How to Measure Profitability to Make MSP Businesses More Robust

There’s an old adage that states, if it’s not measured, it’s not managed. Therefore, profitability is one of the most important metrics you should be measuring as a business owner.

According to Gartner, profitability is a measure of an organisation’s profit relative to its expenses. To put it another way, when you have an efficient income-to-cost ratio with your customers, your business is going to be more profitable.

So, as Managed Service Providers (MSPs), how can you keep your business profitable and more efficient?

In this article, we’ve highlighted just some of the ways you can be operationally more profitable.

Why Profitability Matters

Profitability is an important factor in the health of a business. It shows how operationally efficient you are, and can be an important factor to investors, or those that wish to acquire your business when it’s the right time for you to sell it.

Profitability goes hand-in-hand with growth, and the more profitable your business is, the better your foundations for growing your business. If your running costs are too high, it could impact your growth plans and make them much more of a risk.

Small businesses with a clear and consistent record of profitability are more attractive to potential investors. According to the National Small Business Association, 72% of small business owners believe that profitability is a key factor in attracting investment.

There are three main ways to increase your profitability as a business owner.

By:

• Increasing sales
• Reducing costs
• Improving efficiencies

For MSPs especially, we have to ensure that our client agreements won’t make them a liability in the future. Spiralling support costs and failing to raise your prices year on year are just two of the inefficiencies that can eat away at your profitability if not controlled.

Attracting Profitable Clients

When you attract new clients that are better suited to the services you provide, they will tend to be more profitable than those that are not as good a fit.

Customers that meet your ideal will be easier to manage, and cheaper to support.

We know from experience that this isn’t always possible. And depending on your operational maturity, you might be tempted to take on any and all clients that slide into your sales pipeline.

However, it’s really worth taking the time to define what your ideal client looks like and make it the cornerstone of your marketing strategy. Whether you’re positioned for a particular vertical or not, having in mind the sort of businesses that you want to attract will serve you better in the long run.

Selecting the Right Pricing Model

It’s a common mistake to think that offering the lowest prices will equate to more business opportunities.

If you price your services too low, it will affect your profitability, and it could be difficult to manage. Trying to deliver quality services on a budget will take a toll on your staff and be potentially not very satisfying for your customers.

The value-based pricing model invites potential customers to consider the value that they get from you as an MSP. If your pricing is too low, then they perceive that the value you add over your products isn’t worth very much.

Value-based pricing strategies are tied into your marketing. Therefore you should be demonstrating this as part of your marketing strategy to attract the right customers.

Marketing to Your Ideal Client

Once you know what your ideal client looks like you can shape your marketing engine to fit them. Your offering, pricing, the problems you can help them with; all of it can be designed to draw those ideal clients your way.

You’re much more likely to find better-suited customers if you specialise in a particular vertical or niche. Although the trade-off is that there may be fewer opportunities and greater competition if your offering doesn’t stand out.

How Can You Make Existing Customers More Profitable for You

As well as attracting new prospects, you can sell additional products and services to your existing customers.

Your existing customers are already a captive audience when it comes to selling your products, because they trust you enough to manage some of their services.

Therefore, as well as keeping track of the services you already provide, and how satisfied they are with the service. You should also keep track of the further sales opportunities too. The services that you provide as part of your stack, that they aren’t taking advantage of currently.

Whether this is a new service, something that they lack, or services in line with their goals for future growth, you should be taking note of these opportunities in your customer relationship database (CRM).

Furthermore, future growth should be something you discuss regularly with your existing customers as part of their technical business reviews (TBR).

Cost Savings to Make Your MSP More Profitable

An essential part of continual business improvement is making cost savings. Reducing your overheads and streamlining your internal processes and services to customers will save your business money.

Depending on the size and maturity of your business, there can be a multitude of ways to cut costs.

Here are a few tips for you to consider when making cost savings.

Outsource Functions to Freelance Virtual Assistants

Hiring extra staff can be expensive, especially if there isn’t enough work for them to do. However, if you only need help for a few hours a week, or if you want to offload tasks to a specialist, then a virtual assistant could be the answer.

Likewise, an intern could be a good hire if you they already have skills you currently lack. There are some specific guidelines for interns employed in the UK, so make sure you read them before deciding if an intern is right for your business.

Insist on Upgrading Client’s Legacy Systems, or Threaten to Raise Your Prices

IT systems are constantly being improved all the time, with faster processing and more robust software. Therefore, as MSPs, we are continually encouraging our clients to use the up-to-date tools that we recommend to them.

You may have some customers who are still using older, antiquated systems, who are delaying migration to newer technologies.

Even if you declare that you’re not supporting them, they could still be a barrier to profitability and a risk to security if they’re not isolated from the network.

And you may still get tickets raised for these older systems, so they can be a drain on your support desk.

Ways to encourage customers to migrate away from old legacy systems include:

• Raising support fees
• Explaining why older, unpatched systems are a risk to their business
• Offer managed data export and migration with followed up training
• Explain cost and efficiency savings for the customer

Review Regular or Repeat Tickets in Your Ticketing System or PSA and Consider Automation

Depending on the size of your MSP offering or the complexity of your customer base, you’ll likely receive similar tickets across your business.

Reviewing these tickets can show you where automation or self-service could help lower the number of tickets you get coming in to your service desk. But it will also show you where the inefficiencies are for you to work on in general.

You may determine that several repeat tickets are the result of a training issue. Or a fault that could affect a number of users which, if resolved, could eliminate further tickets being raised.

Automation and Self-Service

To aid your team’s productivity, you could implement a self-service portal to help your clients help themselves. Or invest in a tool with integrated AI or machine learning capabilities.

Self-service encourages your clients to be pro-active in their service requests. This requires some set up training for each client, but it should reduce repeat service requests tying up your resources.

While sophisticated automation tools are becoming increasingly accurate and affordable, they may require some investment in implementation to get the best use out of them.

Risks to Profitability

Every business needs to consider risk in their supply chain. IT suppliers will be thinking of how secure their customers’ businesses are in terms of cybersecurity. And if they were to suffer a successful cyber-attack, whether they’d be able to survive the impact to their business.

Factors such as having adequate cyber insurance, and having a recovery plan to get things back up and running.

However, there are other risks to consider when you think of your customer base. These include:

1. Economic Instability – Would a recession affect growth and customer spending?
2. Governance Criteria – will ESG have an impact on your niche customers?
3. Irregular Payments – Do they pay upfront and on time or are they a charity or government institution that depends on funding budgets?
4. Price Agreements Too Low – Did you initially set your prices too low, and they’ve become a drain on your resources?

How to Keep on Top of Your Profitability

As I said earlier, if it’s not measured, it’s not managed. You have to keep track of your metrics!

There are a few ways you can ensure you keep on top of your profitability.

Measure the Revenue and Costs of Services with Your PSA Tool

Your PSA tool, as well as tracking service requests, will also provide the costs of each service or product a client has. Comparing this to the monthly recurring revenue they pay, you can determine how profitable this client is, compared to the other clients you have.

It’s much easier to see it all together on a PSA tool, than using spreadsheets, but make sure that you’re measuring engineers time for any ad-hoc services you provide.

Hold Regular Technical Business Reviews with Your Clients

Technical review meetings with your clients are a great way to identify areas to help them grow their business. Those growth areas could be opportunities for you, but it’s important to not treat them as sales meetings.

An opportunity for sales is just one of the outcomes that can improve a client’s profitability to your business. However, the second is an opportunity to talk to your clients about any repeat service requests they make and find ways of reducing them through education, automation or remedying a more long-term solution.

Spotting the Opportunities to Upsell to Existing Clients

Keeping a database of the services you provide for each client will highlight areas you can exploit. You can see which clients have not yet signed up to some of the other services you provide to your other clients.

Not only will you have a good idea of what products your clients might need if you keep this database up-to-date, but you’ll also mark any areas for the potential phasing out of legacy systems, which will also improve their profitability.

Make part of your strategic marketing target your already-engaged audience of clients. Highlight new services in your marketing newsletter or your website, and across social media.

Other Areas to Watch for Profitability

Aside from those things you can directly control, there will be other factors that are beyond your scope to manage. However, they are worth keeping an eye on in any case.

Irregular Payment of Invoices

If clients are paying upfront and on time, then it’s usually a good sign that they’re happy with the service you provide and the relationship is a healthy one. But if payments are irregular, and you have to chase them now and then, it could be a sign of problems they are having in-house.

Whatever the case may be, it doesn’t hurt to reach out and ask if there is anything you can do to make things easier. If you can find a reasonable solution to any short-term issues, then it won’t be a major concern.

It’s only if the problems have a chance of escalating that you should be wary. If it looks like the relationship might end up being unprofitable in the long run, then it’s worth considering letting that client go.

Fluctuating Markets in the Sector

As the COVID lockdowns hit in the early 2020s, quite a few businesses took a huge financial hit. Likewise, Brexit also affected many businesses, and now many UK councils are experiencing funding issues.

If your MSP serves a particular vertical or provides services for businesses from a specific type of industry, then it’s worth paying attention to economic forces affecting those types of business.

Likewise, if you provide services for overseas companies, it’s worth keeping abreast of any geopolitical factors that may impact on your bottom line.

Your Client is About to Be Merged or Acquired

Mergers and Acquisitions (M&A) are already a complicated process for the businesses directly involved. But what about for the contracted service providers they employ?

You should try and get as clear a picture as possible about where you stand as soon as you can. Though your contract may be safe in the short-term, it might affect your bottom line in future if the new entity chooses not to continue with your services.

On the other hand, if you suddenly have to expand to cover more seats, that will also affect profitability in a good way. However, it might mean you need to recruit more staff to your team if you suddenly go from supporting 200 people to supporting 600 people.

Conclusion on Profitability

Profitability, cash flow and growth are the three essential parts of a business, and an MSP business is no different. Managing profitability is a way of keeping your business healthy enough to endure and grow.

Choosing the right kind of client is essential, as a good fit will mean high profitability. However, keeping them profitable, as well as working to make any other clients you have more profitable, is just as important as finding new clients to add to your portfolio.

By making sure we’re monitoring revenues and costs, we can measure how effective each client business relationship is. From there we can determine where any efficiency savings can be made and where any opportunities for upselling might be.

How do you manage profitability in your business? Do you have any tips for anyone out there starting their MSP journey that could help them maintain a healthy bottom line? We’d love to hear all about it in the comments.

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