6 ways to improve your MSP business' profit margins
Improving profit margins is one of the most crucial goals of an MSP business. But it's a challenging one too. Let's explore the steps necessary to expand your IT services and increase your revenue potential.
Illustration: Karthikeyan Ganesh
Ever wake up in the middle of the night, stressed and wondering, "Am I running my MSP business the right way?"
Most business owners have, no matter which phase of the growth lifecycle their company is in. It's what I call textbook angst for any responsible business owner. And for good reason.
It's no secret that optimally operating businesses tend to reap higher profits. Revenue is the fuel that powers your business engine. Flush more stable profits, and you are in a far better position to focus on innovation, marketing efforts, new market pursuits, and other strategic endeavors.
Ask anyone who runs an MSP business, and they'll invariably tell you that growing revenue can be challenging. It can be a crapshoot—lots of unanticipated crises—some of their creation, some the fault of external forces. Many MSPs tend to settle for less than the true potential of their business.
Right now, MSPs are at an interesting time in their evolution. Hence, it is a good time for you to take the necessary steps to expand your IT services and increase your revenue potential.
Audit your customer base
Take a moment, and think about all the customers you are working with now. Not every customer is profitable. Some even cost you money! One way to grow your MSP business is to audit your customer base and fire those who don't add to your revenue.
Here's what you need to do. Rank your customers based on the revenue, customizations, amount of time you need to invest. Now consider if more profit margin can be made on customers that use more repeatable services, and keep them. Walk away from customers who cost you more than what they are bringing in. Use the recovered extra time to close new clients.
Related listening: How can MSPs identify and fire high-cost, low ROI clients
Upsell and cross-sell high margin services
Customers onboard adopting essential services like connectivity or network. But as their business grows, their service requirements such as storage, network, VOI, infrastructure management, etc., increases.
To me, the most significant benefit of an MSP business model is the ability to upsell and cross-sell services as your client's business grows, and they trust you with your solutions. It allows you to upgrade their contract to more complex and complete service solutions. You also get to position yourself as a trusted advisor on technology, driving high, long-term MSP profit margins for your business.
Pro tip: Your customer's loyalty and trust are directly influenced by customer satisfaction. Provide kickass services at a reasonable price point so that it becomes easier for you to win their trust and eventually sell more products/services to them.
Make an offer your customers can't refuse
You want to price your service offerings just right—not too low, not too high. To design the right offer, you need to analyze your existing expertise and limitations. Your service offering must reflect your capabilities. Next, bundle your services. It allows you to sell additional services to your customers and improves your revenue.
Pro tip: When bundling your services, ensure that you include at least one service that requires your client's long term commitment. It creates a steady revenue stream for your MSP business.
Closely track key MSP business metrics
There are plenty of metrics to help you assess your MSP business. Tracking every single one of them wouldn't be a wise idea. If anything, you will end up spending way too much time tracking them. You must identify crucial business metrics to help you gauge the growth of your business. Here are the 10 MSP business metrics you can track to determine where you are losing money and what you can do to mitigate this loss to achieve revenue growth.
- Net operating income
- Product margin
- Service department profitability
- Managed service agreement profitability
- Hourly service rates
- Sales compensation
- Sales expense
- Administrative expense
- Service utilization
- Service salaries
Choose services that are in demand
It's good to pivot to create new revenue streams but be cautious. When you decide to offer a new service, ensure there is enough demand for it in the market. For example, there is a huge demand for security services as many small- and medium-sized businesses (SMBs) are not equipped to deal with cyber threats on their own.
Compliance is another service that is equally in demand, and most customers are happy to pay a premium price for such services. Capitalizing on this demand will bring in a range of revenue opportunities for your MSP business.
Related reading: Lesser-known hacks to grow your MSP business revenue
Structure your sales team for continuous growth
How you segment your sales teams is what sets apart a high-growth MSP from the rest. There are two kinds of salespeople—the hunters who thrive on chasing new opportunities and the farmers who are great at nurturing long-term relationships.
Once your 'farmers' have closed enough clients to hit their targets, they won't bother about hunting. Similarly, when your 'hunters' are off chasing the next client, they tend to neglect their existing accounts, resulting in missed opportunities for revenue growth.
You need to understand the difference between the two and segment your sales team accordingly. By segmenting your sales teams between these two key roles, you enable your salespeople to play to their strength and drive continuous business growth.
You don't always have to make drastic changes to your MSP business or implement comprehensive strategies to improve your bottom line. Sometimes a simple tweak in your pricing, the way you structure your team, the services you choose to bundle, or a phone call to your vendor can pave the way for wider margins.