee depending on the user (power users and standard users). Power users have a number of devices to maintain, whereas standard users has just a laptop and mobile.
  • Scalability: Easier to stack per user when a customer adds more users.
  • Cost: It is easy to illustrate costs to prospects and customers.
  • Suitability: Suitable for industries that have a number of users similar to several devices.
  • User experience: While serving clients the focus should be on users, not the devices because it is the user who gets value from your service.

Per ticket

  • Tier-based price: The price per ticket varies depending on the type of request, incident, problem, and priority.
  • Cost: Easier to charge the client based on per ticket.
  • Customer satisfaction: Client feedback plays an important role in determining customer satisfaction level, allowing improvement to help desk service.
  • Revenue: Resolving tickets in a shorter amount of time increases the handling of overall tickets per month which translates into more revenue.
  • Efficiency: Reducing ticket resolution time restores customers' business workflow, providing a better customer and service experience.

List of common engagements/offerings with their perceived values

Perceived Value – High

INCLUSION NAMECATEGORY
vCIOIT Management & Consulting
vCTOIT Management & Consulting
vCISOIT Management & Consulting
Technology Business Reviews IT Management & Consulting
Procurement AssistanceIT Management & Consulting
Documentation ManagementIT Management & Consulting
IT Budget PlanningIT Management & Consulting
Business Continuity PlanningIT Management & Consulting
Simulated Disaster RecoveryBackups & Disaster Recovery
Penetration TestingSecurity & Cybersecurity
Simulated PhishingSecurity & Cybersecurity
Cybersecurity/Security Awareness TrainingSecurity & Cybersecurity
Guaranteed Service Level Agreement (SLA)Support Services
Technology Enablement SessionsTraining

Perceived Value – Medium

INCLUSION NAMECATEGORY
Managed Backup & Disaster RecoveryBackups & Disaster Recovery
Server BackupBackups & Disaster Recovery
Asset ManagementIT Management & Consulting
Executive ReportingIT Management & Consulting
Managed Anti-MalwareSecurity & Cybersecurity
Managed Anti-VirusSecurity & Cybersecurity
Vulnerability ScanningSecurity & Cybersecurity
Managed Security Operations Centre (SOC)Security & Cybersecurity
24x7x365 SupportSupport Services
After Hours SupportSupport Services
Emergency SupportSupport Services
Onsite Support (Business Hours)Support Services
Remote Support (Business Hours)Support Services
Server SupportSupport Services

List of common engagements/offerings with their perceived values

Perceived Value – Low

INCLUSION NAMECATEGORY
G-Suite Backup LicenseBackups & Disaster Recovery
Office 365 Backup LicenseBackups & Disaster Recovery
Workstation BackupBackups & Disaster Recovery
G-Suite LicenseLicenses
Office 365 LicenseLicenses
24x7x365 Remote MonitoringMonitoring & Maintenance
3rd Party Patch ManagementMonitoring & Maintenance
Azure Tenant ManagementMonitoring & Maintenance
Cloud MonitoringMonitoring & Maintenance
Google Compute Tenant ManagementMonitoring & Maintenance
Microsoft Patch ManagementMonitoring & Maintenance
Network & Infrastructure ManagementMonitoring & Maintenance
Office 365 Tenant ManagementMonitoring & Maintenance
Employee Purchase SchemeOther

Perceived Value – Low

INCLUSION NAMECATEGORY
Identity & Access ManagementSecurity & Cybersecurity
Managed FirewallSecurity & Cybersecurity
Password ManagementSecurity & Cybersecurity
Spam FilteringSecurity & Cybersecurity
Adds/Moves/ChangesSupport Services
Change ManagementSupport Services
Desktop SupportSupport Services
Incident ManagementSupport Services
Mobile Device ManagementSupport Services
NOC ServicesSupport Services
Business InternetTelephony & Data
Managed VoIPTelephony & Data
Managed WAN/SDWAN/MPLSTelephony & Data
VoIP ManagementTelephony & Data

Align pricing strategy with engagement types

ITSPs can generate profit in proportion to the value and outcome delivered to clients based on the type of engagement

This image shows how ITSPs can generate profit in proportion to value and outcome delivered to clients

Building an optimized pricing strategy is a journey to maximize profit

The central idea during pricing must be value creation for customers

A roadmap is depicted, with the following steps along the path: Understand; Build; Price; Serve; Win.

  • Understand customer/market needs
    • With a customer-first approach, the qualitative and or quantitative survey can help to elucidate customers' needs and problems with a desire to pay for an offering.
  • Build the products and services
    • Develop products or services fulfilling the needs and addressing the challenges that customers highlighted in the survey.
  • Price the offerings based on value
    • Align the price of offerings based on perceived value and communicate the value and outcomes associated with the product or service to customers.
  • Serve to customers
    • Once they purchase the products and their expectations are met, you build brand and trust and retain customers.

Research Contributors and Experts

Tara Bartels
Team Lead, IT Strategy Consulting
Dataprise

Michael Keelan
Director of Managed and Support Services
T4S Partner, Inc

Sajid Pathan
Managing Partner
Business Analytics Consulting Group (BACG)

Rob Redford
Practice Lead, Research – Industry
Info-Tech Research Group

Joanne Correia
Principal Research Analyst – Marketing SoftwareReviews
Info-Tech Research Group

Fred Chagnon
Principal Research Director – Industry Practice
Info-Tech Research Group

Scott Young
Principal Research Director – Infrastructure
Info-Tech Research Group

Katy Piatanesi
Executive Counselor
Info-Tech Research Group

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Author

Brijesh Kumar

Contributors

  • Tara Bartels, Team Lead, IT Strategy Consulting, Dataprise
  • Michael Keelan, Director of Managed and Support Services, T4S Partner, Inc
  • Sajid Pathan, Founder & CEO, Business Analytics Consulting Group (BACG)
  • Rob Redford, Practice Lead, Research – Industry, Info-Tech Research Group
  • Scott Young, Practice Lead, Research – Industry, Info-Tech Research Group
  • Joanne Correia, Principal Research, Director, Info-Tech Research Group
  • Fred Chagnon, Principal Research Director, Industry Practice, Info-Tech Research Group
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