Packaging services into profitable tiers

Tiered packages make managed services easier to sell and easier to run. Clients choose from a short menu instead of negotiating every line item, and your team supports a known set of services instead of dozens of custom arrangements. Tiers only help margins, though, if each one is built around what it actually costs to deliver.

Decide what goes into each tier

Start from what you already deliver, not from a competitor's brochure. Pull a list of every service your current agreements include and sort it into three groups:

• Baseline services every client needs and you are unwilling to skip, such as monitoring, patching, backup and your core security tools.
• Services that add meaningful value for some clients, such as advanced security tooling, compliance support, vendor management or strategic planning meetings.
• Labor-heavy items whose cost depends on client behavior, such as onsite visits, after-hours support and user onboarding.

The baseline belongs in every tier. Your lowest tier should not be a version of your service that you would be uncomfortable defending after a security incident. Higher tiers add the value services, and the labor-heavy items are where you need the most care.

Keep the number of tiers small. Two or three is easier to sell, support and report on. Each tier needs a clear unit of pricing, usually per user or per device, and a written scope that says what is included and what is billed separately.

Test each tier against cost to serve

Cost to serve has two main parts: tool and licensing cost per unit, and labor. Tool cost is fairly easy to calculate from vendor invoices. Labor is harder and requires time entries tied to agreements so you can see how many hours each client actually consumes.

Here is an illustrative example with round numbers. An MSP prices three tiers per user per month and uses a fully loaded labor cost of $50 per hour.

The premium tier brings in the most dollars per user, $85 compared with $75 and $50, but at a lower margin percentage. In this example, the reason is labor: premium clients receive unlimited onsite support and use it. The MSP could raise the premium price, cap or separately bill onsite time, or accept the lower percentage in exchange for the higher dollar contribution. Any of those can be reasonable, as long as the choice is made on purpose.

Run this analysis by client, too, not only by tier. A tier can look healthy on average while two or three clients inside it lose money every month.

How tier structure shows up in reporting

Tiers are only useful for management if your systems can see them. A few setup choices make that possible:

• Create a separate agreement type or product in your PSA for each tier, and make sure every client is assigned to one.
• Map each tier to its own revenue line, class or item in the accounting system so revenue by tier appears in the financial statements.
• Require time entries to be logged against the client's agreement, so labor can be measured by tier and by client.
• Track tool costs per unit in a way that can be allocated to tiers, even if the vendor bill arrives as a single invoice.
• Report monthly on revenue, users and gross margin by tier, plus the number of clients that moved up or down.

Clear tier reporting also matters outside the business. Lenders and buyers want to understand what recurring revenue consists of, and a business that can show revenue and margin by package, with clients on standard agreements, is easier to evaluate than one with a different arrangement for every client.

Review tiers at least once a year. Tool prices change, labor costs rise and services drift between tiers through one-off promises. A yearly review keeps the packages aligned with what they cost to run.

This guide is general information, not financial, legal or tax advice for your situation. Work with your CPA, attorney and other advisors before changing pricing, agreements or how revenue is reported.