Healthy Margins Are Key To Never Losing Money In A Month Again

It’s hard for many MSPs to figure out how to price their services, let alone leave room for healthy margins. Back when we were break-fix businesses, we had a unit of measure—one hour. We knew what an hour cost us and what our hourly rate was. But now that MSPs charge a monthly fee, the unit of measure isn’t as obvious. That’s why I developed Picanomics, to teach MSPs how to measure their services and price them accordingly.

One of the key concepts I teach is about leverage as an MSP. We can define leverage as service revenue per employee; it’s a relationship between people and revenue. You can increase leverage by increasing your prices and lowering your costs. Ideally, you want to generate the most amount of service revenue with the lowest number of people possible.

Pricing That Prioritizes Growth

Start by looking at your current pricing. This is easy—just take your current MRR and divide it by the number of seats you currently manage. That’s your average seat price. That gives you an idea of your average profit; ideally, you’ll be making 65-75% gross margins on managed services. That’s how you’ll maintain steady growth.

Here’s the theory I used to build my MSPs. Place everyone into a role or function, which will scale as you grow. Then, you want to create a relationship between each role or function and your top-line revenue. For example, how much MRR can one VCIO manage? You need to figure out what your average cost per seat is. This average cost per seat is your unit of measure, just like an hour used to be. With that information plus your target margins, you can calculate what your average price should be. Then all you have to do is ensure the value you deliver to your clients supports that price!

The Importance Of Keeping Healthy Margins

If your margins are too tight, you’ll either need to increase your prices, or lower your costs. There are two ways to lower your seat costs: lower your labor costs or increase the seats managed per resource. Lowering your seat costs isn’t a great option right now; I don’t know anyone who doesn’t have an average higher salary today than a year ago. So, all you can do is increase the seats managed per resource.

That will allow you to charge the same amount as your competitors, while keeping extra money freed up to spend on high-value things the customer needs and appreciates, such as VCIO services, security recommendations, and designing technology offerings that align with the client’s goals. Things like your tool stack and support, however, have low perceived value, since customers expect that. The high-value services will enable you to get more customers and charge higher prices.

These things all fit together. The higher your value, the more customers are willing to invest in alignment to reduce their risk, the fewer tickets you have to deal with. In turn, your people are able to manage more seats because they have fewer tickets to take care of—now your costs are going down.

Tracking Your Turning Point

But here’s the real turning point for MSPs—when all your operating expenses and overhead are covered by your recurring revenue. Once you hit this point, all your non-recurring revenue and your margin on hardware go to the bottom line. This means you can never again lose money in a month; you have profit from day one. Before you reach this turning point, it’s impossible to achieve 30% true net profit after your owner’s salary and run your business the way it’s meant to be run.

You have to track your turning point too, because you can’t make the decisions necessary to reach it otherwise. The only way to achieve it is by maintaining wide enough gross margins as you scale. Otherwise, your turning point acts like the horizon—it keeps moving as you grow. Instead, set it as a north star and make business decisions accordingly.

If you focus on these three metrics—seat price, seats managed per support resource, and your MSP’s turning point—you’ll continue to grow without getting stuck.

And if you think your pricing might be at fault, check out my previous article about how to package and price your MSP services.

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ABOUT THE AUTHOR
Gary Pica is the founder of TruMethods, a Kaseya company, which helps MSPs build world-class businesses through training, frameworks, and peer networking. trumethods.com

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