Link Between Customer Satisfaction and MSP Profitability May Not Be What You Think

Few people would disagree that having happy customers is a good thing for managed service providers, and certainly a goal worth chasing. But can customer satisfaction be too high for an MSP’s own good?

Peter Kujawa, VP and GM of Service Leadership, a ConnectWise solution, maintains there can be too much of a good thing when it comes to focusing on the customer experience. And he has data to back up that claim.

Kujawa will present that data in his session, Hot Data with Peter Kujawa: The Link Between High Profitability and Happy Customers. at the MSP Summit Sept. 17-19 in Atlanta. He will provide results from the 2024 Service Leadership Annual Industry Profitability Report that compares customer Net Promoter Scores (NPS) scores with MSP profitability. One of his takeaways is that making customers too happy can actually hurt gross margins.

Service Leadership's Peter Kujawa

We asked Kujawa about this study and what surprised him (and what didn’t surprise him).

Channel Futures: What is the history of the Service Leadership Industry Profitability Report – when did it start, and what was the purpose for creating it?

Peter Kujawa: This is the 19th edition of the Service Leadership Index Annual Profitability Report.  Most of the data cited in the report comes from the 20 years of our benchmarking data from partners from all over the world via the Service Leadership Index and we do pull some data from other sources as needed, such as SLIQ (Service Leadership’s online operational maturity level evaluation and coaching tool).

Related:ConnectWise Acquires Service Leadership to Drive TSP Best Practices

The purpose of the report was to provide an update on what is driving profitability for the TSP [technology solution provider] industry as a whole and broken down by specific predominant business models (PBMs). It is designed to be an extremely comprehensive look at what is working and not working in the industry. We’ve heard partners refer to it as “The TSP industry profitability Bible.”

 CF: What is the methodology for this report?

PK: We begin working on the report as soon as the Q4 data submission into Service Leadership Index is complete, and it takes us over three months to complete it fully. Most of the report is an update on last year’s data, including the analysis of each of the PBMs we do and each year we add “special sections” based on current topics of interest. For example, this year we added special sections on successfully implementing hyper automation, the correlation between NPS and profitability, geographic differences between North America, Europe, and Australia/New Zealand, and more. Hundreds of hours go into the data analysis and narratives throughout the report; it is a huge project for the Service Leadership team every year.

Related:Service Leadership Report: Less-Profitable TSPs Shelling Out More for Employees

CF: For those not familiar with NPS, how does it work for MSPs? And how is it different than a customer satisfaction score (CSAT)?

PK: Net promoter score is a concept used to evaluate whether a client is a promoter, detractor, or neutral. The way that it works is that the decision makers at clients are asked how likely on a scale of 1-10 they are to recommend your MSP to a business associate or friend.  If they answer as a 9 or 10, they are a Promoter. That means they will eagerly tell everyone they know that you are an MSP that they should use.  If they answer 1-6, they are the opposite, a Detractor and they will tell those same companies to avoid your MSP at all costs. If they score a 7 or 8, they are Neutral and will not speak up. There is a significant body of research that backs this up as a good barometer of how the client feels about the MSP overall, including help desk, billing, project work, etc. as opposed to CSAT scores collected after a ticket is closed. That data is important as well, but typically it only speaks to the experience the end user just had with the help desk as opposed to the totality of the relationship.

CF: How many MSPs did you gather data for? 

PK: As a matter of policy, we never release sample sizes but it was a lot.  Because both Service Leadership and [customer satisfaction survey system] SmileBack are owned by ConnectWise, we were able to pull extensive NPS data from SmileBack and correlate it with our partner-level profitability data.

CF: What surprised you most about the results?

PK: First off, what didn’t surprise us was how strong the correlation was between high NPS scores, partner profitability, and partner Operational Maturity Level.  We have long believed that those go hand in hand and the data definitely showed that. What did surprise us was that the link with NPS and profitability actually had diminishing returns after a certain point.

CF: What do you think causes those diminishing returns?

PK: Delivering good NPS correlated to strong profitability but delivering off-the-charts high NPS lowered managed service gross margin. Upon investigation, this made sense, that the cost to do the types of things needed for these scores materially increases COGS [cost of goods sold] and there is a point where the customer won’t pay the MSP enough to make up for the increase in COGS. So, the data we discuss in the report shows that you want to build an MSP that delivers high, but not excessively high NPS if you want to maximize profitability.