Grasping profit margins is crucial to running a thriving MSP business.
While the profit margins can be challenging to understand if you don’t have an MSP background, the entire concept is pretty straightforward once you break down everything.
What follows is a guide on calculating MSP profit margins and what you can do to boost the margins.
Breaking Down MSP Profit Margins
For starters, a profit margin is a measure of how much revenue your business is generating.
It represents which percentage of the business’s revenue is your profit after deducting expenses.
Profit margins are represented in percentages.
Below is the formula to calculate the profit margin.
Profit Margin = [Net Income ÷ Revenue] x 100%
So, if your MSP’s net annual income is $100,000 and generates $1,000,000 in revenue, your profit margin based on the above formula is 100,000 ÷ 1,000,000 x 10 or 10%.
Accounting Methods and Profit Margin Calculations
It is essential to mention how you calculate profit margin. The most commonly used formula is the accrual-based formula.
This formula accounts for the revenue record upon invoicing, not when the customer pays. So, the profit margin could vary depending on your formula, even if your sales remain the same.
Still, your profit margins will enable you to accurately track your business’s performance over time, irrespective of which formula you use.
Why is Profit Margin Crucial?
As stated, profit margin allows you to keep tabs on how your business is doing over time. It also lets you compare your MSP business against your competition.
By regularly tracking your MSP’s profit margin, you can determine if your investment is paying off or what you need to do to boost the margins.
So, What’s a Good Profit Margin for MSPs?
Well, MSPs must achieve no specific profit margin to be considered successful.
Of course, profit margin may vary depending on factors such as how much you re-invest in your business, the size of your enterprise, and how you manage service offerings.
You can even generate a negative profit margin, which isn’t necessarily bad if the loss is because you invested in something that’ll rake in profits later, and you have a healthy cash flow to keep things running.
In fact, some MSPs avoid positive profit margins at certain times because they prefer investing in their businesses instead of parading profits and being forced to pay taxes.
How to Maximize MSP Profit Margins
While profit margins can vary from one MSP to another, you can leverage the following strategies to boost your MSP’s profitability.
One of the benefits of an MSP business model is that it is easy to upsell your clients as your relationship and trust grow.
You can upgrade the entry-level package to a premium solution at a higher price.
Most customers onboard with a Managed Service Provider by purchasing basic network or connectivity services.
As these customers’ needs grow, they’ll require more storage, better IT infrastructure, more end-users, and application services like VOIP, allowing you to sell them a higher-tier solution. This, in turn, enables you to increase your revenue and boost your profit margin.
Offload Unprofitable Customers
At times, the most logical way to boost your profit margin is to get rid of customers that aren’t bringing in profits.
If you’ve been running your MSP for a while, you have the data to know your existing clients and their value to your business.
You can leverage reporting tools to determine which customers have a negative ROI. Before eliminating them, though, you may want to check why they’re unprofitable.
If the customer is ripe for upselling, go ahead and do it. If the client doesn’t buy into your offer, it’s time to let them go.
You’re better off with a handful of customers and raking in profits than having an extensive portfolio of clients who don’t bring the profits.
Reduce or Eliminate Discounts
MSPs, like any business, may use discounts to entice customers and prospects to sign long-term deals.
However, if the discounts affect our profit margins negatively, it’s time to reconsider your offer.
For instance, you may consider offering 30 to 60 days discounts to lure your clients and prospects instead of providing incentives for long-term deals.
You can also consider eliminating the discounts or offering them at specific periods of the year. You can only offer massive discounts if your competitors take away your customers by offering them better discounts.
Outsource Complex or Low-margin Areas
While setting up your own security or network operations center may seem like a good idea, maintenance and operation costs can rack up very fast, reducing your profit margins.
It would be best to audit your company to determine what you can outsource to a vendor. You can also consider outsourcing low-margin areas to enable you to focus on other high-margin sections of your MSP business.
Increase Your Digital Footprint to Attract More Customers
According to Statista, over 2 billion people buy online.
Sure, your target audience may only be a small portion of these buyers, but the truth is, it pays to establish your online presence.
Running a digital campaign will enable you to place your business in front of your potential customers.
You increase your digital footprint by leveraging strategies like creating a well-optimized website, email marketing, building sales funnels, churning out content your prospects want to read, etc.
The idea is to generate more leads that you can convert into buying customers, boosting your revenue and profit margins.
GrowthGenerators Can Help You Increase Your Digital Presence
GrowthGenerators is a fully-fledged digital marketing agency that can help you double or triple your online reach.
We will run a comprehensive digital marketing campaign targeting your clients and prospects. We do this by:
Researching keywords your potential clients are typing on Google
Creating content around these keywords to help drive the prospects to your website
Improving your website’s design to enhance the user experience
Book a free consultation session with one of our digital marketing experts and start the journey to boosting your profit margins today.