Modern business is increasingly reliant on IT services, offering managed service providers (MSPs) a unique opportunity for immense growth. Becoming a profitable MSP will come down to creating the ideal MSP business model and meeting the needs of your customer base.

Managed service provider businesses that focus on streamlining their services, boosting sales, and improving their efficiency will invariably see the fruits of their labor. Like in every industry, the willingness and ability to adapt to evolutions in technology and demand will keep your business profitable in the short and long term.

1. Efficiency

“Time is money,” as the saying goes. Identifying and correcting inefficiencies in your MSP’s workflow eliminates time wasted on routine tasks, increases productivity (without raising costs), and consequently boosts profitability.

Collaboration Platforms Increase Efficiency

Innovative service collaboration platforms like Thread speed up communication between MSPs and clients and reduce the need for manual tasks that take up valuable time. The following features, in particular, improve MSP efficiency:

  • Magic AI capabilities categorize and prioritize incoming issues. This focuses your dispatchers on the most pressing tickets, aids in faster troubleshooting, and prevents P1 issues from getting lost.
  • To-the-minute customization of technicians’ calendars ensures the right technician is assigned to the right tasks at a specific time. This optimizes technicians’ time and prevents threads from slipping through the gaps.
  • Interaction with service tickets within chat software like Microsoft Teams saves precious time and improves communication as team members can see service ticket notes, assign service tickets, and interact with the ticket within their regular work messaging app.
  • The ability to see responses that go out from other staff members makes it much easier to stay abreast of what’s going on and saves time on following up with the status of different tasks.

2. MSP Business Metrics

There are hundreds of metrics you could use to track the financial health of your MSP. However, it’s most effective to focus on a few key business metrics and work at improving them over time. Use the following metrics to determine where you’re losing money, and how to address any weak points.

  • Product margin: This KPI identifies how much profit you make on the sales of your products or services. This metric will tell you which services are most profitable, which products you should abandon, and which to double down on.
  • Sales performance: There are various ways to track your sales team’s performance including your quote-to-close ratio. This KPI (key performance indicator) shows the average number of quotes you send out before successfully closing a deal. This helps identify issues with your pricing, timing, or approach.
  • Gross profitability: Determine how well you’re balancing costs like production and labor with pricing and service delivery.
  • Average revenue per user: This KPI shows how much revenue each customer generates. You can use this data to understand the value of adding or losing customers and also to prioritize your most profitable customers.
  • Average resolution time: Your clients will expect speedy and efficient service. Unsurprisingly, your MSP’s resolution time has a huge impact on customer satisfaction as customers don’t want to wait long for a solution to a critical problem. Use this KPI to better understand and improve resolution times.

3. Unprofitable Customers

Automatically equating more customers with increased profitability can (ironically) end up damaging your MSP profit margin. The first step to rectify this is acknowledging that not every customer is profitable. In fact, you can even lose money with some customers! Growing a profitable MSP business means prioritizing quality over quantity. This can be achieved by auditing your existing customers and ceasing relations with those who don’t add to your revenue.

This may go against your instinct to foster long-term customer relationships. However, ensuring revenue growth will require you to make hard decisions. Audit your customers with these steps:

  1. Rank your customers based on factors like the revenue they contribute, any customizations they require, and the amount of time you invest in them.
  2. Determine if you can increase your profit margin on customers who use repeatable or high-margin services.
  3. Redirect time and resources spent on unprofitable customers to onboarding new, more profitable clients.

4. Upselling and Cross-Selling High-Margin Services

Many clients contract basic services like connectivity or network when they first hire MSP services. However, as their business and confidence grow, they may also require more managed services. This is your chance to sell storage, cloud services, or infrastructure management services.

A key to a profitable business in the IT sector is to upsell or cross-sell services to match your clients’ growth and then update your customers’ contracts to include more complex service solutions. You want to establish yourself as a trusted advisor and an essential cog in your clients’ businesses. This will drive your long-term MSP profit margins.

Prioritize High-Quality Service Delivery

Providing excellent service at a reasonable price point will make it easier to win customers’ trust and ultimately sell them more products or services. Satisfied customers are also more likely to make repeat purchases, ensuring your mid- and long-term financial security too.

5. Pricing Models

Research suggests that rather than implementing traditional cost-based pricing, service providers must establish prices that reflect the customer’s perceived value from the service they contract. Prices must be pitched just right; neither too high nor too low and reflect your capabilities.

Some possible pricing models include:

  • Monitoring: This provides businesses with networking and alerting services that adapt to the service level they need. This works best in a hybrid model where a small in-house IT team isn’t enough to monitor their infrastructure effectively.
  • Per user or per device: Apply a flat fee that covers each user or device.
  • Tiered: Bundling services allows you to build in price increases from tier to tier. This lends itself well to effective upselling.
  • All-inclusive: Customers pay a flat fee that covers remote and on-site support services.

Top tip: Bundling your services is most effective when you include at least one service that requires your clients’ long-term commitment.

Establish Subscription-Based Recurring Payments

Many modern businesses are turning away from the traditional practice of hourly billing. A recurring revenue model makes your MSP revenue more predictable, stabilizing your cash flow and supporting growth. Recurring revenue also speeds up the billing process, freeing up valuable time for focusing on serving your customers.

Automate Billing and Invoicing

Automating your billing process speeds up invoicing and can cut accounting and administration-related costs in some cases. Automation also helps to prevent potentially costly human errors and streamlines the overall process.

6. Maxing Out Your Partner Programs

Cloud providers like Azure and AWS offer partner programs that offer MSPs resources to boost profitability such as:

  • Extra sales reps to sit in on potential deals
  • Premium customer support
  • Bonuses and/or loyalty rewards
  • Marketing support
  • Discounts for bulk orders

These programs help you cut costs, boost sales, and improve the level of cloud services you can offer. For example, Microsoft’s Partner Earned Credits program incentivizes partners to promote Microsoft cloud services like Azure or Microsoft 365.

Maximize the Profitability of Your MSP

Achieving and then maintaining healthy profit margins in the MSP industry requires a multifaceted approach. Delivering exceptional value to clients and adopting a sustainable business model allows MSPs to optimize their operations, enhance customer satisfaction, and drive business growth.

From refining service offerings and pricing strategies to cultivating strong client relationships and investing in employee development, building a profitable MSP demands a holistic perspective. By focusing on these key areas and adapting to the evolving IT landscape, MSPs can position themselves for long-term success.