The MSP Equation: Finding the Balance

By MAXfocus Guest Blog 1

Numbers are a funny thing. They seem so absolute, as we know that two plus two is always four, and there is a certain expectation that discussing numbers gives us the ability to compare in absolute terms. However, just like two apples are not the same as two pears, two different sets of numbers around managed services are not the same.   

I’m knee deep in thinking about content for GFI’s upcoming conferences and planning and picking speakers. It’s inevitable we will hold a session on pricing at some level, because this is one of the most popular topics to talk about at any managed services event.  

It’s often the favorite discussion topic of MSPs as they compare notes – what do you charge? What does your managed services offering include? How do you package it? And how much margin do you make on it?

Discussing offerings in absolute terms to try and compare them is fun, but it’s not the core. Two service providers at $4 million can look very different, and revenue is only the top of the critical equation. One might be investing heavily in marketing and sales, which causes a (planned!) lowering of net profit, while the other could be a business focused on maximizing profit in anticipation of acquisition. Both are sound strategies, but declaring them “both $4 million businesses” loses the strategic intention. 

Two MSPs could package their solutions identically, using a per-device model and pricing per device the same. However, if one is using a toolkit that is paid for on a consumption based model, and the other has pre-paid licenses and has significant ‘shelfware’, that small difference will cause dramatic differences in gross margin. 

At their core, the majority of MSPs should be focused on growth, but how that growth looks numerically will vary from MSP to MSP. The ratios of profitability and cost will look vastly different depending on a number of factors, including the MSP strategy and business plan.

The key to clarity around pricing is understanding the basics of your core equation. What is that, you might ask? Revenue, minus the Cost of Goods Sold (aka, how much it costs to deliver your service) is your Gross Margin. Remove your overhead, selling, and general and administrative expenses, and you are left with your earnings. While this may be basic, and often assumed to be standard, it’s the core equation that drives all others.

Growing to $2 million or $4 million or any target in revenue is only part of the equation. Executing a strategy to ensure you grow and achieve your income goals is the key to success. Is your strategy to maximize for profit?  Is your strategy to grow as quickly as possible, regardless of impact to earnings (and assuming you’re watching to keep that from ever going negative… unless that’s the plan!)?      

Growth is the lifeblood of a business. However, growing a broken business model will make the businesses’ problems worse, not better. Simply adding revenue to a profit and loss sheet that is imbalanced will cause greater imbalance, not fix any problems. MSPs can’t “sell their way to success”.     

And thus, focus on the three parts of the equation. Is revenue balancing against the Cost of Goods Sold. Are expenses in line? And finally, in  balance, is that business achieving the right goal. If so, add more revenue. If not, fix the balance. And by focusing in this way, growth will be welcome rather than problematic.

Dave Sobel, Director of Partner Community at GFI MAX, is responsible for fostering the growth and success of GFI MAX Partners. As Director of Partner Community, he helps promote collaboration, education and innovation among GFI MAX Partners and among the industry as a whole, ensures they have access to business, technology and market resources, and are utilizing the MAX Platform to achieve positive growth, enhance their offerings and become best-in-class solution providers.