If you’re running an MSP and you’re not making the kind of money you should be — not just surviving but genuinely building wealth, paying yourself a fair market salary on top of taking home 20% in net-net profits — there’s a very good chance you’ve been undercharging for years. Maybe since day one.
I know all the reasons why you think you can’t charge more. The cheap competition. The constant pushback from prospects and client about your fees being “too high.” But hear me out, because this isn’t just about rates and invoices. Undercharging is a strategic crisis hiding in plain sight that is destroying your MSPs ability to grow profitably and consistently, as well as holding you back from keeping and compensating your best people.
Here’s the hard truth most MSP owners forget you didn’t get into this business to be the cheapest option in the room. You started your MSP to provide a useful service to good clients and make money while doing it. You have a sincere desire to be a trusted IT expert for your clients. To create a business that actually works for you, not just for your clients, vendors and employees.
So why are so many MSP owners still pricing like they’re afraid to ask for what they’re worth?
Let’s break it down.
Why MSP Owners Undercharge (And Why None Of The Reasons Are Good Enough)
Before we talk about the dangers, let’s talk honestly about why undercharging happens. It doesn’t come from nowhere.
1. Fear of losing the deal.
This is the big one. You’re in front of a good prospect you really want to have as a client – but you can sense they’re hesitating over the fees. They might even say you’re the “most expensive option” they’ve seen. So instead of quoting the fees you should and standing your ground, you discount your services. It feels like a win in the moment, but it’s a slow-motion loss over the next three years.
2. Competing on price because you don’t know how sell the value.
If you don’t know how to build value and trust and can’t clearly articulate why your MSP solutions and services are worth more than the cheaper competitor down the street, you’ll default to price. This is a marketing and sales problem, not a pricing problem — but the pricing is where you feel it.
3. You set your prices years ago and never revisited them.
Costs go up, cyber threats have exploded and your tech stack has grown. Here’s a concrete example: if you were charging $125 per seat in 2015 and you still are today, you should be billing $162 based on CPI (consumer price index) alone – but hyper-inflation over the last several years has demanded more than a CPI increase. Best-in-class MSPs are now charging north of $200 per seat all in. That gap is money you have permanently given away.
4. You’re afraid that if you raise prices, you’ll lose clients.
This fear is understandable. It’s also almost always overstated. We’ll get to this.
5. You don’t actually know your numbers.
Many MSP owners have no idea what their true cost to deliver is, what their gross margin on managed services is, or what a healthy MSP profit margin actually looks like — per client. Without that data, pricing decisions are just guesswork.
None of these reasons justify chronically undercharging your clients. And here’s why.
The Real Cost Of Undercharging In Your MSP
1. You Attract The Worst Clients
Price is a filter. When you price low, you signal to the market that your service is a commodity, and you attract buyers who are shopping on price. These are the clients who call at 10:00 pm over non-emergencies, push back on every renewal, demand scope creep without additional billing and bail the moment they find someone $5 cheaper.
Meanwhile, the clients with real budgets, real needs, and a genuine appreciation for quality IT support never even talk to you. Your pricing already told them you’re not in their league.
The right MSP pricing strategy doesn’t just affect your margins. It determines the entire composition of your client base.
2. You Can’t Afford To Hire The Right People
You can’t pay A-player technicians when your margins are built around B- and C-rate pricing. Undercharging creates a ceiling on talent and throttles your ability to provide benefits, incentives and upward growth necessary to attract and keep your best people.
MSPs with healthy managed services pricing can invest in people — Tier-2 and Tier-3 engineers, a dedicated vCISO, a real help desk manager, a salesperson. MSPs running on thin margins are constantly in reactive mode: one tech doing the work of three, one bad month away from a cash flow crisis, no capacity to grow.
3. You Can’t Invest In Marketing Or Sales
You can’t afford to do anything other than slap up a basic website and hope for referrals to come in. You can’t run SEO/AEO…at least not at the level required to beat your very aggressive competitors. You can’t afford paid ads. You can’t hire a salesperson or marketing manager to drive inbound leads and new clients. You can’t sponsor events. You can’t build the kind of brand awareness that brings in qualified leads month after month.
Low MSP pricing doesn’t just hurt your bottom line today. It starves your growth engine for the future.
Without consistent marketing and lead generation, you’re entirely dependent on referrals — which means you’re not in control of your own growth.
4. You Burn Out
When you’re undercharging, you work more hours to compensate – after all, you’re the most willing CHEAP labor available, so you do it all. You take on more clients to make the numbers work. You cut corners on tools, on training, on processes. And eventually, you wake up and realize you’ve built a job that pays you less per hour than your own technicians — with none of the security of actually being employed.
5. You Devalue Your Company
Your company is not just a place to work – it’s an asset that someday you’ll sell. If your entire business consists of crappy, cheap clients, nobody is going to pay you top dollar for it. Why would they take on that misery? They won’t. They’ll pay you pennies of what it could be worth if you fixed your pricing.
Your pricing is a vote for what you believe managed services are worth.
What Does A Healthy MSP Profit Margin Actually Look Like?
Let’s get specific, because this is where most MSP owners are flying completely blind. These benchmarks come from 20+ years of Service Leadership Index data on thousands of MSPs. They are not estimates — they are what the best-in-class MSPs in the top 25% by EBITDA actually achieve.
First, let’s make sure you understand a few fundamentals:
Gross margin = Revenue – COGs, or cost of goods sold. For managed services, the COGs are your tech’s fully burdened salary plus the cost of any tools you need to deliver on that service (RMM, PSA, etc.). We do NOT could product resale in this, such as Office 365 or Azure. That’s a different revenue bucket.
Second, the margins below are based on INDIVIDUAL accounts. When you look at your ENTIRE service department, your gross margin will be more like 50%.
To calculate the gross margin by client, you must be tracking time against these agreements. Not projects (unless those projects are included in your managed services offering, which most do not). This is purely on managing the infrastructure, providing help desk services and regular maintenance.
Clients should be broken down into an ABCD Client Classification framework based on their individual profitability for managed services:
| Grade | Gross Margin | Client Type | What It Means |
|---|---|---|---|
| A Client | 70%+ | Best in class | They should be on your full tech stack, current pricing, current package and contract. This is the standard. |
| B Client | 50–65% | Good, but need to be upgraded. | These clients are one conversation away from becoming an A client by increasing their rates. |
| C Client | ~40% | Could go either way | Upgrade them to a minimum of a B status with the intention of continually upgrading to A status. If they refuse, they slide toward D. Act with intention. |
| D Client | Under 35% | Immediate action required | Unprofitable and unsustainable. You are paying them to be their IT company. Usually these clients are noisy and were underpriced since day one. Raise their prices or fire them. |
The goal is to get 100% of your clients on 100% of your current offerings at your current price. That single objective, pursued systematically through quarterly account reviews, is how MSP businesses that implement this framework have tripled their enterprise value and grown revenue 15% per year — without adding a single new logo.
How To Calculate What You’re Actually Making (Or Losing) On Each Client
Most MSP owners think they know which clients are profitable. Most are wrong — especially about their largest accounts. Here is the exact methodology our MSP Profitability Expert in Residence, Paul Cissel, uses with the MSPs he coaches.
Step 1: Calculate your true average hourly cost per technician.
Take your total annual service department W2 wages, multiply by 125% to account for payroll taxes and benefits. Add roughly 10% overhead for tools. Divide the resulting total by the number of service employees — this includes technicians, coordinators, service managers, and procurement personnel, not just techs. Then divide by 1,660 hours — the effective working hours per year after PTO, holidays, and sick time.
For example: An engineer with an $80,000 W2, with loaded benefits and tool overhead, comes out to approximately $118,000 in total annual cost. At 65% utilization — which is roughly the realistic average; it’s rare to see a company exceed 70% full utilization — your actual cost per billable hour is approximately $87.
Step 2: Apply the service firm rule.
If you’re running a service firm — which you are — you should be charging triple what your people cost you. That’s what CPAs charge. That’s what attorneys charge. That’s what best-in-class MSPs charge. At an $87/hour cost, you should be billing $250/hour or more for that engineer’s time. If you’re not, you’re subsidizing your clients.
Aside, AI is driving this 3X multiplier up. Right now, best-in-class are more like 3.5X service wages, and I estimate they’ll go above 4 for a period of time before the market is normalized when all are using AI to lower costs.
Step 3: Pull the ticket hours for each client from your PSA.
Look at the reactive ticket hours for each account over the trailing 12 months. Multiply by your cost-per-hour figure. That is your cost to serve that account. Subtract from the account’s annual MRR. What’s left — as a percentage of revenue — is your actual gross margin on that client.
A real example: A client billing $4,000/month ($48,000/year) had 720 hours of reactive tickets. At $38/hour loaded cost for a smaller MSP, that is $27,000 in service cost. Net margin: $21,000, or 44% — a C client, not the “good client” the owner assumed.
Step 4: Rank all clients A through D every quarter.
Once you’ve run this analysis, sort your client base from highest to lowest margin, assign your ABCD grades, and work through them in batches of 25. Top-performing MSPs do this every single quarter. Eventually your account managers own this process.
This review process is the START of the QBR (quarterly business review) process, also called TBRs or technology business reviews.
What To Do With Your ABCD Client Analysis
B Clients: Your Fastest Revenue Wins
Start here. B clients are 50–65% margin and generally just need to be asked to upgrade. They’re already familiar with your value. A direct, value-framed conversation about moving them to your current full stack and current pricing is usually all it takes. Prioritize B client visits first. This will give you the extra margin (and courage) to fire the C’s and D’s.
C Clients: Upgrade or Migrate to D
C clients need a decision. With intentional account management — QBRs, technology roadmaps, budget conversations — many C clients can be brought to B or A status. If they resist, they’ll drift to D. Know the difference and don’t allocate unlimited cycles to them.
D Clients: Double Or Triple Their Rates
This is the step most MSP owners avoid, and it’s the step that changes everything. For your D clients, double or triple their rates — and hold the line.
HOT TIP: My recommendation is not to just raise the rates for what they are getting. Create a new service plan and sell them into it. Every year, name your service offering by that year: The 2027 Managed Services Package (or whatever). Point is, 2 years from now, you can tell the client they are on the “old” plan that was relevant back in 2027, not TODAY.
As Paul Cissel states from 20 years of working with MSPs: out of 10 D clients, you will lose approximately 8. The 2 who stay, now billing at corrected rates, will generate more PROFIT than all 8 you lost combined. You do not lose net profit from this action. You lose bad revenue and replace it with good revenue.
The clients who leave? They were the ones calling your service desk the most, paying the least, and making your team miserable. Give them to your competition.
The MRR-To-Project Ratio Most MSPs Don’t Know About
Here’s a number that should shock most MSP owners. According to 20 years of Service Leadership data, the average MSP’s billing breaks down roughly like this:
- MRR/recurring billing: ~48% of total revenue
- Non-recurring product: ~21%
- Project labor: ~7.6%
- Time and materials: ~3.5%
Add it up and the conclusion is this: for every $100,000 in MRR, you should be generating approximately $68,000 in project revenue. Of that project revenue, roughly 75% is hardware and 25% is labor.
If your project revenue is nowhere near that ratio, you’re leaving significant money on the table with your existing client base — money that doesn’t require a single new logo. Best-in-class MSPs who actively sell projects into their base achieve much higher year-over-year revenue growth – more than double bottom-quartile performers.
How To Raise Your MSP Prices Without Losing Good Clients
- Know your numbers first. Before you change any pricing, run the client profitability analysis above. Don’t price emotionally. Price from data.
- Start with your B clients — not your D clients. Your B clients are your fastest revenue opportunity. They’re profitable, they know you, and they’re one conversation away from being fully on your stack and your pricing. Build confidence and revenue simultaneously.
- Build your case for value before you deliver the news. A price increase should never feel like it came out of nowhere. QBRs, business reviews, security reports, uptime metrics — make the value visible before you ask for more money.
- Frame the conversation correctly. Use these talking points: the current inflationary environment, insurance-mandated risk reduction requirements, becoming a regulated industry, the obligation to protect all clients in the chain — and, where applicable, the plain fact that rates haven’t changed since the client first came on board.
- Build annual escalators into every new MSP agreement. Annual price escalation clauses (typically 3–5%) should be in every contract you sign going forward, and you must actually enforce them every year. Having the clause but not executing it does nothing.
- For D clients: double or triple their rates and hold the line. As described above — raise dramatically, expect most to leave, keep the few who stay at the corrected rate. Do not negotiate down. The math works out in your favor.
- Build an annual price increase into your contracts NOW. A big reason for being unprofitable is that you don’t slowly increase your fees every year, even though costs go up annually. If you build in an annual 3% to 5% price increase, the client isn’t sticker shocked when you have to double their rates that you start charging 5 years ago and never raised them at all.
The Marketing Connection Most MSP Owners Miss
Here’s something I want to be direct about, because I’ve seen it play out hundreds of times: undercharging is often a marketing problem dressed up as a pricing problem.
- You’re targeting the WRONG clients in the first place.
- You never build a marketing engine and don’t have enough inbound leads coming in, so you’re desperate and starving for any revenue you can get.
- You don’t have a good story about why you’re worth more than your competitors – and being “good” and “responsive” is weak sauce these days. Everyone says it.
The antidote to undercharging is not just a better rate card. It’s a marketing engine that keeps you out of desperation mode.
When MSP owners invest in building a real marketing system — one that generates consistent opt-in leads from qualified MSP prospects — everything changes. Pricing conversations get easier. Negotiations shift in your favor. You start attracting the kind of clients who will pay what your services are actually worth.
FAQ: MSP Pricing Questions Answered
What gross margin should an MSP target on managed services?
According to Service Leadership Index benchmarks compiled over 20 years, best-in-class MSPs — top 25% by EBITDA — target 70% or higher gross margin on their A clients. B clients fall in the 50–65% range. C clients run around 40%. D clients are under 35% and represent the most urgent corrective action priority. This is individual profitability. Your overall service department will be closer to 50%.
How do I calculate the true cost to serve each MSP client?
First, figure out your blended hourly rate for your service technicians: Take your total annual service department W2 wages, multiply by 125% for benefits and taxes, add ~10% for tool overhead, divide by the number of service employees, then divide by 1,660 effective working hours per year. That gives you your cost per hour. Pull the annual reactive ticket hours for each account from your PSA, multiply by that hourly cost, and compare it to the account’s annual revenue for managed services.
What should MSPs charge per hour for engineering labor?
Service firms — including best-in-class MSPs — should charge approximately triple what their people cost them, which is consistent with how CPAs and attorneys price their time. If your loaded engineer cost is around $87/hour, you should be billing $250/hour or more.
How often should an MSP review client profitability?
Top-performing MSPs conduct ABCD customer classification reviews every quarter, eventually assigning this responsibility to account managers as the process matures. Doing this once is useful. Doing it consistently every 90 days is transformative.
Will raising prices on D clients cause me to lose all of them?
Yes — most of them. Expect to lose approximately 8 out of 10 D clients when you double or triple their rates. The 2 who stay will generate more revenue than the 8 who left, meaning you do not lose net revenue. The clients you lose are typically your highest-maintenance, lowest-margin accounts.
How much project revenue should an MSP generate relative to MRR?
Based on Service Leadership data, for every $100,000 of MRR, a healthy MSP should be generating approximately $68,000 in project revenue, with roughly 75% of that in hardware and 25% in labor. If your project revenue is significantly below this ratio, you have an account management and cross-sell problem, not a pricing problem.
How often should an MSP raise prices?
At minimum annually. MSPs should build contractual annual escalation clauses into every agreement and enforce them every year. If you were charging $125/seat in 2015 and haven’t moved the number since, CPI alone means you should be billing $162 today.
Stop Leaving Money On The Table
Undercharging isn’t a strategy. It’s a symptom — of fear, of a weak pipeline, of insufficient marketing, and of a fundamental undervaluation of what you bring to your clients every single day.
The MSPs who build genuinely profitable businesses — ones that run without the owner working 70-hour weeks in panic mode — are the ones who made a decision at some point to price for the business they wanted to build, not for the deal they were afraid to lose.
You are worth more than you’re charging. The question is whether you’re willing to make the changes — in your pricing, your account management process, and your marketing — to prove it.
