Industry Insights

Measuring the True Value of MSP Margins

By Ideas @ AppDirect / July 11, 2018

Pricing. Say the word and managed service providers (MSPs) will have a lot to say, especially in today’s increasingly competitive market. As MSP business models have grown more complex—expanding from hardware and services, to cloud and software subscriptions—so too has the complexity of figuring out the true cost of doing business.

There’s no better illustration of this challenge than margins. Since 2016, net-new revenue for MSP services have actually risen 42 percent. However, profit margins have eroded 30 percent. The reason why is straightforward: MSPs are offering more and different types of solutions, including cloud services, but they’re relying on the same business models they’ve used for years.

MSPs offer new solutions, but they’re relying on the same business models they’ve used for years.

Boosting margins is a topic that Howard M. Cohen, contributing editor at Redmond Channel Partner Magazine, has thought about a lot over the nearly three decades he’s been in the technology industry. As he explained in a recent RCP webinar, “IT practices cannot live by subscriptions alone. A lot of players got in thinking, ‘Oh, if I just sell a lot of Office 365, I'll make a lot of money.’ They’ve found that to not necessarily be true.” He adds: “You need to start to think about what you can sell beyond that one subscription.”

With this in mind, it’s more important than ever for MSPs to understand what they get from their partners, particularly when it comes to distributors. Does the partner offer features like billing, provisioning, and customer support? Do you need even more features? Perhaps most important, can the partner actually deliver everything it promises?

A Manual Muddle: Seven Days for 10 Licenses

Here’s an example: A large successful MSP located in North America found itself needing to spend seven days to provision 10 software licenses—that’s right, an entire week for just 10 licenses—of a popular office productivity solution. Why? The distributor didn’t provide adequate software provisioning tools. In this case, an attractive margin couldn’t offset the cost of needing employees to manually provision licenses, or the cost of unhappy customers.

A large MSP needed seven days to provision 10 software licenses. The cost of unhappy customers was not reflected in the margin.

In addition to provisioning, billing is another potential pain point for MSPs and their customers. Without automated consolidated billing, MSP margins can suffer. Manual invoicing often creates revenue leaks that can add up to big losses over time. Not only that, but manual billing processes can also lead to a poor customer experience, which often leads to churn.

It’s easy to understand the percent that you pay on every software license you sell. What’s not so easy to see is the damage to your business if provisioning takes too long, or invoices are inaccurate, or customer support questions go unanswered.

Balancing Margins and Profitability

Like trying to fit round pegs into expensive square holes, using old business models to sell cloud solutions creates inefficiencies that drive up costs. MSPs are under increasing pressure to balance margins, pricing, and cost of service delivery, as well as the pressure to find what sets them apart in an increasingly crowded market.

The solution is to invest wisely and for the long term. Margins are always important, but so are ongoing profitability and scale. Understanding your margin, and every part of your business that it impacts is critical for success.

To go deeper and learn more about MSP margins, pricing, and differentiation, download our recent white paper “The Future of The MSP Market: Can Existing MSPs Make Money in the Cloud?”

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