Azure Cloud Billing Wiki

MSP Billing Best Practices

Building a Profitable Azure Billing Model

How you structure client billing directly impacts profitability, client satisfaction, and operational efficiency. This guide covers proven approaches for MSPs billing Azure services.

Billing Model Options

1. Cost-Plus Markup

The most common MSP billing model for Azure.

How It Works

  • Pass through actual Azure costs
  • Add percentage markup (typically 15-40%)
  • Invoice monthly based on consumption

Advantages

  • Simple to explain and calculate
  • Transparent to clients
  • Scales automatically with usage
  • Lower administrative overhead

Disadvantages

  • Revenue fluctuates with client usage
  • No incentive to optimize (lower costs = lower revenue)
  • Clients may question markup percentage
  • Difficult to predict monthly revenue

Example

  • Azure costs: $5,000
  • 25% markup: $1,250
  • Client invoice: $6,250

MSP Implementation Tips

  • Set markup tiers based on client size or consumption
  • Higher percentages for smaller clients (more support burden)
  • Include markup clause in contract clearly
  • Reconcile monthly: Cost Management data vs. Microsoft invoice

2. Fixed Monthly Fee

Predictable pricing regardless of Azure consumption.

How It Works

  • Establish baseline Azure spend
  • Charge fixed monthly fee (e.g., $5,000/month)
  • MSP absorbs overage risk, keeps savings

Advantages

  • Predictable revenue for MSP
  • Client budgeting certainty
  • Strong incentive to optimize costs
  • Demonstrates MSP value through savings

Disadvantages

  • Risk if usage spikes unexpectedly
  • Requires accurate forecasting
  • Complex to establish baseline
  • May need quarterly true-ups

When to Use

  • Established clients with predictable usage
  • MSP confident in optimization ability
  • Combined with managed services contract
  • 6-12 months of historical data available

Risk Mitigation

  • Set overage threshold (e.g., +20% triggers adjustment)
  • Quarterly review and adjustment clauses
  • Exclude specific unpredictable services

3. Tiered/Pooled Model

Charge based on usage tiers with flat rates.

Example Structure

  • 0-$2,000 Azure spend: $500 management fee
  • $2,001-$5,000 spend: $1,000 management fee
  • $5,001-$10,000 spend: $1,750 management fee
  • $10,000+ spend: $2,500 + 10% of overage

Advantages

  • Partially predictable for both parties
  • Easier than full fixed fee
  • Client understands pricing progression

Disadvantages

  • Administrative complexity
  • Clients near tier boundaries may delay projects
  • Requires clear tier definitions

4. Hybrid Models

Combine approaches for optimal balance.

Base + Usage Example

  • $1,500/month base management fee
  • +15% markup on Azure consumption
  • Total invoice: $1,500 + (Azure costs × 1.15)

Benefits

  • Predictable base revenue
  • Upside from usage growth
  • Covers fixed support costs via base fee
  • Usage portion funds variable costs

Itemized Hybrid Example

  • Managed services: $2,000/month (flat)
  • Azure infrastructure: Cost + 20%
  • Professional services: $150/hour
  • Total varies by consumption and projects

Markup Strategies

Determining Your Markup Percentage

Factors to Consider

Client Size

  • Small clients (<$1K/month Azure): 30-40% markup
  • Mid-market ($1K-$10K/month): 20-30%
  • Enterprise (>$10K/month): 15-25%

Service Level

  • Basic pass-through: 10-15%
  • Monitoring + alerts: 20-25%
  • Full managed services: 30-40%

Competition

  • Research local MSP pricing
  • Position based on value, not just price
  • Bundle services for higher effective margins

Cost Structure

  • Calculate your fully loaded costs (labor, tools, overhead)
  • Target 50%+ gross margin after all costs
  • Factor in Partner Earned Credit (15%) if eligible

Industry Benchmarks

Typical MSP Markups on Azure

  • Low end: 10-15% (competitive markets, large clients)
  • Mid range: 20-30% (most common)
  • High end: 35-50% (specialized services, small clients)

Effective Margins (After PEC)

  • Baseline margin: 15% (CSP partner margin)
  • PEC credit: +15% (if eligible)
  • Additional markup: 20-30%
  • Total effective margin: 50-60%

Showback vs. Chargeback

Two approaches to internal cost allocation for clients with multiple departments or cost centers.

Showback

Definition: Report costs to departments without actually billing them.

Use Case

  • Client has centralized IT budget
  • Informational cost visibility for departments
  • No internal financial transactions

Implementation

  • Use Azure tags to attribute resources
  • Generate monthly reports showing cost by department
  • Client uses data for budget planning and accountability

MSP Value

  • Demonstrate cost transparency
  • Help client identify wasteful spending by team
  • Foundation for future chargeback if client evolves

Chargeback

Definition: Actually bill departments for their Azure consumption.

Use Case

  • Decentralized budgets (each department pays own way)
  • Client needs formal cost allocation
  • MSP may bill departments separately or provide allocation data

Implementation

  • Rigorous tagging strategy (mandatory)
  • Automated reporting by cost center
  • Allocate shared services (networking, security) fairly
  • Monthly reconciliation with client finance team

Challenges

  • Requires disciplined tagging
  • Disputed allocations (who pays for shared VPN?)
  • More administrative overhead
  • Finance integration necessary

MSP Opportunity
Position chargeback services as premium offering:

  • Setup: One-time project fee
  • Monthly administration: Additional management fee
  • Justify based on client's need for accurate departmental accountability

Pricing Transparency

What to Include in Invoices

Clear Line Items

  • Separate Azure infrastructure costs from management fees
  • Break down by subscription or client division
  • Include date range covered

Example Invoice Structure

ABC Company - January 2025 Azure Services

Azure Infrastructure (Cost + 25% management)
  - Production Subscription (SUB-123)     $3,240.00
  - Development Subscription (SUB-456)    $1,080.00
  - Subtotal Azure Infrastructure:        $4,320.00

Managed Services
  - 24/7 Monitoring & Support              $1,500.00
  - Monthly Optimization Review              $500.00
  - Subtotal Managed Services:             $2,000.00

Professional Services
  - Migration Planning (8 hours @ $150)    $1,200.00

Total Due:                                 $7,520.00

Supporting Documentation

  • Attach Azure usage summary (optional, for transparency)
  • Link to Cost Management portal views
  • Provide Azure Advisor savings recommendations

Handling Cost Spikes

Unexpected Azure cost increases can strain client relationships. Have a plan.

Proactive Monitoring

Set Budget Alerts

  • Configure alerts at 50%, 80%, and 100% of expected spending
  • Alert both MSP staff and client stakeholders
  • Include link to Cost Analysis for details

Weekly Cost Reviews

  • Check for unusual spending patterns
  • Identify specific resources driving increases
  • Investigate before month-end surprises

Client Communication

When Spike Detected

  1. Notify immediately – Don't wait until invoice
  2. Identify root cause – Specific resource, service, or event
  3. Quantify impact – "Costs tracking 40% over normal"
  4. Propose action – Optimize, accept cost, or scale back
  5. Document decision – Get client approval in writing

Example Communication

"We've detected a cost increase in your Production subscription. Storage costs have increased from $500 to $2,200 this month due to a new backup policy retaining daily snapshots. We can adjust retention to 7 days (reducing cost to ~$800) or continue current policy. Please advise."

Contractual Protection

Include Terms Addressing:

  • Client responsibility for usage-based charges
  • MSP right to suspend resources if spending exceeds thresholds
  • Client obligation to respond to cost alerts within X hours
  • Process for approving spending increases

Payment Terms and Collections

Standard Terms

Payment Due Date

  • Net 30 is typical, but consider Net 15 or Net 10 for new clients
  • Shorter terms improve cash flow (you pay Microsoft in 60 days)

Accepted Payment Methods

  • ACH/bank transfer (lowest fees)
  • Credit card (factor fees into pricing: 2-3%)
  • Check (slowest, declining in use)

Late Payment Policies

  • State clearly in contract
  • Typical: 1.5% monthly late fee (18% annual)
  • Service suspension after X days overdue
  • Credit card auto-pay option to reduce issues

Managing Microsoft Payment Float

CSP Timing Advantage

  • Microsoft invoices on ~6th, due in 60 days (~66 days total)
  • You invoice client on ~1st, collect in 30 days
  • Provides 30+ day cash flow cushion

Optimizing Cash Flow

  • Invoice clients as early in month as possible
  • Offer discount for early payment (1% for payment within 10 days)
  • Set up automated payment reminders
  • Monitor aging and follow up on overdue accounts promptly

Contract Language for Azure Billing

Essential Clauses

Pricing Structure

"Client will pay Microsoft Azure costs plus a 25% management fee. Azure costs are based on actual consumption as reported by Microsoft Azure Cost Management. Invoices are generated monthly in arrears."

Cost Increases

"Client acknowledges that Azure consumption-based charges may vary monthly based on usage. MSP will notify Client of unusual cost increases within 3 business days of detection. Client is responsible for all Azure charges incurred under their subscription."

Optimization Expectations

"MSP will provide monthly cost optimization recommendations. Implementation of recommendations requires Client approval. MSP is not responsible for costs incurred due to Client's choice not to implement recommended optimizations."

Billing Disputes

"Client must raise billing disputes within 30 days of invoice date. After 30 days, invoices are considered accepted and accurate."

Reporting to Clients

Monthly Reports Should Include

Executive Summary

  • Total Azure spend (vs. previous month, YoY)
  • Significant changes or trends
  • Top 3 cost drivers
  • Key recommendations

Detailed Breakdown

  • Cost by subscription
  • Cost by service type (compute, storage, networking, etc.)
  • Cost by resource group or tag (if applicable)
  • Reserved Instance utilization

Optimization Opportunities

  • Azure Advisor recommendations
  • Right-sizing suggestions
  • RI/Savings Plan candidates
  • Estimated savings if implemented

Visual Elements

  • Cost trend charts (6-12 months)
  • Service breakdown pie chart
  • Comparison to budget or forecast

Automation

Use Azure Cost Management API to auto-generate reports. See Azure Billing APIs & Automation for implementation.

Value-Based Pricing Considerations

Move beyond cost-plus to value-based pricing.

Charge for Outcomes

  • "Reduced Azure spending by 30% = $3,000 saved = $1,000 optimization fee"
  • Share in savings achieved
  • Flat project fees for migrations or optimizations

Bundle Services

  • Azure management + M365 management + security monitoring
  • Single price, multiple value streams
  • Difficult to compare to cost-plus competitors

Client Perception

  • Emphasize total value, not just Azure markup
  • Highlight PEC benefit (if client asks why markup needed)
  • Position as insurance and optimization, not just reselling

Avoiding Common Billing Pitfalls

Pitfall 1: Unclear Contracts

  • Solution: Crystal clear terms on pricing, responsibilities, and processes

Pitfall 2: Sticker Shock

  • Solution: Proactive cost monitoring and client communication

Pitfall 3: Undercutting on Price

  • Solution: Compete on value, not lowest markup. A 10% markup doesn't fund quality service.

Pitfall 4: No Documented Savings

  • Solution: Track and report optimizations to justify fees

Pitfall 5: Ignoring Cash Flow

  • Solution: Tight payment terms, automated reminders, credit card options

Next Steps

  • Implement Azure Tagging Strategies to enable showback/chargeback
  • Review Azure Cost Optimization for MSPs to maximize client value
  • Explore CSP Program Overview for PEC and margin optimization

Billing done right is transparent, fair, and profitable. Structure your model to align MSP and client incentives.