How to Set Prices & Storage Plans and Calculate Profits for an Online Backup Service
Two of the most common questions I am asked by new Online Backup Service Providers are, “How much should I charge,” and “How much storage space should I offer?” The answers have huge impact on profitability and marketability, and have been among the most difficult to answer – until now.
If you dissect the questions you find that they have something important in common – the cost of storage space, broken down by gigabyte. To answer them both, we need to know how much each gigabyte costs us, per month. Then, just like any retailer with inventory, we can figure out how to price it.
First let’s convert ALL our business costs into costs per gig per month, capital expenses first. These are the costs of hardware, equipment and software that is sold on a one-time-fee, perpetual license basis like Remote Backup Systems’ RBackup. Add up all these costs and divide by the number of months over which you want to amortize them. Often, this is also the length of time you expect your hardware to last before you have to replace it. It’s just a convenient figure.
Thirty-six months is a good place to start. So, divide all your capital expenses by thirty-six. This gives you their cost per month. Now add up all your monthly expenses, like rent, hosting charges, bandwidth and utilities. Add in your monthly capital expenses and you will have your total monthly expenses.
Now, here’s the part most people miss. Divide your total monthly expenses by your total amount of storage space in gigabytes. Brilliant, yes? This gives you your monthly cost per gigabyte.
It’s really a little more complicated than this, but this is a good start. We didn’t take into account your startup loans or expenses, marketing, and a few other expenses. Be sure you consider ALL your expenses. It’s a good idea to consult your accountant.
Rob’s Handy Online Costs & Profit Calculator
Now that you know how much your inventory actually costs, you can start working out how much you can charge, and you can project your profit.
I’ve written a little online calculator to help with all this. It will calculate your cost per gigabyte, your monthly expenses, your amortized capital expenses, your capital payoff (in months), and it will project your profit by both a number of clients and your storage capacity. The calculator takes into account a base price per month, and a base storage quota, and automatically accounts for the different prices of under-quota storage and over-quota storage.
My calculator is in spreadsheet format, so you can easily test many combinations of base prices, quotas, amortization, over-quota prices, and storage space allocation. It assumes the most common Online Backup business model of charging one price for an account that includes a fixed amount of storage space (base quota), and an additional charge per gigabyte above the base quota.
How would you like to double the amount of storage space you have to sell in the next 30 seconds?
My calculator does not take data compression into account. Remember that Online Backup software from Remote Backup Systems compresses data, sometimes as much as 90%. So when you are doing calculations that include the NATIVE size of the data, calculate the server side data size as half (just to be safe) the size of the client side data. So, 10 GB of customer data will usually become 5 GB of data on your server.
Many Online Backup services charge by the NATIVE file size, simply because that’s what customers know, and it is impossible to predict how much a file will compress. RBS software always displays totals to the client as native file size, not compressed. So, in many cases, you can adjust for file compression simply by doubling the amount of storage space you have available when you enter it in the calculator.
Zeroing in on your Pricing Plans
The best way to establish your pricing plans is to first complete your business plan, your marketing plan, your accounting plan, and the pro forma financials for your new business.
Determine your breakeven point, add the minimum profit that will make your venture worthwhile, and estimate the number of clients you can attract in the first six months. I have written an online calculator that can help you calculate your breakeven point. It is at the following URL:
After you finish calculating your costs, you’ll then know the minimum you can charge each client. Put that figure through a “reasonableness test” with several friends and associates, and by researching the prices of similar services online, and adjust it to the highest figure you think your market will bear.
A “reasonableness test” is simply a gut level determination of what’s “reasonable” to pay for a certain product or service. It’s your first emotional (note, I said emotional not reasonable) reaction to a price after the product or service has been fully described.
Be aware that statistics show that RBS providers who charge very low monthly rates ($5 to $15) make the least amount of money overall. Of course, this isn’t as straightforward as it looks – you can’t simply charge more and expect to make more. My most successful Service Providers service 80% business customers and 20% personal customers, and charge an average of $99 per month for business customers, with a range of $89 to $350. They charge a range of $4.95 to $19.95 per month for personal customers, with an average of $9.95.
The average amount of storage space included in the basic price for personal customers is 5 GB, and the average for business customers is 30 GB. Nobody using my software offers an “unlimited” service. They all come with some amount of storage as part of the basic fee (called a quota), and charge extra for storage that exceeds the quota.
Some of them charge a per gigabyte fee for over-quota storage, and some automatically move users up to the next higher plan which has a bigger quota. Keep in mind that my software, RBackup and Mercury, allow users to delete data from storage. So, automatically moving users between plans can prove problematic and confusing to end users if you have a number of users.
Some Providers give a free month of service for prepaying six months, or two free months for prepaying for one year’s fees.
When you are marketing your service, you’ll find that the easier the pricing plan is to explain, the easier it is to sell. “Unlimited backups for five dollars a month” is simple and easy to explain, even if it is not completely true. It is inexpensive, customers don’t have to count gigabytes, and they know the price won’t change.
I am not suggesting that you offer unlimited backups for five dollars a month, although you might want to offer something for five dollars a month, maybe five or ten GB, payable in advance for a year.
The first Service Provider offers a fully managed business level service using RBackup. This Service Provider has about 1,200 business clients, and operates locally. Here are his pricing plans.
Plan Name Price Storage Space
|Starter Package||$20.95 / Month||4 GB|
|Standard Package||$31.95 / Month||20 GB|
|Professional Package||$57.95 / Month||40 GB|
|Warehouse Package||$83.95 / Month||60 GB|
|SMB Package||$104.95 / Month||80 MB|
The second Service Provider has only one level of service, and uses the Mercury software to service about 21,000 laptops. Half are Windows and half are Mac. He offers completely automated registration and software deployment with preselected files backed up only from certain folders. He charges $60 / year.
Only one Mercury server (non-clustered) is used by this service provider, and it operates at about one-half capacity. A second identical server is on standby for automatic fail-over in case the first one fails. The hardware is a 64-bit Dell quad-core server and Windows 2003 Server, with 16GB of RAM attached to several storage arrays.
BackUPMAX has an interesting price structure. It offers both RBackup and Mercury. The RBackup packages are billed as their “Business Edition,” while their Mercury offering is billed as the “Personal Edition.”
Both have full integration and automation, with the ability to pay at a web site and download the software immediately to begin backing up.
BackUPMAX Business Edition
|Number of PCs||Monthly||6 Months 1 Month Free!||1 Year 2 Months Free!|
|1 PC, 10 GB Storage||$89.95||$449.75||$899.50|
|5 PCs, 15 GB Storage||$139.95||$699.75||$1399.50|
|10 PCs, 20 GB Storage||$179.00||$899.50||$1799.00|
|25 PCs, 30 GB Storage||$299.75||$1498.75||$2997.50|
|More than 25 PCs||CALL||CALL||CALL|
BackUPMAX charges for extra storage space beyond the base quota.
When you do your research, go online and search for “remote backup” or “online backup.” Visit a number of web sites, especially those that offer a service similar to the kind you want to offer.
Rob Cosgrove is the President of Remote Backup Systems, founder of the Online Backup Industry, and a vocal advocate for maintaining the highest standards in Online Backup software. His latest book, the Online Backup Guide for Service Providers: How to Start and Operate an Online Backup Service, is available online now, on Amazon.com, and at bookstores.
Remote Backup Systems provides brandable, scalable software and solutions to MSPs and VARs enabling them to offer Online Backup Services.