Building a profitable MSP business does not happen by chance. It requires careful forward planning, financial know-how, and ongoing measurement and monitoring.
You may be in the exploratory stage of starting a new managed service provider (MSP), or perhaps you've been battling uphill for several years and wondering when things will improve. The following keys will help MSPs in both positions achieve their goals.
The first key to running a profitable MSP is to understand what profitability entails. In its simplest sense, profitability means making more money than you spend in order to earn that money.
A closer look reveals the following three prongs to running a profitable MSP:
Get these three points right and you have the recipe for long-term profitability and business growth. Get them wrong and your managed service provider likely won't last very long.
The only way to achieve profitability is to establish a clear goal and then work your way backward to the figures needed to achieve that goal.
To begin, define where you hope to be in 5, 10, or 20 years:
Once you have established your financial vision, work out the figures needed to achieve this vision so that you can develop an actionable business strategy to get you there.
This is where the rubber hits the road. How will you actually make the amount of revenue (with workable costs) to achieve the figures you need to reach your goals? For that, you'll need a strong business strategy based on what actually works in the MSP industry.
The good news is that there is a wealth of information available now about business strategies that work (and don't work) for managed service providers. The following are a few real-world insights to help you develop a business strategy that delivers the figures you need.
Your initial business strategy may work well but will need to be updated over time as technologies and industry trends evolve. Attending MSP conferences is a great way to stay up to date with solutions, pricing models, and marketing and sales strategies that are working in the current business climate.
Let's imagine you have launched your managed services business—either with a clear business strategy or simply by accepting any and all IT requests that came your way and evolving as a business as you go. You now need to measure your business's financial performance with MSP KPIs relating to finance and monitor your performance in these areas over time to make strategic improvements.
Track the following KPIs for a clear picture of your finances.
Calculate your total monthly revenue for your product and service offerings separately for a clear picture of your income. Monthly recurring revenue and one-time revenue are also best considered separately.
Your MSP profit margins matter immensely for achieving overall profitability. Healthy profit margins for an MSP are generally 50% or more for your gross margins (before operating expenses) and 20% or more for your net margins (after operating expenses).
The cost of goods sold includes everything you spend to offer goods and services (product licenses, software subscriptions, labor costs, transport, training, materials, and so on). Calculate this figure for each of your product and service offerings separately.
The service multiple of wages is your total service revenue divided by your total taxable service wages.
The effective rate per customer is your total monthly revenue from each customer divided by the number of hours you spend each month servicing that client.
The effective rate per offering is your total revenue from a given offering divided by the number of hours you dedicate to that offering in the same time period.
Odds are that you and your team have more expertise in IT than in finance. Do yourselves a favor and partner with a finance team such as MSPCFO that can help you track your finances consistently and analyze your financial records to identify areas for improvement.
Some MSPs may hire an outsourced bookkeeper, others may use bookkeeping software and hire an accountant for periodic analyses and tax support. Yet others may invest in a reputable business advisor to help them improve their profitability over a defined period. Whichever path you choose, rest assured that it takes financial expertise (either your own or a professional's) to build a profitable business.
Most MSPs use technology at some level to track and manage their finances. Software makes the whole process much more efficient and gives you financial data you can use to make decisions to improve your profitability.
A common financial tech stack for an MSP involves a PSA platform for time and expense tracking and an accounting software solution for invoicing, bill payments, payroll, generating financial statements, and filing taxes (you may find some PSA and accounting software features overlap). Thread's Magic AI automates time entries, saving techs at least 30 minutes per day on this task and ensuring complete labor data for billing and reporting purposes.
Improving profitability is an ongoing process. Getting out of the red might be your initial goal and then you can work on increasing your profit margins until you reach that coveted 20% (or more!).
External factors such as changing economic conditions, new technology, and changing customer demands will also impact your revenues and costs. Monitoring revenues and costs regularly and continuing to improve your operational efficiency are necessary for improving and maintaining your profitability over the long term.
Running a profitable MSP business is possible but requires strategy, work, and accurate data. To improve your profitability:
Do all of that consistently and you should soon see your bottom line improve!