Do MSPs Have a Profitability Problem?
This blog post could be one word. Do MSPs have a profitability problem? Yes. But easy answers are rarely the best answers, and a closer look at the data reveals a more nuanced reality.
The truth is, most MSPs have a profitability problem; but some MSPs – best-in-class MSPs – do not. In fact, when it comes to profit, we see a pattern that shows up a lot in the MSP space: a marked gap between ‘the best’ and ‘the rest.’
Data from Service Leadership revealed that top MSPs averaged 23% profit while a whopping 31% lost money in Q1 of 2023. That’s almost a third of shops in the red. The same report found that MSPs have an average profit margin of 8%, compared to 18% for top-tier companies.
When you consider the fact that margins in other prominent service industries (e.g., legal and financial) hover around 30% – 35%, the above numbers hurt. But maybe this is the most painful stat of them all: 28% of MSPs aren’t profitable. The MSP space doesn’t have a profitability problem; we’ve got a cash flow crisis.
In this post, we’re looking at why – the reasons behind MSPs’ razor-thin margins. We want to help your MSP better understand the source of the problem, so you can take more effective steps toward solving it.
A Small but Important Caveat
Low margins aren’t always indicative of poor business health. For instance, MSPs in the early stages of their journeys are often focused on aggressively reinvesting earnings to fuel growth. This can be a sound strategy, even though it will likely hurt margins in the short term.
The lesson here is that you should always take into account where you’re at when assessing your MSP’s margins. Is profit low because you’re reinvesting in future growth – or because there’s something fundamentally broken in your business? Those are two very different situations, so make sure you’re paying attention to what’s going on behind the numbers.
Why Do MSPs Struggle with Profitability?
Why is profitability an industry-wide pain point for MSPs, but not law firms? IT services are no less crucial than legal support, no less expertise-based. So what’s going on?
The short answer? A lot of things are going on. MSPs with lower margins typically aren’t guilty of just one thing – some egregious misstep that accounts for all their struggles. It’s usually a combination of factors. Here are some of the most common ‘profit-killers’:
Costly Clients
Sometimes low margins can be traced to particular clients. Is your MSP tracking profitability by client? If not, start – even if it’s just with one client. If you end up discovering a client who’s not contributing ‘their share’ to your bottom line – or even costing you – consider cutting ties. That can be extremely difficult, but working with troublesome clients doesn’t just hurt your bottom line; it also drains resources, negatively impacting the service you provide other clients.
Of course, you’ll want to exercise judgment and see the big picture. Clients can go through periods of low profitability for good reasons (e.g., they’re still transitioning from legacy systems). And just as it can make sense to sacrifice short-term profit for long-term success, it can be a good idea to swallow costs for the sake of client development.
Underpricing
Letting go of a client is tough – but so is letting go of a potential client. This fear drives a lot of MSPs to offer low prices or special discounts. MSPs fighting over the same businesses can easily find themselves locked in a race to the bottom.
Underpricing can also stem from a poor understanding of the economy and market conditions. Some MSPs underprice because they’re simply not aware of what their competition charges. Others underprice because they are aware of their competitors’ rates, and choose to simply mimic them. But when others are systematically underpricing and you copy them, you end up underpricing too.
Poor Value Articulation
Underpricing is rooted in a deeper problem. Why are MSPs afraid of losing business if they raise prices? Why are MSPs so quick to lower prices for a prospect who’s looking for a ‘sweet deal’?
Often, these tendencies are symptoms of poor value articulation. When you don’t – or can’t – explain what makes your MSP’s services worth it, of course there will be anxiety around pricing.
Our advice? Become an expert at conveying the value your MSP adds. And get specific. Don’t just talk about keeping their IT running smoothly; highlight the costs of downtime versus the costs of your managed services. Don’t just talk about protecting their assets; compare the cost of a cyberattack to the cost of your cybersecurity expertise.
Articulating value is also easier when your MSP possesses highly specialized expertise. Get really good at one thing, and shine a light on that unique value. Why should clients pay amore for your services than for those of the MSP down the road? Because you understand their industry 10x as well as the generalist with lower pricing. That’s why.
Operational Inefficiencies
There are a number of inefficiencies that can eat away at your MSP’s margins. Let’s start with your techs. Are they wasting their time on routine tasks that could easily be automated? As Kaseya’s then-CEO Fred Voccola remarked in an interview last year, MSP “engineers are not leveraging automation in a full way. So the number of clients or endpoints that a technician or engineer can manage is 15–20% lower than what it should be.” We think this is spot on, and strongly encourage MSPs to explore boosting profitability by automating routine, mundane tasks out of technicians’ workflows.
We also recommend thoroughly reviewing your tools. Are they a well-integrated stack…or a redundancy-riddled mess? There’s ample overhead in managing a disparate stack, when each tool requires separate onboarding, training and maintenance. Simplify your stack to boost margins – even if it means abandoning that one tool you really love.
A Profitable Platform
As we’ve seen, there are a number of reasons for MSPs’ struggles with profitability – and that is itself a problem. When there are a whole host of profit-killers, it becomes difficult to tackle them all, and in an order that makes good business sense. It doesn’t help that fixing one source of low profitability can easily aggravate another (e.g., raising prices without also sharpening your value proposition can result in higher customer churn).
This gets at why joining something like The 20 can be so transformative. We’ve built an entire platform that scales – not a bunch of different solutions that you need to figure out how to combine into a coherent business model. It’s truly ‘plug and play,’ with scalability and profitability baked in at every level.
Check out this case study for a more detailed look at how The 20 helps MSPs with profitability and overall business health.
Struggling with thin margins and poor work/life balance? Reach out today to discuss your pain points – and how to solve them.