Critical Steps To Drive Higher Margins For Your MSP Business

As an MSP, you provide invaluable benefits to your customers, yet far too often, you’re leaving money on the table. At every stage of the client life cycle, there are critical steps that, when taken, can maximize the value of each opportunity.

From the top of the sales funnel down to the nitty-gritty details of implementation, we’ve identified key chances for MSPs to generate additional revenue and improve their operational efficiency to increase margins.

Communicating Value And Expanding Repertoires

MSPs can do a lot of things for their clients, most of which can’t be replicated with their own homegrown talent and resources. But it’s quite common for MSPs to undersell the magnitude of the benefits their services bring to the table.

To an MSP, these services might feel like a commodity, which drives some to undervalue and underprice what they’re pitching to prospects. But high-performing MSPs are separating themselves from the pack by continually adding new services.

When it comes to IT services outsourcing, the vast majority of customers want one-stop shopping. They need a trusted partner that views their systems holistically, not just a collection of point solutions operating in a vacuum. An MSP that can advise customers on what they need today and tomorrow is essential given the complexity of an ever-shifting IT landscape.

This begins with the language MSPs use to position themselves. MSPs limiting themselves to specific technical areas and simply reacting to customer requests — versus proactively exploring all possibilities — are selling themselves short when articulating their value proposition.

The Art Of The Cross-Sell

It typically costs about 125% to 150% of a customer’s monthly recurring revenue (MRR) to close an initial deal, factoring in the various sales and marketing expenses. That’s why MSPs fight so hard to keep their existing customers happy.

In the software industry, it’s standard practice to lure in new customers with a particular product or service. Then, once customers are in the fold, businesses increase each client’s value by continually pushing them to purchase additional offerings.

But for whatever reason, this is usually not the case with MSPs that often do not have a strong sales culture within their organization. Instead, most MSPs work very hard to cram as many services as possible into the initial deal, then move on to other prospects once that deal is closed. This leaves a tremendous amount of revenue on the table.

Although a customer may not have initially been interested in backup or compliance services during the sales cycle, their needs will change over time. Plus, once they start seeing how much value they’re getting from working with your MSP, they’ll be much more open to expanding the relationship.

For MSPs, not pursuing cross-sell opportunities within their current client base is a huge mistake. The costs to win additional business from existing customers is negligible, but cross-selling can dramatically improve an MSP’s MRR.

With customers already in the fold, MSPs can assess each client to see where opportunities for expansion lie. This includes proactively checking to see if the client’s security is adequate, if they are planning for backup and disaster recovery, or if they are undergoing a digital transformation that requires additional cloud services.

Pricing For Profit

Another area where MSPs aren’t always maximizing their margins is pricing their services. The underlying rationale for their price tags is often a hodgepodge of formulas and approaches.

Some MSPs are purely driven by what they see competitors charging. Others try to guess what the engagement will cost them, tack on some margin, and present it to customers, and some simply ask customers what they can afford and try to make it work.

There’s no reason to adopt such a slapdash pricing strategy. By doing a little bit of homework, you can follow a standard formula that always nets a healthy margin:

  • Calculate the cost of the tools required to manage the account.
  • Tabulate the labor required for proactive services (such as monitoring endpoints or installing patches and upgrades).
  • Tabulate the labor required for reactive services (e.g. fixing stuff when it breaks).

With these figures in hand, MSPs can add it all up, divide it by the number of seats, and see exactly how much it’s costing them per seat to support each type of service. Take that number, tack on a 70% margin, and the pricing is all set.

Of course, not every MSP is already tracking these metrics, so it might require some effort to complete this exercise and create a systematic way to assess your expenses. But without that underlying cost data, any pricing calculations are essentially being done blind. MSPs are inevitably undercounting just how much it’s really costing them to deliver and, therefore, underpricing in most cases.

Charge what your services are worth and don’t be afraid to turn away prospects or fire clients that don’t match your model. Every bad deal with low margins is taking up bandwidth that could be spent landing and supporting customers with higher margins and greater upside.

Mandating Standardization

Unless you’re lucky enough to have a startup knock on your door and ask for help from day one of their business, MSPs are inheriting a potpourri of legacy systems when they onboard a new client. But just because a customer is using a particular solution before signing on doesn’t mean MSPs must settle for the status quo.

Every additional variant an MSP supports is a direct hit on their ability to maximize profitability and efficiency. So, if your new client is using a firewall, server, or anti-virus solution that you don’t typically support, your staff are now going to require additional training and must keep tabs on new patches, upgrades, security alerts, and firmware updates from multiple vendors. Then there’s the impact of “switching costs” as your staff shift from one vendor’s platform to the next. And, of course, these systems require monitoring with a variety of dashboards that may not integrate well or use common terminology or user interfaces.

MSPs should make their lives — and the lives of their staff — easier by switching clients to their preferred solutions as part of the engagement. Most customers don’t really care about which vendor’s solutions they’re running on; they just want things to work.

If a particular prospect is unwilling to make the transition, MSPs should seriously consider walking away from the opportunity. While that additional revenue is nice, supporting multiple vendor solutions directly impacts profitability and the ability to scale efficiently.

With this approach, staff only need to get certified on a limited number of platforms, and the business is primed to fully exploit the benefits of automation.

MSPs also shouldn’t be afraid to approach existing customers and get them to switch to their preferred solutions. Even if that results in losing some business, it will pay off in the long run as engagements become more uniform, automated, efficient, and profitable.

Exponential Capacity Thanks To Automation

Many MSPs are pretty small operations — more than one-third have fewer than 10 employees. But that doesn’t mean they have to hire an army of minions to accelerate growth.

By standardizing on a comprehensive tool set supporting the full range of IT services they’re looking to provide, many routine tasks can be automated. This frees up their limited staff to focus on the hard, interesting challenges, letting day-to-day matters run on autopilot much of the time.

Automation enables MSPs to increase their book of business without ramping up headcount. This leads directly to increased profits and potential for growth.

Integration For The Win

Core applications like remote monitoring and management, professional services automation, and IT documentation are table stakes for any MSP. Unfortunately, many MSPs treat these as discrete tools in their arsenal.

But amongst high-growth MSPs, 80% believe integration between core MSP applications is important, and 92% connect this integration to helping them drive better bottom-line profits. Adopting a common platform for as many services as possible saves MSPs time and money, and there’s no better place to start than with the most commonly used apps.  Remember, time is money! Your staff only has so many hours in a day, so devising ways to get the most out of them by eliminating inefficiencies is key to increasing margin on every engagement