Increasing your MSP’s profit margin is most likely one of your business’ top priorities. To best serve your customers, pay your employees and continue to grow your company, your business must be profitable. Strong MSP profit margins are the key to sustainable growth as a company. That being said, most MSPs don’t know exactly where their pain points are and how to highlight the areas that need improvement to maintain healthy profit margins. Only 1 in 3 MSPs feel they are maximizing their profit margins. This highlights the common need to optimize services, client contracts and processes. Let’s consider some of the areas that may help you increase your profit margin.
“Micro problems affect your business. Macro problems affect everyone’s business.” We all spend most of our time focused on macro problems because they seem to require most of our attention, but the areas where we see the ability to tighten the gaps and increase your profit margins are generally on the micro level.
When we rank clients, we almost always find that some are somewhat unprofitable, and some clients are very profitable. So if your MSP is shooting for an overall 30% margins, you might have some clients bringing in 60% gross margins, while some might be at 5%, and everything averages out to about 28%. Most MSPs wonder, “How do I squeeze 2 more points out to get the 30% that I’m shooting for?” The data suggests that you focus on those 5% clients. Take the small problems you are seeing with those clients, and as you narrow down the problems, you can find an opportunity to grow your profitability – not by overhauling your entire business, but through small and simple measures.
Good data can help you narrow down what a client’s specific problem might be. For example, a client may be working with outdated machines that are constantly in need of small repairs, or they’re having problems with password resets. The answers to these small problems could be as easy as suggesting newer equipment or loosening up the requirements on a password. It’s all about zeroing in on very discrete problems.
Adopting a micro-level perspective and using data to focus on small details and daily interactions allow your MSP to home in on individual problems and evaluate how your business practices may contribute to that problem and what you can do to fix it once and for all.
Contracts make up a large part of revenue for MSPs, and we notice that often many contracts are underperforming. The biggest question we get regarding this issue is, “Why is this contract underperforming?” Realistically, it could be any number of things. As we dive into the data we may find that the pricing of the contract is off and that your MSP is undercharging for the actual amount that is being offered. The numbers could reveal that a client is dealing with an outdated technology stack or is undertrained. It could be that your MSP is not charging enough for the number of users and the number of machines they’re covering. Perhaps, you’re simply doing a lot more work than projected. There are several reasons contracts tend to underperform, and the right information can help you get to the root of the problem.
Armed with the right data, your MSP can turn to an underperforming client and let them know that the current agreement isn’t working, so you can work together towards a mutually beneficial agreement.
Most MSPs are staffed with incredibly intelligent people, which means that clients are getting top-of-the-line service. The downside to this is that while most large MSPs have a portfolio of engineers, they have level-one call center people and level-three project engineers who could do advanced work. Sometimes those level-three engineers are tasked with simple break-fix problems. If you’re sending your most skilled people out on break-fix problems, rebuilding a machine, resetting a password or establishing a VPN, you probably have a resource allocation problem.
While it’s easy to send the most reliable person out to fix a problem, as a business, you need to be making sure your higher-paid employees are generally working on the difficult problems that yield a greater profit. It’s straightforward – you want your expensive people to be tackling the high-level projects that require their skill set. If they’re doing less than that, you are probably dealing with a profitability hit.
Allocating resources wisely also applies to your MSP clients. When we meet with our new clients to go over the profitability of their own clients, we generally find about 10 client names in the bottom 20% of profitability. Frequently, they’ll say they knew 2 to 3 of those clients were problems, but it’s justified with “Well, they’ve been a great client,” or “We had a bad year with them; they had a lot of issues we had to resolve.”
Ultimately, the numbers don’t tell you to do something, they tell you to investigate something. They can help track down the “why” behind a problem client. Having in-depth information allows you to make informed decisions about how you can allocate resources and make the most of each client relationship.
At the end of the day, several factors work together to influence your MSP profit margin. While we are able to give you the granular data you need to see exactly which of your agreements, engineers and clients are profitable, you still have to do the work. You’ll have to be the one to have that hard conversation with a client, but we can empower you with the data you need to back up your decision. If you’re ready to do the work, we can give you the tools. If you want to make a change in your profit margin and you want to see an improvement, we can show you where you need to start.
Learn more about how MSPCFO has helped increase profit margins for numerous MSPs. Contact us today and schedule a free demo for your MSP.